UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number 0-17501
CNB BANCORP, INC.
NEW YORK 14-1709485
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10-24 NORTH MAIN STREET, P.O. BOX 873, GLOVERSVILLE, NEW YORK 12078
(Address of principal executive offices)
Registrant's telephone number, including area code: (518) 773-7911
Securities registered pursurant to Section 12 (b) of the Act:
Title of each class Name of exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 Par Value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate the number of shares outstanding of each of the issurer's classes
of common stock:
Class of Common Stock Number of Shares Outstanding as of March 1, 1998
$2.50 Par Value 1,600,000
The aggregate market value of the Registrant's common stock (based upon the
average bid and asked prices on March 1, 1998) held by non-affiliates was
approximately $55,600,000.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to stockholders for the fiscal
year ended December 31, 1997.
(2) Portions of the Registrant's Proxy Statement for its Annual Meeting of
stockholders.
ITEM 1. Business
On January 3, 1989, the corporate structure of City National
Bank and Trust Company (the Bank) was revised by the
establishment of a one-bank holding company, CNB Bancorp, Inc.
(the Company). Stockholders of the Bank retained their
outstanding shares which automatically became shares of the
Company. The Company, in turn, acquired all of the outstanding
shares of the Bank.
Prior to the merger, the Bank was independently owned and
operated and organized in 1887. The Bank is headquartered in
Gloversville, New York, with four branches located in the
county of Fulton.
The Bank is engaged in a general banking business with a range
of banking and fiduciary services including checking,
negotiable orders of withdrawal, savings, certificates of
deposit and club deposit accounts; the Bank offers a wide range
of loan products including commercial, real estate, and
installment type lending. Overdraft banking lines of credit are
also provided.
There have been no significant developments or trends that have
occurred during the last fiscal year.
Competition
Competition for banking business is experienced from regional
based commercial bank holding companies, as well as from
savings banks, savings and loan associations, and credit
unions. The competition is reflected in both lending efforts
and deposit solicitations.
The Bank has a relatively stable deposit base and no material
amount of deposits is obtained from a single depositor or group
of depositors. The Bank has not experienced any significant
seasonal fluctuations in the amount of its deposits.
Employees
The Bank employs approximately 65 persons on a full time basis.
There are also 11 part time employees. The Bank provides a
variety of employment benefits and considers its relationship
with its employees to be good.
Supervision and Regulation
The operations of the Bank are subject to federal and state
statutes applicable to banks chartered under the banking laws
of the United States, to members of the Federal Reserve System,
and to banks whose deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC"). Bank operations are also
subject to regulations of the Comptroller of the Currency, the
Federal Reserve Board, the FDIC, and the New York State Banking
Department.
The primary supervisory authority of the Bank is the
Comptroller of the Currency, who regularly examines the Bank.
The Comptroller of the Currency has the authority under the
Financial Institutions Supervisory Act to prevent a national
bank from engaging in unsafe or unsound practice in conducting
its business.
Federal and state banking laws and regulations govern, among
other things, the scope of a bank's business, the investments a
bank may make, the reserves against deposits a bank must
maintain, the loans a bank makes and collateral it takes, the
activities of a bank with respect to mergers and
consolidations, and the establishment of branches. Branches may
be established within the permitted area only after approval by
the Comptroller of the Currency. The Comptroller of the
Currency is required to grant approval only if it finds that
there is a need for the banking services or facilities
contemplated by the proposed branch and may disapprove the
application if the bank does not have the capital and surplus
deemed necessary by the Comptroller of the Currency, or if the
application relates to the establishment of a branch in a
county contiguous to the county in which the applicant's
principal place of business is located and another banking
institution that has its principal place of business in the
county in which the proposed branch would be located has in
good faith notified the Comptroller of the Currency of its
intention to establish a branch in the same municipal location
in which the proposed branch would be located.
A subsidiary bank (which the Bank is) of a bank holding company
is subject to certain restrictions imposed by the Federal
Reserve Act on any extentions of credit to the bank holding
company or its subsidiaries, on investments in the stock or
other securities of the bank holding company or its
subsidiaries and on taking such securities as collateral for
loans. The Federal Reserve Act and Federal Reserve Board
regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal
shareholders of its parent holding company, among others, and
to related interest of such principal shareholders. In
addition, such legislation and regulations may affect the terms
upon which any person becoming a principal shareholder of a
holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
Federal law also prohibits acquisitions of control of a bank
holding company without prior notice to certain federal bank
regulators. Control is defined for this purpose as the power,
directly or indirectly, to direct the management or policies of
the bank or bank holding company or to vote 25% or more of any
class of voting securities of the bank holding company.
From time to time, various types of federal and state
legislation has been proposed that could result in additional
regulation of, and restrictions on, the business of the Bank.
It cannot be predicted whether any such legislation will be
adopted or how such legislation would affect the business of
the Bank. As a consequence of the extensive regulation of
commercial banking activities in the United States, the Bank's
business is particularly susceptible to being affected by
federal legislation and regulations that may increase the costs
of doing business.
The Depository Institutions Deregulation and Monetary Control
Act of 1980 became effective in March, 1980. The principal
effects of this law are to: phase in the deregulation of the
interest rates paid on personal deposits by gradually
eliminating regulatory ceilings on interest rates and dividends
paid on deposit accounts, as well as eliminating the interest
rate differential allowed thrifts and savings institutions;
enable all banks to offer personal interest bearing checking
type accounts; phase in mandatory and uniform reserve
requirements; and override certain usury limits on loan
interest rates established by state laws. On October 1, 1983,
the Depository Institutions' Deregulation Committee, acting
under the provisions of the Act, removed all remaining interest
rate ceilings and other regulations on time deposits, except
for early withdrawal penalties.
Under the Federal Deposit Insurance Act, the Comptroller of the
Currency possesses the power to prohibit institutions regulated
by it (such as the Bank) from engaging in any activity that
would be an unsafe and unsound banking practice or would
otherwise be in violation of law. Moreover, the Financial
Institutions and Interest Rate Control Act of 1978 ("FIRA")
generally expands the circumstances under which officers or
directors of a bank may be removed by the institution's federal
supervisory agency, restricts lending by a bank to its
executive officers, directors, principal shareholders, or
related interest thereof, restricts management personnel of a
bank from serving as directors or in other management positions
with certain depository institutions whose assets exceed a
specified amount or which have an office within a specified
geographic area, and restricts management personnel from
borrowing from another institution that has a correspondent
relationship with their bank. Additionally, FIRA requires that
no person may acquire control of a bank unless the appropriate
federal supervisory agency has been given 60 days prior written
notice and within that time has not disapproved the acquisition
or extended the period for disapproval.
Under the Community Reinvestment Act of 1977, the Comptroller
of the Currency is required to assess the record of all
financial institutions regulated by it to determine if these
institutions are meeting the credit needs of the community
(including low and moderate neighborhoods) which they serve and
to take this record into account in its evaluation of any
applications made by any such institutions for, among other
things, approval of a branch or other deposit facility, office
relocation, a merger, or an acquisition of bank shares.
The Garn-St. Germain Depository Institutions Act of 1982 (the
"1982 Act") removes certain restrictions on a bank's lending
powers and liberalizes the depository capabilities. The 1982
Act also amends FIRA (see above) by eliminating the statutory
limits on lending by a bank to its executive officers,
directors, principal shareholders, or related interest thereof
and by relaxing certain reporting requirements. However, the
1982 Act strengthened FIRA provisions with regard to managment
interlocks and correspondent bank relationships involving
management personnel.
On December 19, 1991, President Bush signed the Federal Deposit
Insurance Corporation Improvement Act ('FDIC Act") into law.
The FDIC Act makes a number of far-reaching changes in the
legal environment for insured banks. The FDIC Act provides for
an increase in the borrowing authority of the Bank Insurance
Fund ("BIF") to $30 billion from $5 billion, to be used to
cover losses in failed banks. The banking industry will repay
BIF debt through deposit insurance assessments. Statutory caps
on deposit insurance assessments were removed under the FDIC
Act, therefore the FDIC may levy deposit insurance assessments
at any level in its sole discretion. Under the FDIC Act,
accepting brokered deposits is limited to institutions that
have capital in excess of regulatory minimums. The FDIC Act
will require banks and thrifts to devote greater time and
resources to compliance and internal controls. The FDIC Act
details provisions and requires prompt regulatory action by
regulators in dealing with undercapitalized and poorly
performing institutions. The FDIC Act also contains expanded
disclosure of consumer provisions, extends the date for the
required use of licensed or certified appraisers to December
31, 1992 and sets limits on state bank powers.
Deposit Insurance Premiums
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository
institutions are placed into one of nine categories and
assessed insurance premiums based upon their level of capital
and supervisory evaluation. Under the system, institutions
classified as well capitalized and considered healthy pay the
lowest premium. The subsidiary Bank is in this category and
currently pays negligible deposit insurance premiums. If the
subsidiary Bank's capital ratios substantially deteriorate or
if the subsidiary Bank is found to be otherwise unhealthy, the
deposit insurance premiums payable by the subsidiary Bank could
increase.
In September 1996, The Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "1996 Act") became law. The 1996 Act
imposed a one time assessment on all SAIF institutions and then
equalized the insurance premiums for BIF and SAIF institutions.
At the same time, the 1996 Act required BIF institutions to
contribute to the costs of the "FICO" bonds sold in the late
1980s to finance the savings and loan bailout. BIF institutions
will pay 20% of the FICO bond assessment paid by SAIF
institutions. It has been estimated that SAIF institutions will
pay a FICO bond assessment of .065% of insured deposits, while
BIF institutions, such as the subsidiary Bank, will pay
approximately .013% of insured deposits. The FICO bond
assessment will equalize no later than January 1, 2000. As a
result of the 1996 Act, the competitive advantage which the
subsidiary Bank may have enjoyed against SAIF institutions has
been reduced, but not yet eliminated. This assessment is not
expected to have a material effect on the consolidated
financial statements of the Company.
