10-Q 1 cnb10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended June 30, 2004 Commission File Number: 0-17501 CNB BANCORP, INC. (Exact Name of Registrant as Specified in its Charter) New York 14-1709485 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 10-24 North Main Street, P.O. Box 873, Gloversville, New York, 12078 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 773-7911 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_ Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date: Number of Shares Outstanding Class of Common Stock as of August 9, 2004 $2.50 par value 2,214,197 CNB BANCORP, INC. INDEX Page No. PART I FINANCIAL INFORMATION Item 1 Consolidated interim financial statements (unaudited): Consolidated statements of income for the three months ended June 30, 2004 and 2003 and the six months ended June 30, 2004 and 2003 1 Consolidated statements of financial condition as of June 30, 2004 and December 31, 2003 2 Consolidated statements of cash flows for the six months ended June 30, 2004 and 2003 3 Notes to consolidated interim financial statements 4 - 6 Item 2 Management's discussion and analysis of financial condition and results of operations 7 - 10 Item 3 Quantitative and qualitative disclosures about market risk 11 Item 4 Controls and procedures 12 PART II OTHER INFORMATION Item 1 Legal proceedings - not applicable Item 2 Changes in securities, use of proceeds and issuer purchases of equity securities 13 Item 3 Defaults upon senior securities - none Item 4 Submission of matters to a vote of security holders - Annual Meeting 14 Item 5 Other information - none Item 6 Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibit Index 17 CNB BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data)

See accompanying notes to consolidated interim financial statements -1- CNB BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (In thousands, except share data)

See accompanying notes to consolidated interim financial statements -2- CNB BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)

See accompanying notes to consolidated interim financial statements -3- CNB BANCORP, INC. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. FINANCIAL STATEMENT PRESENTATION The accounting and reporting policies of CNB Bancorp, Inc. (the Company), City National Bank and Trust Company (subsidiary Bank) and Hathaway Agency, Inc. (subsidiary Insurance Agency) conform to accounting principles generally accepted in the United States of America in a consistent manner and are in accordance with the general practices within the financial services industry. Amounts in the prior periods' consolidated financial statements are reclassified, whenever necessary, to conform to the presentation in the current periods' consolidated financial statements. In the opinion of CNB Bancorp, Inc. management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company's consolidated financial position as of June 30, 2004 and December 31, 2003 and the results of operations for the three and six months ended June 30, 2004 and 2003 and cash flows for the six months ended June 30, 2004 and 2003. All accounting adjustments made for these periods were of a normal recurring nature. The accompanying interim consolidated financial statements should be read in conjunction with CNB Bancorp, Inc.'s consolidated year-end financial statements including notes thereto, which are included in CNB Bancorp, Inc.'s 2003 Annual Report on Form 10-K. 2. EARNINGS PER COMMON SHARE The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share (EPS) for the three month and six month periods ended June 30, 2004 and 2003. (In thousands, except per share amounts)

3. STOCK BASED COMPENSATION The Company accounts for stock options in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date. FASB Statement No. 123, "Accounting for Stock-Based Compensation", encourages entities to recognize the fair value of all stock-based awards on the date of grant as compensation expense over the vesting period. Alternatively, Statement No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma disclosures of net income and earnings per share as if the fair-value-based method defined in Statement No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by Statement No. 123 and FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." On October 20, 1998, the Company's shareholders approved the CNB Bancorp, Inc. Stock Option Plan (Stock Option Plan) which permits the issuance of options to selected employees. The primary objective of the Stock Option Plan is to provide employees with a proprietary -4- interest in the Company and as an incentive to encourage such persons to remain with the Company. On April 16, 2002, the Company's shareholders approved the Long-Term Incentive Compensation Plan which provided the Company's Compensation Committee with the authority to grant stock options to employees, non-employee directors and consultants of the Company and its subsidiaries. Under the Stock Option Plan, 240,000 shares of authorized but unissued common stock are reserved for issuance upon option exercises. Under the Long-Term Incentive Compensation Plan, 225,000 shares of authorized but unissued common stock are reserved for issuance upon option exercises. The Company also has the alternative to fund both plans with treasury stock. Options under the plans may be either non-qualified stock options or incentive stock options. Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair market value on the date of the grant. Options expire no later than ten years following the date of the grant. On June 26, 2001, 35,850 options were awarded at an exercise price of $32.50 per share. These options have a ten-year term with fifty percent vesting one year from the date of the grant and the remaining fifty percent vesting two years from the date of the grant. On June 24, 2002, 40,550 options were awarded at an exercise price of $29.43 per share. These options have a ten-year term with twenty-five percent vesting each year starting one year from the date of the grant. On June 30, 2003, 41,800 options were awarded at an exercise price of $25.75 per share. These options have a ten-year term with twenty-five percent vesting each year starting one year from the date of the grant. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 2003, 2002 and 2001: dividend yield of 2.84%, 2.41% and 2.11%, respectively; expected volatility of 15.7%, 15.8% and 18.8%, respectively; risk free interest rate of 2.27%, 4.19% and 4.81%, respectively; and an expected life of five years for grants awarded in all three years. Based on the aforementioned assumptions, the Company has estimated that the fair value of the options granted on June 30, 2003 was $2.84, June 24, 2002 was $4.71 and June 26, 2001 was $6.60. The Company applies APB Opinion No. 25 in accounting for its stock options and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the estimated fair value at the grant date for its stock options under Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below for the three month and six month periods ended June 30, 2004 and 2003 (in thousands, except per share data):

Because the Company's employee stock options have characteristics significantly different from those of traded options for which the Black-Scholes model was developed, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models, in management's opinion, do not necessarily provide a reliable single measure of the fair value of its employee stock options. 4. COMPREHENSIVE INCOME The Company recorded a total comprehensive loss of $1,135,000 for the three months ended June 30, 2004 as compared to total comprehensive income of $1,330,000 for the three months ended June 30, 2003. For the six month periods ended June 30, 2004 and 2003 the Company recorded total comprehensive income of $797,000 and $2,380,000, respectively. At the Company, comprehensive income represents net income plus other comprehensive income/(loss), which consists of the after tax net change in unrealized gains and losses on securities available for sale for the period and minimum pension liability adjustment. -5- 5. PENSION BENEFITS The following components of net periodic pension cost were recognized by the Company in the accompanying consolidated statements of income:

The Company contributed $241,000 to its pension plan in June 2004. This is the total amount expected to be paid in 2004. 6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the FASB issued SFAS No. 132 (revised), "Employers' Disclosures About Pensions and Other Postretirement Benefits". SFAS No. 132 (revised) prescribes employers' disclosures about pension plans and other postretirement benefit plans, but does not change the measurement or recognition of those plans. The statement retains and revises the disclosure requirements contained in the original SFAS No. 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. SFAS No. 132 (revised) generally is effective for fiscal years ending after December 15, 2003. The interim period disclosures required by this statement are effective for interim periods beginning after December 15, 2003. The Company's disclosures in note 11 of the 2003 Annual Report incorporate the requirements of SFAS No. 132 (revised). The Company's disclosures in Note 5 of this Form 10-Q incorporate the interim period disclosure requirements of SFAS No. 132 (revised). 7. CRITICAL ACCOUNTING POLICIES Pursuant to recent SEC guidance, management of public companies are encouraged to evaluate and disclose those accounting policies that are judged to be critical policies, that is, those most important to the portrayal of the Company's financial condition and results, and that require management's most difficult subjective or complex judgments. Management of the Company considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent subjectivity and uncertainty in estimating the levels of the allowance required to cover credit losses in the portfolio and the material effect that such judgments can have on the consolidated financial statements. Included in Note 1 to the consolidated financial statements contained in the Company's 2003 Annual Report is a description of this critical policy and the other significant accounting policies that are utilized by the Company in the preparation of the consolidated financial statements. 