The 1996 Act contemplates a merger of the SAIF and BIF funds,
with the elimination of the federal savings bank charter by
January 1, 1999. The exact manner in which the elimination will
be accomplished has not been established, but commentators have
suggested that all federal thrift institutions will be required
to convert either to a national bank, which the subsidiary Bank
is, state commercial bank or state savings bank charter.
Monetary Policy
The earnings of the Bank are affected by the policies of other
regulatory authorities including the Federal Reserve Board and
the FDIC. An important function of the Federal Reserve System
is to regulate the money supply and prevailing interest rates.
Among the instruments used to implement those objectives are
open market operations in United States government securities
and changes in reserve requirements against member bank
deposits. These instruments are used in varying combinations to
influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect
interest rates charged on loans or paid for deposits.
The Bank is a member of the Federal Reserve System and,
therefore, the policies and regulations of the Federal Reserve
Board have had and will probably continue to have a significant
effect on the Bank's reserve requirements, deposits, loans, and
investment growth, as well as the rate of interest earned and
paid thereon, and are expected to affect the Bank's operation
in the future. The effect of such policies and regulations upon
the future business and earnings of the Bank cannot be
predicted.
On August 9, 1989, the Financial Institutions Reform, Recovery
& Enforcement Act of 1989 (FIRREA) was signed into law. FIRREA
was enacted to deal with the problems involving the savings and
loan industry. The basic provision of FIRREA established a new
regulatory structure for all financial institutions. However,
the principal changes were with respect to the savings
associations previously insured by the Federal Savings and Loan
Insurance Corporation. FIRREA created a new deposit insurance
system which consists of two funds; the Bank Insurance Fund
(BIF) and the Savings Associations Insurance Fund (SAIF). The
Company's subsidiary bank is insured under BIF. FIRREA also
increased the insurance premiums and limited certain activities
of savings associations. The majority of the provisions of
FIRREA have little effect on the Company or its subsidiary.
STATISTICAL DISCLOSURE REQUIRED BY BANK HOLDING COMPANIES
The following are exhibits included herewith:
<TABLE>
<CAPTION>
Exhibit No. Exhibit
<S> <C>
I. A.B. Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rates and Interest Differential
I. C. Rate Volume Analysis and Interest Rate Sensitivity Analysis
II. Securities Portfolio
III. Loan Portfolio
IV. Summary of Loan Loss Experience
V. Deposits
VI. Return on Equity and Assets
</TABLE>
<TABLE>
I. A.B. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential
<CAPTION>
1997 1996 1995
Interest Interest Interest
Average Earned/ Average Earned/ Average Earned/
(thousands) Balance Paid <F2> Rate Balance Paid <F2> Rate Balance Paid<F2> Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Securities <F1>:
U.S Treasury & Government
Agencies $ 63,741 $ 4,094 6.42% $ 63,217 $ 3,992 6.31% $ 54,787 $ 3,379 6.17%
State & Political
Subdivisions 21,555 2,013 9.34 22,374 2,102 9.39 21,547 2,074 9.63
Other 877 55 6.27 755 47 6.23 448 31 6.92
Total Securities 86,173 6,162 7.15 86,346 6,141 7.11 76,782 5,484 7.14
Interest Bearing Balances With
Other Financial Institutions 59 3 5.08 60 3 5.19 0 0 0.00
Federal Funds Sold 6,170 343 5.56 7,453 391 5.25 5,537 320 5.78
Loans:
Loans,Less
Unearned Incom <F3> 112,785 9,990 8.86 105,814 9,541 9.02 102,749 9,504 9.25
Total Interest-
Earning Assets 205,187 $16,498 8.04% 199,673 $16,076 8.05% 185,068 $15,308 8.27%
Cash and Due From Banks 6,175 6,184 5,846
Reserve for Loan Losses (1,558) (1,545) (1,447)
Other Assets <F4> 5,757 5,478 4,578
Total Assets $215,561 $209,790 $194,045
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing Liabilities:
Deposits:
Savings:
Regular Savings $ 40,834 $ 1,136 2.78% $ 39,739 $ 1,189 2.99% $ 40,220 $ 1,209 3.01%
NOW 21,457 322 1.50 19,504 336 1.72 19,194 336 1.75
Money Market Accounts 14,630 469 3.21 15,873 547 3.45 13,749 511 3.72
Certificates of Deposit
$100,000 or More 33,311 1,887 5.66 35,530 1,961 5.52 26,543 1,610 6.07
Other Time Interest-Bearing 57,324 3,096 5.40 53,743 2,881 5.36 52,486 2,786 5.31
Total Int.-Bearing Deposits 167,556 6,910 4.12 164,389 6,914 4.21 152,192 6,452 4.24
Other Short-Term Borrowings
& Repurchase Agreements 592 32 5.41 278 10 3.77 527 22 4.17
Total Interest-Bearing
Liabilities 168,148 $ 6,942 4.13% 164,667 $ 6,924 4.21% 152,719 6,474 4.24%
Demand Deposits 17,900 17,539 16,040
Other Liabilities 808 704 678
Total Liabilities 186,856 182,910 169,437
Stockholders' Equity 28,705 26,880 24,608
Total Liabilities and
Stockholders' Equity $215,561 $209,790 $194,045
<FN>
<F1> Includes available for sale and investment securities, both at amortized
cost, and FHLB and FRB stock.
<F2> Portions of income earned on U.S. Government obligations and obligations
of states and political subdivisions are exempt from federal and/or state
taxation. Appropriate adjustments have been made to reflect the equivalent
amount of taxable income that would have been necessary to generate an
equal amount of after tax income. The taxable equivalent adjustment is
based on a marginal Federal income tax rate of 34% for all periods
presented, and a marginal state income tax rate of 9.00% for 1997, 9.225%
for 1996 and 9.675% for 1995.
<F3> For the purposes of this analysis, non-accruing loans have been included
in average balances; in accordance with Company policy on non-accruing
assets, income on such assets is not recorded unless received.
<F4> Other assets include all assets except those specifically identified above
including the valuation adjustment related to the securities available for
sale.
</FN>
</TABLE>
I. A.B. The following table represents the average yield on all
interest-earning assets, the average effective rate paid on all
interest-bearing liabilities; and the net yield on interest-earning
assets for CNB Bancorp, Inc.
(Cont'd)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Average yield on interest-
earning assets <F1> 8.04% 8.05% 8.27%
Average effective rate paid
on interest-bearing liabilities 4.13% 4.21% 4.24%
Spread between interest-earning
assets and interest-bearing
liabilities <F1> 3.91% 3.84% 4.03%
Net interest income <F1> (thousands) $ 0 $ 0 $ 0
Net interest margin <F1> 4.66% 4.58% 4.77%
<FN>
<F1> On a fully taxable equivalent basis.
</FN>
</TABLE>
<TABLE>
1. C. Rate Volume Analysis
The following tables set forth, for the periods indicated, a summary of
changes in interest earned and interest paid resulting from changes in
volume and changes in rates (thousands)
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Increase (decrease) due to: <F1> Increase (decrease) due to: <F1>
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest Earned on: <F2>
Loans $614 ($165) $449 $219 ($182) $ 37
Taxable Securities <F3> 36 74 110 554 75 629
Non-Taxable Securities <F3> (78) (11) (89) 80 (52) 28
Federal Funds Sold (73) 25 (48) 96 (25) 71
Interest-Bearing Balances
with Banks 0 0 0 3 0 3
Total 499 (77) 422 952 (184) 768
Interest Paid on:
Deposits 266 (270) (4) 513 (51) 462
Short-Term Borrowings & Repos 16 6 22 (10) (2) (12)
Total 282 (264) 18 503 (53) 450
Net Interest Differential <F2> $217 $187 $404 $449 ($131) $318
Notes to Rate Volume Analysis
<FN>
<F1> The change in interest due to both rate and volume have been allocated to
changes due to volume and changes due to rate in proportion to the
relationship of the absolute dollar amounts of the changes in each.
<F2> A "tax equivalent adjustment" has been included in the calculations to
reflect this income as if it had been fully taxable. The "tax equivalent
adjustment" is based upon the federal and state income tax rates.
<F3> Includes securities available for sale, investment securities, FHLB and FRB
stock.
</FN>
</TABLE>
<TABLE>
1. C. Interest Rate Sensitivity Analysis
<CAPTION>
Maturity/Repricing Period at December 31, 1996
After 3 Mo. After One
Within But Within But Within After
(in thousands) 3 Months 1 Year Five Years Five Years Total
<S> <C> <C> <C> <C> <C>
Rate sensitive assets:
Securities <F1> $18,999 $23,854 $29,801 $14,983 $ 87,637
Loans, net of unearned discount 40,483 18,260 36,673 23,722 119,138
Cash & Cash Equivalents 2,822 0 0 0 2,822
Total rate sensitive assets $62,304 $42,114 $66,474 $38,705 $209,597
Rate sensitive liabilities:
Savings, NOW & MMDA accounts $23,305 $5,948 $5,665 $47,062 $81,980
Time deposits 21,813 43,710 18,760 0 84,283
All other rate sensitive liabilities 2,142 0 0 2,200 4,342
Total rate sensitive liabilities $47,260 $49,658 $24,425 $49,262 $170,605
<FN>
<F1> Includes securities available for sale and investment securities, at
amortized cost, and FHLB and FRB stock.
</FN>
GAP (RSA - RSL) $15,044 ($ 7,544) $42,049 ($10,557)
CUMULATIVE GAP (RSA - RSL) 15,044 7,500 49,549 38,992
RSA divided by RSL 131.8% 84.8% 272.2% 78.6%
RSA divided by RSL - Cumulative 131.8 107.7 140.8 122.9
GAP divided by equity 50.7 (25.4) 141.7 (35.6)
GAP divided by equity - Cumulative 50.7 25.3 166.9 131.4
RSA divided by total assets 28.0 18.9 29.9 17.4
RSA divided by total assets - Cumulative 28.0 47.0 76.9 94.3
RSL divided by total assets 21.3 22.3 11.0 22.2
RSL divided by total assets - Cumulative 21.3 43.6 54.6 76.7
GAP divided by total assets 6.8 (3.4) 18.9 (4.7)
GAP divided by total assets - Cumulative 6.8 3.4 22.3 17.5
</TABLE>
CNB Bancorp, Inc., through its subsidiary Bank, actively manages its interest
rate sensitivity position through the use of new products and repricing
techniques. The objectives of interest rate risk management are to control
exposure of net interest income to risks associated with interest rate
movements and to achieve consistent growth in net interest income. The
measurement of the interest rate sensitivity position at any specific point
in time involves many assumptions and estimates. Nonetheless, the
accompanying interest sensitivity analysis, broken into future repricing time
frames, helps to illustrate the potential impact of future changes in
interest rates on net interest income. The table above shows the interest
rate sensitivity gap position. The table presents data at a single point in
time. The under one year cumulative gap was 3.4% of assets at December 31,
1997. Interest sensitivity, however, is only one measure of the extent to
which changes in interest rates might affect net interest income; the mix
within the interest earning asset and interest bearing liability portfolios
is continually changing as well. To date, the Company has not used financial
futures or interest rate swaps in the management of interest rate risk. The
Asset Liability Management Committee, using policies and procedures set by
the board of directors and senior management, is responsible for managing CNB
Bancorp, Inc.'s rate sensitivity position.
In evaluating the Company's exposure to interest rate risk, certain factors
inherent in the method of analysis presented in the table above must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market rates. Further, certain assets, such as
adjustable rate mortgages, have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. The Company
considers the anticipated effects of these various factors in implementing
its interest rate risk management objectives. It should also be noted that
the interest rate sensitivity level shown in the table above could be changed
by external factors such as loan prepayments or by factors controllable by
CNB Bancorp, Inc. such as asset sales.
The Company has identified a portion of it's savings deposits as being rate
sensitive based on prior years historical experience, due mainly to the shift
in dollar volume from certificates of deposit to savings accounts over and
above the historical level of core deposits. In addition, the Asset/Liability
Management Committee reviews, on a quarterly basis, the potential impact to
the Company's net interest margin based on a shift of +/- 200 bp change in
interest rates. At December 31, 1997 the net interest margin exposure,
expressed in dollars, for the one year cumulative gap based on a +200bp
change was an increase of approximately $168,000.
Another function of asset/liability management is to assure adequate
liquidity by maintaining an appropriate balance between interest sensitive
assets and interest sensitive liabilities. Liquidity management involves the
ability to meet the cash flow requirements of the Company's loan and deposit
customers. Interest sensitivity is related to liquidity because each is
affected by maturing assets and liabilities. Interest sensitivity analysis,
however, also considers that certain assets and liabilities may be subject to
rate adjustments prior to maturity. It is the Company's policy to manage its
affairs so that liquidity needs are fully satisfied through normal bank
operations. To maintain short-term liquidity, the Company strives to be a net
seller of Federal Funds, to keep a significant amount of the investments
available for sale portfolio in unpledged assets that are less than 18 months
to maturity, and to maintain lines of credit with correspondent banks.
Long-term liquidity involves the laddering of the investment portfolio to
provide stable cash flow, and the matching of fixed rate mortgage loans with
identified core deposits.
II. Securities Portfolio
<TABLE>
A. The carrying amounts of the Company's securities for the years ended
December 31 are summarized below:
(in thousands)
<CAPTION>
Securities Available for Sale: 1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury and other U.S. Government Agencies $44,548 $45,641 $40,296
State and Political Subdivisions 9,810 10,479 10,168
Privately-issued collateralized mortgage obligations 0 0 286
Total $54,358 $56,120 $50,750
Investment Securities: 1997 1996 1995
Obligations of U.S. Government Agencies $20,732 $18,811 $15,198
State and Political Subdivisions 12,315 12,120 11,565
Total $33,047 $30,931 $26,763
Investments Required By Law: 1997 1996 1995
Federal Reserve Bank stock $ 240 $ 240 $ 150
Federal Home Loan Bank stock 644 595 0
Total $ 884 $ 835 $ 150
</TABLE>
B. Maturity Distribution of the Company's securities as of December 31, 1997:
(in thousands)
<TABLE>
<CAPTION>
Maturing
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
Securities Available for Sale <F1> Amount Yield <F2> Amount Yield <F2> Amount Yield <F2> Amount Yield <F2>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US Treasury and other
U.S. Gov't Agencies $15,423 6.09% $15,365 6.44% $7,653 7.09% $ 6,107 5.93%
State and Political Subdivisions 1,877 10.08 5,039 10.07 2,672 8.67 222 7.86
Total <F3> $17,300 6.52% $20,404 7.30% $10,325 7.48% $ 6,329 6.10%
Maturing
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
Investment Securities <F1> Amount Yield <F2> Amount Yield <F2> Amount Yield <F2> Amount Yield <F2>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Agencies $14,200 6.59% $ 6,085 6.78% $ 447 6.42% $ 0 0.00%
State and Political Subdivisions 1,998 7.91 6,396 9.62 3,517 8.77 404 7.92
Total <F3> $16,198 6.75% $12,481 8.24% $3,964 8.51% $404 7.92%
<FN>
<F1> Maturities are based on the earlier of the maturity date or the call date.
<F2> A "tax equivalent adjustment" has been included in the calculation of the
yields to reflect this income as if it had been fully taxable. The "tax
equivalent adjustment" is based on federal and state income tax rates. The
yield on securities available for sale is calculated based upon the
amortized cost of the securities.
<F3> There are no securities of individual issuers that represent greater than
10% of stockholders' equity at December 31, 1997.
</FN>
</TABLE>
Investments Required By Law
Federal Reserve Bank Stock and Federal Home Loan Bank Stock are nonmarketable
equity securities carried at cost with no stated maturity date. The fully tax
effected yield on these stocks as of December 31, 1997 was 6.53%.
III. Loan Portfolio
<TABLE>
<CAPTION>
A. Types of Loans 1997 1996 1995
December 31 (thousands) Balance % <F1> Balance % <F1> Balance % <F1>
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans <F2> $ 46,750 36.4% $ 44,583 38.8% $ 43,010 38.6%
Commercial and Commercial
Real Estate 37,265 29.0 32,685 28.4 34,815 31.2
Consumer Loans 44,537 34.6 37,780 32.8 33,632 30.2
Total 128,552 100.0% 115,048 100.0% 111,457 100.0%
Less: Reserve for loan losses 1,492 1,620 1,505
Unearned Income 9,414 8,063 6,983
Total $117,646 $105,365 $102,969
<FN>
<F1> % represents the percentage of loans in the category to total loans (gross of reserves and unearned).
<F2> Real Estate Loans consists of only regular residential mortgage loans. At December 31, 1997, 1996 and
1995 the subsidiary Bank did not have any construction loans in the loan portfolio.
</FN>
</TABLE>
B. Maturities and Sensitivity to changes in Interest Rates
Shown below are the amounts of loans outstanding (excluding certain mortgages
and consumer loans) as of December 31, 1997, which, based on remaining scheduled
repayments of principal, are due in the periods indicated and the relative
sensitivity of such loans to changes in interest rates:
<TABLE>
<CAPTION>
After One
One Year But Within After
(thousands) or Less <F1> Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial and Commercial
Real Estate $25,009 $10,918 $1,338 $37,265
<FN>
<F1> Includes demand loans having no stated schedule of repayments and no
stated maturity and overdrafts.
</FN>
</TABLE>
The following table reflects the total of commercial, financial, and
agricultural loans at December 31, 1997 that will be maturing after one year
which have predetermined fixed interest rates or floating interest rates.
<TABLE>
<CAPTION>
(thousands)
<S> <C>
Predetermined interest rates $5,611
Floating interest rates 6,645
</TABLE>
C. Risk Elements
1. Nonaccrual, Past Due, and Restructured Loans
Risk elements consist of nonaccrual, past due, and restructured loans.
<TABLE>
<CAPTION>
(thousands) 1997 1996 1995
<S> <C> <C> <C>
Loans on a non-accrual basis $283 $ 680 $ 681
Loans past due 90 days or more 88 557 353
Restructured loans 0 0 0
Total non-performing loans $371 $1,237 $1,034
Total non-performing loans as a percent
of total loans - net of unearned income 0.3% 1.2% 1.0%
</TABLE>
For loans on a non-accrual basis, loans past due 90 days or more and
restructured loans the difference between the interest collected and
recognized as income and the amounts which would have been accrued is not
significant.
Non-Performing Loans
Non-Performing loans are composed of (1) loans on a non-accrual basis, (2)
loans which are contractually past due 90 days or more as to interest or
principal payments but have not been classified non-accrual, and (3) loans
whose terms have been restructured to provide a reduction of interest or
principal because of a deterioration in the financial position of the
borrower.
The Company's policy with regard to non-accrual loans varies by the type of
loan involved. Generally, commercial, financial, and agricultural loans are
placed on a non-accrual status when they are 90 days past due unless they are
well secured and in the process of collection. In some instances, consumer
loans are classified non-accrual when payments are past due 90 days; but as a
matter of general policy, these loans are charged off after they become 120
days past due unless they are well secured and in the process of collection.