8. GUARANTEES FASB Interpretation No. 45 (FIN No. 45), " Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others; an Interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No.34", requires certain disclosures and liability-recognition for the fair value at issuance of guarantees that fall within its scope. Under FIN No. 45, the Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $193,000 at June 30, 2004 and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of the Company's standby letters of credit at June 30, 2004 and December 31, 2003 was insignificant. -6- CNB BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL: CNB Bancorp, Inc. (the Company), a New York corporation, organized in 1988, is a registered financial holding company headquartered in Gloversville, New York. Its wholly-owned subsidiaries, City National Bank and Trust Company (the subsidiary Bank) and Hathaway Agency, Inc. (the subsidiary Insurance Agency), were organized in 1887 and 1915, respectively, and are also headquartered in Gloversville, New York. The subsidiary Bank has five branches located in the county of Fulton and one branch located in the county of Saratoga. The subsidiary Insurance Agency has one office located in the county of Fulton. The subsidiary Bank is a full service commercial bank that offers a broad range of demand and time deposits; consumer, mortgage, and commercial loans; and trust and investment services. The subsidiary Bank is a member of the Federal Deposit Insurance Corporation and the Federal Reserve System and is subject to regulation and supervision of the Federal Reserve and the Comptroller of the Currency. The subsidiary Insurance Agency offers a broad range of general insurance products and is under the supervision of the State Insurance Department. Except for historical information contained herein, the matters contained in this review are "forward-looking statements" that involve risks and uncertainties, including statements concerning future events or performance and assumptions and other statements which are other than statements of historical facts. The Company wishes to caution readers that the following important factors, among others, could in the future affect the Company's actual results and could cause the Company's actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: * the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company and its banking subsidiary must comply, the cost of such compliance and the potentially material adverse effects if the Company or its banking subsidiary were not in substantial compliance either currently or in the future as applicable; * the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or changes in the Company's organization, compensation and benefit plans; * the effect on the Company's competitive position within its market area of increasing consolidation within the banking industry and increasing competition from larger "super regional" and other banking organizations as well as non-bank providers of various financial services; * the effect of unforeseen changes in interest rates and; * the effects of changes in the business cycle and downturns in the local, regional or national economies. The Company wishes to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including those described above, could cause the Company's actual results or circumstances for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. FINANCIAL REVIEW: Financial Condition: Total assets at June 30, 2004 were $389.2 million, a decrease of $6.3 million, or 1.6%, from the December 31, 2003 amount of $395.6 million. The decrease was primarily related to a decrease in cash and cash equivalents of $18.1 million. This decrease was partially offset by an increase in loans, net of unearned discount, of $4.3 million and an increase in securities available for sale of $7.4 million. The decrease in liabilities and stockholders' equity was primarily related to a decline in deposits of $1.2 million and a reduction in notes payable to the Federal Home Loan Bank of $5.0 million. Stockholders' equity remained virtually unchanged with the retention of earnings offsetting dividends paid and the reduction in accumulated other comprehensive income. Securities available for sale increased by $7.4 million, or 4.5%, from $163.3 million at December 31, 2003, to $170.6 million at June 30, 2004 primarily as a result of the Asset/Liability Management Committees' decision to invest excess cash in available for sale securities with maturities or average lives of less than five years. This was done in conjunction with sales in the first quarter of securities with maturities and average lives of greater than five years to shorten the overall average life of the securities portfolio in anticipation of higher interest rates. -7- Loans receivable, net of unearned income, increased $4.3 million, or 2.5% from $171.2 million at December 31, 2003 to $175.5 million at June 30, 2004. Increases in commercial lending and consumer installment lending were primarily responsible for this increase in the loan portfolio. Cash and cash equivalents decreased by $18.1 million, or 57.6%, from $31.4 million at December 31, 2003, to $13.3 million at June 30, 2004 primarily as a result of the increase in loans and securities available for sale combined with the decrease in deposits and the reduction in notes payable with the Federal Home Loan Bank. Deposits at June 30, 2004 were $307.0 million, a decrease of $1.2 million, or 0.4%, from the balance of $308.2 million at