Mortgage loans are generally not placed on a non-accrual basis unless it is
determined that the value or marketability of real estate securing the loans
has deteriorated to the point that a potential loss of principal or interest
exists. Once a loan is on non-accrual basis, interest is recorded only as
received. Interest previously accrued on non-accrual loans which has not been
paid is reversed and charged against income during the period in which the
loan is placed on non-accrual status. Interest on restructured loans is only
recognized in current income at the renegotiated rate and then only to the
extent that such interest is deemed collectible.
C. Risk Elements
2. Potential Problem Loans
In addition to the total non-performing loans set forth above, loans in the
amount of $3.6 million at December 31, 1997 were classified as potential
problem loans. These are loans for which management has information which
indicates that the borrower may not be able to comply with the present
payment terms. Although there is some doubt about the ability of these
borrowers to comply with payment terms, minimal losses, if any, are
anticipated in 1998.
3. Foreign Outstandings - None
4. Loan Concentrations
Loan concentrations, as defined by the Securities and Exchange Commission,
are considered to exist when there are amounts loaned to a multiple number
of borrowers engaged in similar activities which would cause them to be
similarly impacted by economic or other conditions. CNB Bancorp, Inc.'s
business area consists of the County of Fulton and, therefore, there are
certain concentrations of loans within this geographic area. The subsidiary
Bank strives to maintain a diverse loan portfolio and accomplishes this
through rigid underwriting standards and by offering a wide variety of
business and consumer loans. At December 31, 1997, the only concentration of
loans that existed within the Bank's portfolio were loans to the leather and
leather related industries. Loans to this segment were $5.5 million, which
represented 4.3% of the gross loans outstanding at December 31, 1997.
IV. Summary of Loan Loss Experience
The following table summarizes year end loan balances, average loans
outstanding and changes in the allowance for loan losses due to loan losses,
recoveries and additions charged to expense.
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Amount of loans outstanding at end
of year (less unearned income) $119,138 $106,985 $104,474
Average loans outstanding during the year
(less average unearned income) $112,785 $105,814 $102,749
Balance of allowance at beginning of year $ 1,620 $ 1,505 $ 1,339
Loans charged off:
Commercial and Commercial Real Estate (230) 0 (5)
Real Estate (41) (24) (7)
Consumer (133) (103) (87)
Total loans charged off (404) (127) (99)
Recoveries of loans previously charged off:
Commercial and Commercial Real Estate 1 0 0
Real Estate 0 0 0
Consumer 20 22 35
Total Recoveries 21 22 35
Net loans charged off (383) (105) (64)
Additions to allowance charged to operating expense 255 220 230
Balance of allowance at end of year $ 1,492 $ 1,620 $ 1,505
Net charge-offs as percent of average
loans outstanding during year
(less average unearned income) 0.34% 0.10% 0.06%
Net charge-offs as percent of allowance
beginning of year. 23.64% 6.98% 4.78%
Allowance as percent of loans outstanding
at end of year
(less unearned income) 1.25% 1.51% 1.44%
</TABLE>
The provision for loan losses charged to expense, as well as the amount of the
allowance for loan losses, are determined by management as a result of its
evaluation of the loan portfolio. Management considers general economic
conditions, changes in the volume of loans and changes in the nature of the
collateral and other relevant factors, including risk elements. The primary
risk element considered by management with respect to consumer and real estate
mortgage loans is lack of current payments. The primary risk elements
considered with respect to commercial, financial and agricultural loans are the
financial condition of the borrower, the sufficiency of collateral and the
record of payment. A subjective review of all non-performing loans, other
problem loans, and overall delinquency is made prior to the end of each
calendar quarter to determine current adequacy of the allowance.
During 1997, the subsidiary Bank made a provision to its reserve for loan
losses in the amount of $255,000. The subsidiary Bank's allowance for loan
losses at December 31, 1997 totaled $1,491,736 or 1.25% of total loans, net
of unearned income. Net charge offs for 1997 totaled $383,342 of which $189,941
was due to one commercial relationship. Certain other commercial, financial,
and agricultural loans known to have problems are not expected to increase the
subsidiary Bank's losses during 1998. At year-end 1997, there were $282,605 of
loans in a non-accrual status. At December 31, 1997, $56,000 of the allowance
for loan losses was allocated to the nonaccrual loans outstanding. Losses
during 1998 in the real estate and consumer categories are expected to
approximate the average of the past three years. Although management of the
Company believes that the allowance is adequate to absorb anticipated losses,
there can be no assurance that the Company will not sustain losses in any given
period which could be substantial to the size of the allowance.
V. Deposits
A. The following table presents the average amount of deposits and rates paid by
major category for the year ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
Average Average Average
(thousands) Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 17,900 $ 17,539 $ 16,040
Regular Savings, NOW, and
Money Market 76,921 2.51% 75,116 2.76% 73,163 2.81%
Certificates of Deposit and
Other Time Deposits 90,635 5.50% 89,273 5.42% 79,029 5.56%
Total $185,456 $181,928 $168,232
</TABLE>
B. There were no foreign deposits in domestic offices at the end of any year in
the three year period ended December 31, 1997.
C. The following table indicates the maturities of time certificates of
deposit in amounts of $100,000 or more at December 31, 1997. (thousands)
Maturing in:
Three months or less $11,520
Over three months through six months 5,990
Over six months through twelve months 4,037
Over twelve months 3,955
D. There are no time certificates of deposit and other time deposits in the
amount of $100,000 or more issued by foreign offices.
VI. Return on Equity and Assets
The following table shows the ratio of net income to average stockholders'
equity and average total assets, and certain other ratios for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Percentage of net income to:
Average total assets 1.44% 1.45% 1.55%
Average total stockholders' equity 10.81 11.34 12.21
Percentage of cash dividends paid
to net income 41.28 38.88 36.23
Percentage of average stockholders' equity
to average total assets 13.32 12.81 12.68
</TABLE>
ITEM 2. Properties
The Bank's main office building is owned by the Company. In
addition, the Company owns property located at 185 Fifth
Avenue, Gloversville, New York, 231 Bridge Street, Northville,
New York, 142 North Comrie Avenue, Johnstown, New York and
4178 State Highway 30, Amsterdam, New York.
ITEM 3 Legal Proceedings
The nature of the Company's business generates a certain amount
of litigation involving matters arising in the ordinary course
of business. However, in the opinion of management of the
Company, after consultation with counsel, there are no
proceedings pending to which the Company is a party to or which
its property is subject which are material in relation to the
Company's net worth or consolidated financial condition, nor
are there any proceedings pending other than ordinary routine
litigation incident to the business of the Company. In
addition, no material proceedings are pending or are known to
be threatened or contemplated against the Company by
governmental authorities or others.
ITEM 4. Submission of Matter to a Vote of Security Holders
None
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholders
Matters The information set forth under the heading "Market and
Dividend Information" on page 28 of the registrant's 1997
Annual Report is incorporated herein by reference.
ITEM 6. Selected Financial Data
The information set forth under the heading "Five Year Summary
of Operations" on page 9 of the registrant's 1997 Annual
Report is incorporated herein by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth under the heading "Financial Review"
on page 5 of the registrant's 1997 Annual Report is incorporated
herein by reference.
Liquidity
Liquidity represents a banking enterprise's capacity to meet
its daily obligations, such as loan demand and the maturity or
withdrawal of deposits and other financial obligations. In
addition to maintaining liquid assets, factors such as capital
position, profitability, asset quality, and availability of
funding affect a bank's abilitiy to meet its liquidity needs.
The Company's primary sources of liquidity continue to be
federal funds sold and interest bearing time deposits. Other
sources of liquidity include repayment of loans and the federal
funds market, which is a vehicle banks use to trade surplus
funds. When the Company experiences a net outflow of funds,
maturing long term investments are not reinvested until
sufficient excess funds are available.
The Company, on average, during 1997 sold $6.2 million of
federal funds.
Capital
At December 31, 1997, stockholders' equity was $29.7 million,
which represents an increase of $2.0 million, or 7.2% over
1996. This follows an increase of $1.8 million, or 6.8% over
1995. The increases from 1996 to 1997 and 1995 to 1996 were due
to the retention of earnings.
The adequacy of the Company's capital is reviewed by management
on an ongoing basis in relation to the size, composition and
quality of the Company's resources and in conjunction with
regulatory guidelines.
The currently required risk-based capital ratio, as established
by the Federal Reserve Board, is 8.00% as of December 31, 1997.
The Company's risk- based capital ratio was 25.3% and 26.2% at
December 31, 1997 and 1996 respectively. Dividends per share
declared in 1997 were $.80 as compared to $.74 in 1996 and $.68
in 1995 after adjusting for the 2 for 1 stock dividend declared
in January 1997.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is effective for years beginning after December 15, 1997
and requires reclassification of consolidated financial
statements for earlier periods provided for comparative
purposes. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components.
Comprehensive income is defined as all changes in equity during
a period except those resulting from investments by owners and
distributions to owners. The Company will provide the
disclosures required by SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No.
131 is effective for consolidated financial statements for
fiscal periods beginning after December 15, 1997. In the
initial year of application, comparative information for
earlier years is to be restated. SFAS No. 131 requires that a
public business enterprise report financial and descriptive
information about its reportable operating segments. The
Company does not believe the adoption will have a significant
effect on its financial reporting.
ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk
The information set forth under the heading "Financial Review -
Market Risk" pages 6 and 7 of the registrant's 1997 Annual
Report is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data
The information set forth on pages 10 through 27 of the
registrant's 1997 Annual Report is incorporated by references.
Additional supplementary data not found in registrant's annual
report.
UNAUDITED INTERIM FINANCIAL INFORMATION (In Thousands, except
per share data). The following is a summary of unaudited
quarterly financial information for each quarter of 1997 and 1996.
<TABLE>
<CAPTION>
1997 Quarters ended 1996 Quarters ended
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $3,874 $3,967 $3,931 $3,991 $3,749 $3,818 $3,868 $3,870
Net Interest Income 2,221 2,197 2,198 2,206 2,065 2,091 2,090 2,135
Provision for Loan Losses 60 45 45 105 30 30 80 80
Income Before Income Taxes 1,107 1,089 1,158 1,098 1,098 1,177 1,151 890
Net Income 775 763 803 760 771 823 810 641
Per Share: Net Income,<F1> 0.48 0.48 0.50 0.48 0.48 0.51 0.51 0.40
<FN>
<F1> Per share figures have been adjusted to reflect the 2 for 1 stock split effected through the 100% stock dividend
declared in January 1997.
</FN>
</TABLE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Election of Directors
The by-laws of the Company provide that the Board of Directors
shall consist of not less than five nor more than 25 members,
and that the total number of directors may be fixed by action
of the Board of Directors or the shareholders. The by-laws
further provide that the directors shall be divided into three
(3) classes as nearly equal in number as possible, known as
Class 1, consisting of not more than eight (8) directors; Class
2, consisiting of not more than eight (8) directors; and Class
3, consisting of not more than nine (9) directors. Such classes
became effective after the first annual meeting of shareholders
in 1989. Each class holds office for a term of three years, but
only one class comes up for election each year. Each director
shall serve until his successor shall have been elected and
shall qualify, even though his term of office as herein
provided has otherwise expired, except in the event of his
earlier resignation, removal, or disqualification.
The eleven persons listed below are currently directors of the
Corporation. Except as noted below, all of the nominees have
held the same or another executive position with the same
employer during the past five years.
<TABLE>
<CAPTION>
Principal Occupation Director of
Name, Age for Past Five Years Class the Corp. Since
<S> <C> <C> <C>
Theodore E. Hoye, Jr., 72 Attorney-at-Law, Hoye & Hoye 3 1988
John C. Miller, 67 President, John C. Miller, Inc.
Automobile Dealer 2 1988
Frank E. Perrella, 70 President, Sira Corp.
Consultant 2 1988
Robert L. Maider, 66 Attorney-at-Law, Maider & Smith 2 1988
William N. Smith, 57 Chairman of the Board, President
and Chief Executive Officer 1 1988
of the Company and the Bank
Leon Finkle, 73 Chairman of the Board,
Finkle Distributors, Inc.
Candy and Tobacco Distribution 1 1988
George A. Morgan, 55 Vice President & Secretary
of the Company and Executive Vice President,
Cashier & Trust Officer of the Bank 3 1991
Clark Easterly, Sr., 71 Chairman of the Board
The Johnstown Knitting Mill Company
Manufacturer of Knitwear 1 1992
Brian K. Hanaburgh, 48 Owner
D/B/A McDonald's Restaurants
Fast Food Restaurants 1 1994
Clark D. Subik, 43 President, Superb Leather, Inc.
Leather Merchandiser 3 1995
Deborah H. Rose, 47 Vice President, Hathaway Agency, Inc.
General Insurance 3 1996
</TABLE>
Management is not aware of any family relationships
between the above name directors.
The Board of Directors of the Company does not have a standing
nominating committee or compensation committee. These functions
are performed by the Company's Executive Committee which met
four times during 1997. Its members are Messrs. Smith,
Chairman, Miller, Morgan and Perrella, and in addition, up to
two other members of the Board may serve as rotating members on
a monthly basis. The Executive Committee reviews and
recommends, to the full Board of Directors, nominees for
election or re-election as directors. The Executive Committee
will consider the names of individuals recommended by
shareholders for nomination to be directors of the Company.
Persons wishing to recommend individuals for consideration
should send such recommendations to the Secretary of the
Company.
The Board of Directors of the Company met five times during
1997. All members, except for Mr. Subik, attended at least 75%
of the aggregate number of meetings of the Board of Directors
and committees of the Board of which they are menbers.
The subsidiary Bank does not have a standing nomininating
committee. This function is performed by the Executive and
Discount Committee. The Executive and Discount Committee, in
addition to matters pertaining to loans and discounts,
exercises, when the Board is not in session, all other powers
of the Board which may be delegated. The Committee met 47 times
during 1997 and these functions were discussed at various times
during these meetings. Its permanent members are Messrs. Hoye,
Perrella, Morgan and Smith, in addition up to two other members
of the subsidiary Bank Board may serve as rotating members on a
monthly basis.
The Board of Directors of the subsidiary Bank had 14 meetings
during 1997. All members, except for Mr. Finkle attended at
least 75% of the aggregate number of meetings of the Board of
Directors and committees of the Board of which they are
members.
The subsidiary Bank has a compensation committee that met twice
during 1997. Its members are Messrs. Hoye, Chairman; Easterly
and Miller. The committee reviews the salaries and other forms
of compensation of the key executive officers of the subsidiary
Bank, reviews salary policies and general salary administration
throughout the subsidiary Bank and recommends to the Board of
Directors profit sharing contributions to be made to the
employee profit sharing plan.
The Company and the subsidiary Bank have standing audit
committees. Their members are Company and subsidiary Bank
directors; Perrella, Chairman; Easterly,Miller, Rose and Subik.
These Committees met seven times in 1997. The Committees each
year verify certain assets of the subsidiary Bank. KPMG Peat
Marwick LLP, certified public accountants, are engaged to
perform an audit of the full consolidated financial statements
of the Company, in accordance with generally accepted auditing
standards. The committees meet with representatives of KPMG
Peat Marwick LLP to discuss the results of their audit, and
these results are then reported to the full Board of Directors.
The Chairman of the Committees, from time to time during the
year, held informal meetings with the Company and subsidiary
Bank's internal auditor.
Principal Officers
The Following table sets forth, as of December 31, 1997,
selected information about the principal officers of the
subsidiary Bank, each of whom is elected by the Board of
Directors and each of whom holds offices at the discretion of
the Board of Directors:
<TABLE>
<CAPTION>
Bank
Office and Position Employee Shares of Hldg. Co.
Name, Age with the Bank Held Since Since Common Stock Owned <F1>
<S> <C> <C> <C> <C>
Robert W. Bisset, 61 Vice President 1972 1968 -
Ronald J. Bradt, 54 Vice President 1992 1966 420
George E. Doherty, 41 Vice President 1988 1983 180
Michael J. Frank, 51 Vice President and
Comptroller 1994 1990 2,000
Donald R. Houghton, 60 Vice President 1989 1955 150
David W. McGrattan, 57 Senior Vice President 1993 1988 200
George A. Morgan, 55 Executive Vice President,
Cashier and Trust Officer 1988 1967 816
William N. Smith, 57 Chairman of the Board,
President and Chief
Executive Officer 1984 1974 2,000
<FN>
<F1> The number of shares owned has been adjusted to reflect the 2 for 1 stock
split effected through the 100% stock dividend declared in January 1997.
</FN>
</TABLE>
Each of the principal officers of the subsidiary Bank, as
listed above, have been principally employed as an officer or
employee of the subsidiary Bank for more than the past five
years.
ITEM 11 Executive Compensation
Remuneration of Directors and Officers
At present, directors of the Company are not compensated in any
way for their services. The Board of Directors of the
subsidiary Bank are the same individuals who are directors of
the Company. Directors of the subsidiary Bank are compensated
for all services as directors as follows:
For attending regular and special meetings of the Board;
$550 for each meeting. For service as regular members of the
Executive and Discount Committee, except salaried officers;
$11,700 per annum, payable quarterly. For service as special
members of the Executive and Discount Committee; $900 for the
month of service. For service as members of the Trust
Investment Committee, except salaried officers, $2,700 per
annum, payable quarterly. For service as members of the
Examining Committee; $225 for each meeting attended. In
addition to the foregoing, the Chairman of the Examining
Committee received an annual fee of $600, payable quarterly.
For service as members of the Compensation Committee, except
for salaried officers; $225 for each meeting attended. Total
directors' fees during 1997 amounted to $125,525. At present,
officers of the Company are not compensated in any way for
their services. The following summary compensation table shows
the annual compensation for the last three years for the
subsidiary Bank's chief executive officer and executive vice
president, the only officers whose total salary and bonus
exceeded $100,000 in 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
All Other
Name and Principal Position Year Salary Bonus Compensation <F1>
<S> <C> <C> <C> <C>
William N. Smith, Chief
Executive Officer, 1997 $169,000 $6,760 $16,567
Chairman of the Board 1996 159,000 6,360 14,918
and President of both 1995 150,000 6,000 14,590
the Company and the
subsidiary Bank <F2>
George A. Morgan, Vice 1997 $113,000 $4,520 $14,764
President and Secretary 1996 106,000 4,240 13,054
of the Company and Executive 1995 100,000 4,000 12,053
Vice President, Cashier
and Trust Officer of the Bank <F2>
<FN>
<F1> Includes contributions to Mr. Smith's profit sharing plan
account of $9,167, $9,068 and $8,740 and Board of
Directors fees of $7,400, $5,850 and $5,850 for the years
1997, 1996 and 1995, respectively and contributions to
Mr. Morgan's profit sharing account of $7,364, $7,204 and
$6,203 and Board of Directors fees of $7,400, $5,850 and
$5,850 for the same periods.
<F2> The aggregate amount of personal benefits, on an individual
basis, for these officers did not exceed $10,000 in 1997.