December 31, 2003. This decrease is primarily attributed to the decrease in certificates and time deposits of $100,000 or more and other time deposits totaling $12.2 million. These decreases were partially offset by increases in demand deposits and regular savings, NOW and money market accounts totaling $10.9 million. Stockholders' equity remained virtually unchanged from December 31, 2003 to June 30, 2004 with the retention of earnings for the first six months of 2004 offsetting dividends paid and a reduction in accumulated other comprehensive income. Liquidity: Liquidity is defined as the ability to generate sufficient cash flow to meet all present and future funding commitments, depositor withdrawals and operating expenses. Management monitors the Company's liquidity position on a daily basis and evaluates its ability to meet depositor withdrawals and make new loans or investments. There have been no trends or demands that have negatively affected the Company's or the subsidiary Bank's liquidity position in any material way during the first six months of 2004. The timing of cash inflows and outflows is closely monitored by management although changes in interest rates, economic conditions, and competitive forces strongly impact the predictability of these cash flows. Funds from repayment of loans, maturing investment securities and securities available for sale, and additional borrowings from the Federal Home Loan Bank are available to satisfy liquidity needs that may arise. Management believes that the level of the Company's liquid assets combined with daily monitoring of cash inflows and outflows provide adequate liquidity to fund outstanding loan commitments, meet daily withdrawal requirements of depositors, and meet all other daily obligations of the Company. Capital Resources: Stockholders' equity to total assets increased from 9.6% at December 31, 2003 to 9.8% at June 30, 2004. The decrease in total assets combined with earnings during the first six months of 2004 over dividends paid, net treasury stock transactions and the decrease in accumulated other comprehensive income caused this ratio to increase from December 31, 2003. The table below shows the Company's June 30, 2004 ratios, December 31, 2003 ratios and the current regulatory guideline ratios for classification as well capitalized as established by the Federal Reserve Board.

These ratios for the Company, as well as the ratios for the subsidiary Bank, are well in excess of regulatory minimums. Results of Operations: Most Recent Quarter and Same Quarter in Preceding Year: Net income increased $157,000 or 16.0% for the second quarter of 2004 as compared to the same period of 2003. This increase was primarily due to an increase in net interest income and an increase in insurance commissions. These increases were partially offset by an increase in the provision for income taxes. Total interest and dividend income for the second quarter of 2004 decreased $273,000 or 5.5% from the corresponding period in 2003, -8- while total interest expense decreased $457,000 or 26.0% from the corresponding period in 2003. Net interest income increased $184,000 or 5.7% from the corresponding period of 2003. This increase is primarily due to the decrease in the overall average rate paid on interest-bearing liabilities exceeding the decrease in the average rate earned on total earning assets by 29 basis points. As a result, the net interest margin increased from 3.72% for the second quarter of 2003 to 3.99% for the corresponding period of 2004. The decrease in interest and fees on loans of $353,000 or 11.0% from the corresponding period of 2003 is primarily due to the decrease of $6.5 million in the average volume outstanding compared to the same period of 2003. The decrease in interest rates on the total loan portfolio of 54 basis points from 7.17% for the second quarter of 2003 to 6.63% for the same period of 2004 also contributed to the reduction in the loan portfolio income. The increase in interest on the securities portfolio of $153,000 from the corresponding period of 2003 is primarily due to the increase in the average volume on the overall securities portfolio of $14.4 million as compared to the same period of 2003. A decrease in the fully tax effected yield of 11 basis points from 4.76% for the second quarter of 2003 to 4.65% for the second quarter of 2004 partially offset some of this volume increase. The decrease in interest expense of $457,000 for the second quarter of 2004 as compared to the same period of 2003 is primarily related to the overall decrease in the average rates being paid in the second quarter of 2004 on virtually all deposit categories as compared to the same period of 2003. The average rate paid on interest-bearing liabilities for the second quarter of 2004 was 1.64% as compared to 2.13% for the same period of 2003. A decrease in the average volume of interest-bearing liabilities of $11.9 million also contributed to the lower interest expense. The provision for loan losses increased $15,000 to $150,000 from the corresponding period in 2003. Net charge-offs decreased $1,000,000 from the prior year period decreasing from $1,129,000 in the second quarter of 2003 to $129,000 in the second quarter of 2004. Non-performing loans decreased from $1,647,000 at December 