</FN>
</TABLE>
Employee Benefit Plans
The subsidiary Bank has a non-contributory defined benefit
Retirement Plan by participation in the New York State Bankers
Retirement System. This Plan covers all employees of the Bank
age 21 years, and less than 65 years, with more than one year
of service who complete 1,000 or more hours of service during
the year. An employee becomes fully vested in the Plan after
five years of service. The amount of contributions, payment, or
accrual in respect to a specified person, is not and cannot
readily be separately or individually calculated by the
actuaries of the Plan. During 1997, the aggregate amount
expensed for retirement contributions to the Plan equaled
approximately 3.75% of the total covered remuneration paid to
participants in the Plan. In addition, the subsidiary Bank has
entered into an agreement with William N. Smith whereby the
subsidiary Bank has agreed to pay Mr. Smith a supplemental
retirement benefit equivalent to the excess of the benefit he
would receive under the Plan if the compensation limitations
provided by Section 401(a) (17) of the Internal Revenue Code
did not exist over his Plan benefit. The agreement also
provides that, for purposes of computing the supplemental
benefit payable to Mr. Smith, he will receive credit for an
additional ten years of service beyond his actual service with
the subsidiary Bank and the Company. Mr. Smith's supplemental
retirement benefit under this Agreement is only payable on his
termination of employment on or after his normal retirement
date, his earlier death or disability or if his employment
terminates within four years of a change in control of the
Company or the subsidiary Bank. The subsidiary Bank has
purchased a life insurance policy on Mr. Smith's life so that
it will have funds available to satisify its obligations under
this Agreement. This life insurance is held in a so-called
"Rabbi" trust but is available to the creditors of the
subsidiary Bank. Amounts expensed for retirement contributions
are not included in the above cash compensation table. Under
the Plan, as supplemented by the Agreement, each participant
who retires at age 65 is entitled to receive an annual
retirement income for life equal to 1.75% of the average of the
highest consecutive five years of compensation during his or
her career (average compensation) times creditable service up
to 35 years, plus 1.25% of the average compensation times
creditable service in excess of 35 years (up to five such
years), less .49% of the final three year average compensation
(limited to covered compensation, which is defined as the
average of the individual's last 35 years of taxable social
security wage base) times creditable service up to 35 years.
The following are examples of estimated annual benefits to
individual employees for the years of service indicated,
exclusive of social security benefits. (The Plan and the
Agreement contain provisions for optional benefits of
equivalent actuarial value which may be elected by the
employee). As of December 31, 1997, William N. Smith had 22
years of credited service with the subsidiary Bank and George
A. Morgan had 30 years.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS FOR YEARS OF SERVICE INDICATED
Years of Service
Highest 5-Year Average
Base Compensation 20 30 40
<S> <C> <C> <C>
$ 25,000 $ 6,300 $ 9,450 $ 12,588
50,000 14,628 21,942 28,724
75,000 23,378 35,067 45,599
100,000 32,128 48,192 62,474
125,000 40,878 61,317 79,349
150,000 49,628 74,442 96,224
175,000 58,378 87,567 113,099
200,000 67,128 100,692 129,974
</TABLE>
The subsidiary Bank has a deferred profit sharing plan. At
present, the profit sharing plan provides for annual
contributions, if any, by the subsidiary Bank, at the
discretion of the Board of Directors. Employees are eligible to
participate in the profit sharing plan after completing one
year of service with the subsidiary Bank and having reached age
21 years. Contributions on behalf of participating employees
are allocated to participants' shares in proportion to their
annual compensation. Amounts expensed for deferred profit
sharing plan contributions are included in the above summary
compensation table. Participants are fully vested over a six
year period. Contributions are invested and administered by the
subsidiary Bank as sole trustee and administrator. In addition,
the Agreement between William N. Smith and the subsidiary Bank
provides that Mr. Smith will receive credit in an account
maintained on the books of the subsidiary Bank for an amount
equal to the difference between the amount actually credited to
Mr. Smith's account under the profit sharing plan and the
contribution he would have received without regard to the
compensation limitations of Section 401 (a)(17) of the Internal
Revenue Code. The balance in Mr. Smith's supplemental profit
sharing account is payable on his termination of employment on
or after his normal retirement date, his earlier death or
disability or if his employment terminates within four years of
a change in control of the Company or the subsidiary Bank. The
subsidiary Bank is contributing money to the "Rabbi" trust
previously referred to so that it will have funds available to
satisfy its obligation under the Agreement to pay Mr.
Smith supplemental profit sharing benefits.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Principal Beneficial Owners Common Stock*
As of December 31, 1997, the Trust Department of the Bank held,
in various fiduciary capacities, 10,120 shares of the Company's
common stock as co-trustee and 10,000 shares of the Company's
common stock as sole trustee. Management does not exercise
voting power over these shares. These holdings represent 1.26%
of the total shares outstanding.
The following table sets forth, as of December 31, 1997, the
amount and percentage of the common stock of the Company
beneficially owned by each director and by all directors and
principal officers as a group.
<TABLE>
<CAPTION>
Name of Individual or Shares of Company Common Percent of
Identity of Group Stock Owned <F1> Class
<S> <C> <C>
Leon Finkle 2,400 <F2> 0.15
Theodore E. Hoye, Jr. 4,200 <F3> 0.26
Robert L. Maider 17,544 1.10
John C. Miller 48,000 3.00
George A. Morgan 816 0.05
Frank E. Perrella 34,800 <F4> 2.18
William N. Smith 2,000 0.13
Clark Easterly, Sr. 3,632 <F5> 0.23
Brian K. Hanaburgh 800 <F6> 0.05
Clark D. Subik 1,000 0.06
Deborah H. Rose 3,420 <F7> 0.21
All Directors and Principal Officers
of the Company as a Group (12 persons) 120,612 7.54
<FN>
<F1> The securities "benefically owned" by an individual are
determined in accordance with the definition of "beneficial
ownership" as set forth in the regulations of the Securities
and Exchange Commission. Accordingly, they may include
securities owned by or for the individual's spouse and minor
children and any other relative who has the same home, as well
as other securities as to which the individual has or shares
voting or investment power. Beneficial ownership may be disclaimed
as to certain of the securities.
<F2> Includes 800 shares owned individually by his spouse.
<F3> Includes 1,000 shares owned individually by his spouse.
<F4> Includes 34,000 shares owned individually by his spouse.
<F5> Includes 1,400 shares owned individually by his spouse.
<F6> Includes 300 shares owned individually by his spouse.
<F7> Includes 1,220 shares owned as custodian.
</FN>
</TABLE>
*The number of shares owned has been adjusted to reflect the 2
for 1 stock split effected through the 100% stock dividend declared
in January 1997.
ITEM 13. Certain Relationships and Related Transactions
The subsidiary Bank has had, and expects to have in the future,
banking transactions in the ordinary course of business with
many of its directors, executive officers and the businesses in
which they are associated. During the calendar year 1997, loans
to directors and executive officers, together with their
business interests, reached maximum aggregate totals of
$3,312,973, 11.16% of the December 31, 1997 equity capital
accounts. At year-end, 1997, loans to directors and executive
officers, together with their business interests, were
$2,193,639, 7.39% of the December 31, 1997 equity capital
accounts. All extensions of credit to such persons have been
made in the ordinary course of business on substantially the
same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other
persons, and in the opinion of the management of the subsidiary
Bank, do not involve more than a normal risk of collectibility
or present other unfavorable features.
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following consolidated financial statements of the
registrant and its subsidiary and the independent auditors'
report thereon included in the registrant's Annual Report to
Shareholders for the fiscal year ended December 31, 1997, are
incorporated herein by reference:
Financial Statements (Consolidated)
Independent Auditors' Report
Statements of Condition - Decmeber 31, 1997 and 1996 Statements
of Income - Years ended December 31, 1997, 1996 and 1995
Statements of Changes in Stockholders' Equity - Years ended
December 31, 1997, 1996, and 1995 Statements of Cash flows -
Years ended December 31, 1997, 1996, and 1995 Notes to
Consolidated Financial Statements
(All financial statement schedules for the registrant and its
subsidiary have been omitted as the required information is
included in the consolidated financial statements or the
related notes thereto.)
The following are the exhibits:
<TABLE>
<CAPTION>
Exhibit No. Exhibit
<S> <C>
3. Articles of Incorporation and Bylaws(incorporated by reference)
10. Material contracts:
Contract with data processing servicer(incorporated by reference)
Supplemental Executive Retirement Plan(incorporated by reference)
13. Annual Report to Security Holders(included herewith)
22. Subsidiaries of the Registrant(incorporated by reference)
23. Published report regarding matters submitted to a vote of
security holders
April 15, 1997 proxy materials(incorporated by reference)
</TABLE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Reg. S - K
Exhibit Number Description
<S> <C>
3. Articles of Incorporation and Bylaws
10. Material contracts:
Contract with data processing servicer
Supplemental Executive Retirement Plan
13. Annual Report to Security Holders
22. Subsidiaries of the Registrant
23. Published report regarding matters submitted
to vote of security holders
April 15, 1997 proxy materials
</TABLE>
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
By: /s/ George A. Morgan
George A. Morgan,
Vice President and Secretary
(principal financial officer)
Dated: March 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
CNB Bancorp, Inc.
By /s/ John C. Miller By /s/ Clark Easterly, Sr.
By /s/ Frank E. Perrella By /s/ Brian K. Hanaburgh
By /s/ Robert L. Maider By /s/ Clark D. Subik
By /s/ William N. Smith By /s/ Deborah H. Rose
By /s/ Leon Finkle By /s/ Theodore E. Hoye III
By /s/ George A. Morgan
CNB Bancorp, Inc.
1997 Annual Report
City
National
Bank
and Trust Company
DIRECTORS
CNB BANCORP, INC.
City National Bank and Trust Company
Theodore E. Hoye, Jr.
Partner, Hoye & Hoye Attorneys
John C. Miller
President, John C. Miller, Inc.
Automobile Dealer
Frank E. Perrella
President, Sira Corp.
Consultant
Robert L. Maider
Partner, Maider & Smith Attorneys
William N. Smith
Chairman of the Board, President and Chief Executive
Officer of the Company and the subsidiary Bank
Leon Finkle
Chairman of the Board, Finkle Distributors, Inc.
Candy and Tobacco Distribution
George A. Morgan
Vice-President and Secretary of the Company and
Executive Vice President, Cashier and Trust Officer
of the subsidiary Bank
Clark Easterly, Sr.
Chairman of the Board, The Johnstown Knitting Mill Company
Manufacturer of Knitwear
Brian K. Hanaburgh
Owner, D/B/A McDonald's Restaurants
Fast Food Restaurants
Clark D. Subik
President, Superb Leathers, Inc.
Leather Merchandiser
Deborah H. Rose
Vice-President, Hathaway Agency, Inc.
General Insurance
HONORARY DIRECTORS
Lydon F. Maider
Richard B. Parkhurst
Edward F. Vonderahe
Henry C. Tauber
Lloyd Politsch
Henry Buanno
Alfred J. Washburn
Richard E. Hathaway
Paul E. Smith
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
NET INCOME $ 3,100,667 $ 3,045,158 $ 3,002,684
Basic Earnings Per Share <F1> 1.94 1.90 1.88
CASH DIVIDENDS DECLARED $ 1,280,000 $ 1,184,000 $ 1,088,000
Per Share <F1> .80 .74 .68
STOCKHOLDERS' EQUITY AT
YEAR END $ 29,678,736 $ 27,746,821 $ 25,979,378
Per Share <F1> 18.55 17.34 16.24
RETURN ON AVERAGE
STOCKHOLDERS' EQUITY 10.8% 11.3% 12.2%
RETURN ON AVERAGE
ASSETS 1.44% 1.45% 1.55%
TOTAL ASSETS AT YEAR-END $222,324,505 $214,761,753 $201,516,183
<FN>
<F1> Per share amounts have been adjusted to reflect the 2 for 1 stock split
effected through the 100% stock dividend declared in January 1997.
</FN>
</TABLE>
TO OUR STOCKHOLDERS'
This is the fifteenth annual report that I have written for our
organization, and I am pleased that it details a very good year with continued
growth in earnings, loans and deposits. My sincere thanks to our dedicated
Board of Directors and staff for their contributions to these achievements.
The Board of Directors at their January 27, 1997 meeting declared a 2-for-1
stock split to shareholders of record February 10, 1997. The split was
effectuated by a 100% stock dividend.
Also in January, the Board increased the dividend for the thirty-first
consecutive year. The dividend per share for the year was $.80, an increase of
8.1% as compared to $.74 in 1996. Total dividends paid for the year amounted to
$1,280,000. At year-end, the bid price per share of stock was $33.00, an
increase of $8.125 or 32.7% from the prior year.
Net income and basic earnings per share in 1997 were $3,100,667 and $1.94,
respectively, compared to $3,045,158 and $1.90 the prior year, after adjusting
for the 2-for-1 stock split.
Total assets at year-end were $222,324,505, an increase of $7,562,752 from
the prior year. The bank experienced very good loan demand during the year as
total loans, net of unearned income, reached $119,138,009, an increase of
$12,152,790 or 11.4% year to year.
Stockholders equity increased to $29,678,736, an increase of $1,931,915 or
7.0%. This resulted in a year-end equity to total assets ratio of 13.3%, an
extremely strong ratio that compares very favorably to our regulatory bank
holding company peer group average of 9.6% and places us in the 92nd percentile
for capital strength within this group. This healthy capital position, along
with other factors, recently received positive notice from two bank rating
services. Based on the subsidiary Bank's performance for the quarter ended
September 30, 1997, Veribanc, Inc. has accorded us their highest rating, the
Blue Ribbon Bank designation and Bauer Financial Reports, Inc. has given us
their highest rating of five stars, an award we have continuously earned since
June 1, 1989. We are pleased to continue to receive this recognition for capital
strength and safety and soundness.
A major project this year has been the Year 2000 issue. Many existing
computer programs use only two digits to identify a year in the date field.
These programs were designed and developed without considering the impact of
the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results when we reach the year
2000. This is commonly referred to as the Y2K problem and affects virtually
all companies, including CNB Bancorp, Inc.
The Federal Financial Institutions Examination Council has issued several
interagency statements providing guidelines for the banking industry. The
guidance to date has stressed two points: (1) banks must consider external
sources of Year 2000 risk - vendors, funds-transfer and data-exchange networks,
and potential credit risk exposure from borrowers who don't deal with their own
Year 2000 problems; and (2) banks must have a comprehensive management plan to
resolve this problem.
We have established a Y2K committee, are actively dealing with these issues
and are confident that when the year 2000 arrives, our systems will be prepared.
Refer to the Financial Review - Impact of year 2000, page 8, for more in-depth
information on this matter.
As always, we welcome your comments and suggestions and please remember to
use our banking services and recommend us to your friends and neighbors.
/s/ William N. Smith
William N. Smith
Chairman and President
<TABLE>
Year End Total Assets
Five Years (1993 - 1997)
<CAPTION>
<S> <C>
1993 $170,275
1994 $188,093
1995 $201,516
1996 $214,762
1997 $222,325
</TABLE>
<TABLE>
Net Income
Five Years (1993 - 1997)
<CAPTION>
<S> <C>
1993 $2,576
1994 $2,825
1995 $3,003
1996 $3,045
1997 $3,101
</TABLE>
<TABLE>
Bid Price Per Common Share Year End <F1>
Five Years (1993 - 1997)
<CAPTION>
<S> <C>
1993 $16.44
1994 $20.38
1995 $22.50
1996 $24.88
1997 $33.00
<FN>
<F1> per share figures have been adjusted to reflect stock splits.
</FN>
</TABLE>
<TABLE>
Dividend Paid Per Common Share <F1>
Five Years (1993 - 1997)
<CAPTION>
<S> <C>
1993 $0.58
1994 $0.62
1995 $0.68
1996 $0.74
1997 $0.80
<FN>
<F1> per share figures have been adjusted to reflect stock splits.
</FN>
</TABLE>
FINANCIAL REVIEW
The financial review is a presentation of management's discussion and
analysis of the consolidated financial condition and results of operations of
CNB Bancorp, Inc. and its subsidiary City National Bank & Trust Company. The
financial review is presented to provide a better understanding of the
financial data contained in this report and should be read in conjunction with
the consolidated financial statements and other schedules that follow.
In addition to historical information, this Annual Report includes certain
forward-looking statements with respect to the financial condition, results of
operations and business of the Company and its subsidiary Bank based on current
management expectations. The Company's ability to predict results or the effect
of future plans and strategies is inherently uncertain and actual results,
performance or achievements could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state, and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the subsidiary
Bank's loan and securities portfolios, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices.
Results of Operations: The comparative consolidated statements of income
summarizes income and expense for the last three years. The Company, again,
achieved record earnings for 1997 of $3,100,667 as compared to $3,045,158 for
1996 an increase of 1.8% over the previous year. Net income for 1996 increased
by 1.4% over that of 1995. The return on average assets for the three years
ended December 31, 1997, 1996 and 1995 was 1.44%, 1.45% and 1.55%, respectively.
The return on average equity for the same periods was 10.8%, 11.3% and 12.2%.
Net interest income, the most significant component of earnings, is the
amount by which the interest generated from earning assets exceeds the expense
associated with funding those assets. Changes in net interest income from year
to year result from changes in the level and mix of the average balances
(volume) of earning assets and interest-bearing liabilities and from the yield
earned and the cost paid (rate). In the following discussion, interest income
is presented on a fully taxable equivalent basis applying the statutory Federal
income tax rate. Net interest income increased $404,781 or 4.4%, as compared to
an increase of $317,158 or 3.6% for the previous year. The increase in 1997 was
a result of higher volumes of loans throughout the year which increased the net
interest margin from 4.58% to 4.66%. Interest and fees on loans for 1997
increased by $448,380 or 4.7% from the previous year, as compared to an
increase of only $36,824 or 0.4%, for 1996 over 1995. The increase for 1997 was
due primarily to higher volumes of consumer loans, which increased by $5.2
million on average over the previous year. Interest on securities was virtually
unchanged for 1997 decreasing by only $3,192, as compared to an increase of
$634,658 or 11.6% for 1996 over 1995. The small decrease in 1997 was due to the
average volume of securities remaining approximately the same throughout the
year. The increase in 1996 was primarily due to new deposit growth being
invested in the investment portfolio. Interest on federal funds sold decreased
$48,772 or 12.5%, as compared to an increase of $71,384 or 22.3% for 1996 over
1995. The decrease in 1997 was due to the lower volume of funds maintained to
offset the decrease in short-term interest bearing liabilities.
Total interest expense increased $17,047 in 1997 or 0.2% over that of 1996
as compared to an increase of $450,846 or 7.0% for 1996 over 1995, The small
increase in 1997 was due to a higher volume of deposits in general but with a
switch from higher cost certificates of deposit to lower cost core deposits.
Total other income for 1997 increased by $65,642 or 9.2% due to higher
fiduciary income, new non-deposit income, and higher credit card merchant
discounts. Total other income for 1996 decreased by $30,937 or 4.1% due to the
non recurring sale of our credit card receivables in 1995 at a gain of $67,000.
Total other expense increased $336,351 or 7.4% over the preceding year as
compared to an increase of $247,564 or 5.7% for 1996 over 1995. The 1997
increase was due mainly to higher salary and benefit costs, and higher data
processing cost.
For comparison purposes, the table below shows net interest income converted
to a fully taxable equivalent basis to recognize the income tax savings between
taxable and tax-exempt assets.