31, 2003 to $859,000 at June 30, 2004, a decrease of $788,000. This decrease primarily relates to partial paydowns on two non-performing commercial loans. Based on our most recent analysis of collateral and cash flow, we believe that the allowance for loan losses allocated to these relationships is adequate. The provision in both quarters was deemed to be adequate based on the overall evaluation of the allowance for loan losses as of June 30, 2004 and 2003. The allowance for loan losses as a percent of net loans outstanding was 1.40% at June 30, 2004, 1.41% at December 31, 2003 and 1.37% at June 30, 2003. Non-interest income increased $95,000 or 18.1% from the corresponding period of 2003. This increase was primarily due to an increase in insurance commissions and net gains on sales of securities available for sale. These increases were partially offset by a reduction in income from fiduciary activities and other income. The higher insurance commissions were primarily related to the timing of contingency commissions paid by the insurance companies based on overall claims experience at the agency. The lower fiduciary fees relate to one time fees received in 2003. The lower other income primarily relates to lower income from the subsidiary Bank's investment in a title company. Non-interest expense remained virtually unchanged from the comparable period of 2003. Increases in salaries and employee benefits, occupancy expense and external data processing expense were offset by lower other expenses. The higher salaries and employee benefits were due to normal salary adjustments and increases in medical insurance premiums. The higher occupancy expenses were due to higher depreciation expense on the new office in Saratoga Springs, New York, higher real estate taxes and insurance premiums on bank premises overall. The higher external data processing expense relates primarily to testing and setup expenses related to the two new branches being acquired in the third quarter of 2004. The lower other expense primarily relates to lower stationery and supplies. In 2003, the subsidiary Bank went to check imaging in the second quarter which caused additional stationery and supplies expense. Provision for income taxes increased $108,000 from the corresponding period of 2003. This primarily relates to the increase in income before taxes of $265,000. The combined effective federal and state tax rate for the second quarter of 2004 was 27.7% as compared to 25.1% for the corresponding period of 2003. This increase is primarily due to the percentage of taxable income to total income increasing and the decline in tax exempt municipal bond interest from $380,000 for the second quarter of 2003 to $367,000 for the second quarter of 2004. Most Recent Year to Date and Corresponding Year to Date Period: Net income increased $451,000 or 21.8% as compared to the same period of 2003. This increase was primarily due to net gains on sales of securities available for sale, a reduction in the provision for loan losses and an increase in net interest income. These increases were partially offset by an increase in the provision for income taxes. -9- Total interest and dividend income for the first six months of 2004 decreased $602,000 or 5.9% from the corresponding period in 2003, while total interest expense decreased $863,000 or 24.1% from the corresponding period in 2003. Net interest income increased $261,000 or 4.0% from the corresponding period of 2003. This increase is primarily due to the decrease in the overall average rate paid on interest-bearing liabilities exceeding the decrease in the average rate earned on total earning assets by 24 basis points. As a result, the net interest margin increased from 3.79% for the first six months of 2003 to 4.00% for the corresponding period of 2004. The decrease in interest and fees on loans of $829,000 or 12.6% from the corresponding period of 2003 is primarily due to the decrease of $9.0 million in the average volume outstanding compared to the same period of 2003. The decrease in interest rates on the total loan portfolio of 60 basis points from 7.27% for the first six months of 2003 to 6.67% for the same period of 2004 also contributed to the reduction in the loan portfolio income. The increase in interest on the securities portfolio of $379,000 from the corresponding period of 2003 is primarily due to the increase in the average volume on the overall securities portfolio of $19.8 million as compared to the same period of 2003. A decrease in the fully tax effected yield of 19 basis points from 4.92% for the first six months of 2003 to 4.73% for the first six months of 2004 partially offset some of this volume increase. The decrease in interest expense of $863,000 for the first six months of 2004 as compared to the same period of 2003 is primarily related to the overall decrease in the average rates being paid in the first six months of 2004 on virtually all deposit categories as compared to the same period of 2003. The average rate paid on interest-bearing liabilities for the first six months of 2004 was 1.70% as compared to 2.18% for the same period of 2003. A decrease in the average volume of interest-bearing liabilities of $10.1 million also contributed to the lower interest expense. The provision for loan losses decreased $220,000 to $300,000 from the corresponding period in 2003. Net charge-offs decreased $947,000 from the prior year period decreasing from $1,207,000 in the first six months of 2003 to $260,000 in the first six months of 2004. Non-performing loans decreased from $1,647,000 at December 31, 2003 to $859,000 at June 30, 2004, a decrease of $788,000. This decrease primarily relates to partial paydowns on two non-performing commercial loans. Based on our most recent analysis of collateral and cash flow, we believe that the allowance for loan losses allocated to these relationships is adequate. The provision in both six month periods was deemed to be adequate based on the overall evaluation of the allowance for loan losses as of June 30, 2004 and 2003. The allowance for loan losses as a percent of net loans outstanding was 1.40% at June 30, 2004, 1.41% at December 31, 2003 and 1.37% at June 30, 2003. Non-interest income increased $361,000 or 29.2% from the corresponding period of 2003. This increase was primarily due to an increase in net gains on sales of securities available for sale and an increase in service charges on deposit accounts. These increases were partially offset by a reduction in income from fiduciary activities, insurance commissions and other income. The higher service charges on deposit accounts primarily relates to an increase in overdraft charges and an increase in the monthly charges on checking accounts. The lower insurance commissions are due to a decline in the customer base and lower contingency commissions paid by the insurance companies based on overall claims experience at the agency. The lower fiduciary fees relate to one time fees received in 2003. The lower other income primarily relates to lower income from the subsidiary Bank's investment in a title company. Non-interest expense increased $92,000 from the corresponding period of 2003. Increases in salaries and employee benefits, occupancy expense and external data processing expense were offset by lower other expenses. The higher salaries and employee benefits were due to normal salary adjustments and increases in medical insurance premiums. The higher occupancy expenses were due to higher depreciation expense on the new office in Saratoga Springs, New York, higher real estate taxes and insurance premiums on bank premises overall. The higher external data processing expense relates primarily to testing and setup expenses related to the two new branches being acquired in the third quarter of 2004. The lower other expense primarily relates to lower stationery and supplies. In 2003, the subsidiary Bank went to check imaging in the second quarter which caused additional stationery and supplies expense. Provision for income taxes increased $299,000 from the corresponding period of 2003. This primarily relates to the increase in income before taxes of $750,000. The combined effective federal and state tax rate for the first six months of 2004 was 28.9% as compared to 26.0% for the corresponding period of 2003. This increase is primarily due to the percentage of taxable income to total income increasing and the decline in tax exempt municipal bond interest from $764,000 for the first six months of 2003 to $729,000 for the first six months of 2004. -10- CNB BANCORP, INC. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and interest rates. The subsidiary Bank's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Although the subsidiary Bank manages other risks, such as credit and liquidity risk, in the normal course of its business, management considers interest rate risk to be its most significant market risk and could potentially have the largest material effect on the subsidiary Bank's financial condition and results of operations. The subsidiary Bank does not currently have a trading portfolio or use derivatives to manage market and interest rate risk. The subsidiary Bank's interest rate risk management is the responsibility of the Asset/Liability Management Committee (ALCO), which reports to the Board of Directors. The ALCO, comprised of senior management, has developed policies to measure, manage and monitor interest rate risk. Interest rate risk arises from a variety of factors, including differences in the timing between the contractual maturity or repricing of the subsidiary Bank's assets and liabilities. For example, the subsidiary Bank's net interest income is affected by changes in the level of market interest rates as the repricing characteristics of its loans and other assets do not necessarily match those of its deposits, other borrowings and capital. In managing exposure, the subsidiary Bank uses interest rate sensitivity models that measure both net gap exposure and earnings at risk. The ALCO monitors the volatility of its net interest income by managing the relationship of interest rate sensitive assets to interest rate sensitive liabilities. The ALCO utilizes a simulation model to analyze net income sensitivity to movements in interest rates. The simulation model projects net interest income based on both an immediate 100 and 200 basis point rise or fall in interest rates over a twelve month period. The model is based on the actual maturity and repricing characteristics of interest rate assets and liabilities. The model incorporates assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The following table shows the approximate effect on the subsidiary Bank's annualized net interest income, on a tax equivalent basis, as of June 30, 2004 assuming the immediate increases or decreases in interest rates shown below: Change in Estimated Net Change in Interest Rate Interest Income Net Interest (basis points) ($000 omitted) Income -------------- --------------- ------------ +200 13,210 (7.4)% +100 13,781 (3.4) 0 14,261 0.0 -100 13,833 (3.0) -200 13,345 (6.4) Another tool used to measure interest rate sensitivity is the cumulative gap analysis. The cumulative gap represents the net position of assets and liabilities subject to repricing in specified time periods. Deposit accounts without specified maturity dates are modeled based on historical run-off characteristics of these products in periods of rising rates. As of June 30, 2004, the subsidiary Bank was in a liability sensitive or "negative gap" position which means that more liabilities are scheduled to mature or reprice within the next year than assets. The cumulative interest rate sensitivity gap as of June 30, 2004 was 12.94% of total assets. The cumulative gap analysis is merely a snapshot at a particular date and does not fully reflect that certain assets and liabilities may have similar repricing periods but may in fact reprice at different times within that period and at differing rate levels. Management, therefore, uses the interest rate sensitivity gap only as a general indicator of the potential effects of interest rate changes on net interest income. Management believes that the gap analysis is a useful tool only when used in conjunction with its simulation model and other tools for analyzing and managing interest rate risk. -11- CNB BANCORP, INC. DISCLOSURE OF EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of June 30, 2004, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2004, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There was no change in the Company's internal control over financial reporting that occurred during the Company's fiscal quarter ended June 30, 2004, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. -12- CNB BANCORP, INC. PART II Item 2. Changes in securities, use of proceeds and issuer purchases of equity securities ISSUER PURCHASES OF EQUITY SECURITIES

The current common stock buyback program was approved by the Company's Board of Directors effective June 1, 2003 for a period of two years, to expire on June 1, 2005. The total number of shares authorized to be purchased under the plan is 110,820. -13- CNB BANCORP, INC. PART II Item 4. Submission of Matters to a Vote of Security Holders - Annual Meeting 1. Election of Directors At the annual meeting of shareholders held on April 20, 2004 there were 1,778,747 voting shares present in person or by proxy, which represented 80.40% of the Company's outstanding shares of 2,212,291. Shareholders of the Company were asked to consider the Company's nominees for directors and to elect three (3) directors, to serve for a term of three (3) years. The Company's nominees for direct were: George A. Morgan, Clark D. Subik, Deborah H. Rose and Theodore E. Hoye, III, each of whom were elected. The results of shareholder voting are as follows: Director Votes For Votes Against -------- --------- ------------- George A. Morgan 1,763,720 15,027 Clark D. Subik 1,769,029 9,718 Deborah H. Rose 1,758,028 20,719 Theodore E. Hoye, III 1,747,073 31,674 Directors continuing in office are: William N. Smith, Brian K. Hanaburgh, Richard D. Ruby, John C. Miller, Robert L. Maider and Timothy E. Delaney. -14- CNB BANCORP, INC. PART II Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - The following exhibits are filed as a part of this report: Exhibit No. Exhibit ----------- ------- 3.1 Restated Certificate of Incorporation of CNB Bancorp, Inc. (Incorporated by reference to the current report on Form 8-K filed on August 10, 2001.) 3.2 Bylaws of CNB Bancorp, Inc. (Incorporated by reference to the annual report on Form 10-K filed on March 31, 1996.) 4. Instruments Defining the Rights of Security Holders. (See Exhibits 3.1 and 3.2) 31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (b) - Reports on Form 8-K - Filed April 20, 2004 - The company reported financial information and accompanying discussion for the quarter ended March 31, 2004. -15- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CNB BANCORP, INC. By /s/ William N. Smith -------------------------------------------- William N. Smith, Chairman of the Board, President and Chief Executive Officer (chief executive officer) By /s/ George A. Morgan -------------------------------------------- George A. Morgan, Vice President and Secretary (principal financial and accounting officer) Dated: August 9, 2004 -16- Exhibit No. Description ----------- ----------- 3.1 Restated Certificate of Incorporation of CNB Bancorp, Inc. (Incorporated by reference to the current report on Form 8-K filed on August 10, 2001.) 3.2 Bylaws of CNB Bancorp, Inc. (Incorporated by reference to the annual report on Form 10-K filed on March 31, 1996.) 4. Instruments Defining the Rights of Security Holders. (See Exhibits 3.1 and 3.2) 31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. -17-

CNB BANCORP INC /NY/ 10-Q