<TABLE>
<CAPTION>
% Change % Change
1997 1996 1995 1997/1996 1996/1995
<S> <C> <C> <C> <C> <C>
Total interest income $15,763,108 $15,304,960 $14,551,487 3.0% 5.2%
Total interest expense 6,941,452 6,924,405 6,473,559 0.2 7.0
Net interest income 8,821,656 8,380,555 8,077,928 5.3 3.7
Tax equivalent adjustment 734,782 771,101 756,570 (4.7) 1.9
Net interest income taxable
equivalent basis $ 9,556,438 $ 9,151,656 $ 8,834,498 4.4% 3.6%
</TABLE>
Net interest rate spread, the difference between average earning asset
yield and the cost of average interest bearing funds, increased from 1996 to
1997 by 7 basis points or 1.8% over the previous year, as compared to a
decrease of 19 basis points or 4.7% from 1995 to 1996. Net interest margin,
the amount of net interest income expressed as a percentage of average earning
assets, increased for the year by 8 basis points or 1.7%, whereas the change
from 1995 to 1996 decreased by 19 basis points or 4.0%. The increases in the
net interest rate spread and the net interest margin for 1997 were attributed
primarily to the funding of the growth in average loans with lower costing
deposits.
<TABLE>
Interest rate spread and net interest margin:
(Tax equivalent basis)
<CAPTION>
1997 1996 1995
Yearly Yearly Yearly
Average Rate Average Rate Average Rate
<S> <C> <C> <C> <C> <C>> <C>
Earning Assets $205,186,283 8.04% $199,674,619 8.05% $185,067,200 8.27%
Interest bearing
liabilities 168,148,482 4.13 164,667,366 4.21 $152,718,579 4.24
Net interest
rate spread 3.91% 3.84% 4.03%
Net interest margin 4.66% 4.58% 4.77%
</TABLE>
Financial Condition: Total assets at December 31, 1997 reached $222 million
as compared to $215 million at December 31, 1996. Total loans outstanding
reached $118 million at December 31, 1997 an increase of $12 million over
December 31, 1996. This growth in loans was funded by an increase in deposits
of $1 million, a reduction in federal funds sold of $5 million, a runoff in
securities of $4 million and an increase in stockholders' equity of $2 million.
The subsidiary Bank's main goal for 1997 was to improve the net interest
margin by increasing the loan to deposit ratio. This ratio was 63.5% at
December 31, 1997 as compared to 57.4% at December 31, 1996. One of the primary
reasons for the growth in loans was an increase of nearly $6 million in the
consumer lending area. This was attributable primarily to increases in new and
used car lending through the purchases of dealer paper. Comercial lending also
increased by $4.6 million primarily due to increased use of lines of existing
customers and an increase in lending participations with other banks.
The subsidiary Bank also began using repurchase agreements in the fourth
quarter of 1997 as a means of leveraging some of the subsidiary Bank's capital
to improve net interest income. These funds were used to purchase securities of
approximately $4 million in the fourth quarter.
Liquidity: The primary objective of liquidity management is to ensure the
availability of sufficient cash flows to meet all of the Company's funding
needs, such as loan demand and customers' withdrawals from their deposit
accounts. While the primary source of liquidity consists of maturing
securities, other sources of funds are federal funds sold, repayment of loans,
sale of securities available for sale, and growth of deposit accounts.
Throughout 1998, approximately $17 million of securities are scheduled to
mature and approximately $16 million become callable. In addition to existing
liquid assets the subsidiary Bank maintains lines of credit with a
correspondent bank and the Federal Home Loan Bank (FHLB) to supplement its
short term borrowing needs.
The subsidiary Bank has pledged certain of its assets as collateral for
deposits of municipalities, FHLB borrowings and repurchase agreements. By
utilizing collateralized funding sources, the subsidiary Bank is able to access
a variety of cost effective sources of funds. Management monitors its liquidity
position on a regular basis and does not anticipate any negative impact to its
liquidity from pledging activities. While there are no known trends or demands
that are likely to affect the Bank's liquidity position in any material way
during the coming year, the above funds are available to satisfy any needs that
may arise.
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, as in 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 operation. 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 committee, 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
committee 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 rise or fall in interest rates of 200 basis point
shock 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
net interest margin as of December 31, 1997, assuming an increase or decrease
of 200 basis points in interest rates.
<TABLE>
<CAPTION>
Estimated net
Change in Interest Rate Interest Margin Change in Net
(basis points) ($000 omitted) Interest Margin
<S> <C> <C> <C>
+200 8,990 1.9%
+100 9,003 2.1
0 8,822 0.0
-100 8,513 (3.5)
-200 8,316 (5.7)
</TABLE>
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. At December 31,
1997, the Company had a positive one year cumulative gap position.
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
sinsitivity 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.
As of December 31, 1997 the subsidiary Bank was in an asset sensitive
position which means that more assets are scheduled to mature or reprice within
the next year than liabilities. The following table shows the interest rate
sensitivity gaps as of December 31, 1997 highlighting the gap percentage within
one year.
<TABLE>
<CAPTION>
Balance Maturing or Subject to Repricing (In Thousands)
After 3 Mo. After One
Within But Within But Within After
3 Months 1 Year Five Years Five Years Total
<S> <C> <C> <C> <C> <C>
At December 31, 1997
Interest Earning Assets:
Securities <F1> $18,999 $23,854 $29,801 $14,983 $ 87,637
Total Loans, net of unearned discount 40,483 18,260 36,673 23,722 119,138
Other Earning Assets 2,822 0 0 0 2,822
Total Earning Assets 62,304 42,114 66,474 38,705 209,597
Excess Fair Value Over Cost of Securities
Available for Sale 653
Other Assets 12,075
TOTAL ASSETS $222,325
Interest-Bearing Liabilities:
Savings, NOW and MMDA $23,305 $ 5,948 $ 5,665 $47,062 $ 81,980
Time Deposits 21,813 43,710 18,760 0 84,283
Other Interest-Bearing Liabilities 2,142 0 0 2,200 4,342
Total Interest-Bearing Liabilities 47,260 49,658 24,425 49,262 170,605
Demand Deposits 21,391
Other Liabilties & Equity 30,329
TOTAL LIABILITIES & EQUITY 222,325
Interest Rate Sensitivity Gap $15,044 ($7,544) $42,049 ($10,557)
Cumulative Interest Rate Sensitivity Gap $15,044 $7,500 $49,549 $38,992 $ 38,992
3.4%
<FN>
<F1> Includes Available for Sale Securities and Investment Securities at
amortized cost and FHLB and FRB stock at cost.
</FN>
</TABLE>
Capital Resources: Stockholders' equity ended 1997 at $29,678,736 up
$1,931,915 or 7.0%. At December 31, 1997 the ratio of stockholders' equity to
total assets was 13.3%, as compared to 12.9% at December 31, 1996.
As of December 31, 1990 banks were required to report new risk-based capital
ratios that require bank holding companies to meet a ratio of qualifying total
capital to risk-weighted assets. Risk-based assets are the value of assets
carried on the books of the Company, as well as certain off-balance sheet
items, multiplied by an appropriate factor as stipulated in the regulation.
Tier 1 capital consists of common stock and qualifying stockholders' equity.
Total capital consists of Tier 1 capital plus a portion of the allowance for
loan losses. Currently the minimum risk-based ratios, as established by the
Federal Reserve Board, for Tier 1 and total capital are 4% and 8%,
respectively. Additionally, the Federal Reserve Board requires a minimum
leverage ratio of 3%. At December 31, 1997 the Company had Tier 1 and total
risk-based capital ratios of 24.0% and 25.3%, respectively. The Company also
maintained a leverage ratio of 13.4% as of December 31, 1997. The leverage
ratio is defined as Tier 1 capital in relation to fourth quarter average
assets. These strong ratios are well in excess of regulatory minimums, and well
above the average for peer banks and the industry as a whole.
Provision for loan losses: The adequacy of the allowance for loan losses is
determined by management's evaluation of the quality of the loan portfolio on a
quarterly basis. This is an integral part of the loan function which includes
the identification of past due loans, non performing loans, the recognition of
the current economic environment and the review of historical loss experience.
Non performing loans, defined as non accruing loans, loans 90 days or more
past due and still accruing interest and loans restructured in a troubled debt
restructuring, ended 1997 at $371,009 or 0.3% of loans net of unearned income.
Non performing loans at December 31, 1996 were $1,236,536 or 1.2% of loans net
of unearned income. There were no troubled debt restructured loans as of
December 31, 1997 or 1996. There are no other loans in the Company's portfolio
that management is aware of that pose significant adverse risk to the eventual
full collection of principal.
The provision for loan losses for 1997 was $255,000, compared to $220,000 in
1996 and $230,000 in 1995. Net charge-offs were $383,342, $105,081 and $63,753
for the years 1997, 1996 and 1995, respectively. The increase in charge-offs in
1997 was primarily attributable to one commercial relationship that totaled
$189,941. The allowance at year-end 1997 was 1.3% of loans net of unearned
income, as compared to 1.5% for year-end 1996.
Deferred tax asset valuation allowance: Deferred tax assets are recognized
subject to management's judgment that realization is more likely than not. In
considering if it is more likely than not that some or all of the deferred tax
assets will not be realized, the Company considers temporary taxable
differences, historical taxes and future taxable income. The valuation
allowance of $149,713 and $155,928 as of December 31, 1997 and 1996,
respectively, relates to New York State deferred tax assets due to the lack of
carryback and carryforward provisions available in New York State. Based
primarily on the sufficiency of historical taxable income, management believes
it is more likely than not that the remaining net deferred tax asset at
December 31, 1997 and 1996 will be realized.
Impact of year 2000: Entering the year 2000 presents a complicated problem
to industries worldwide including the banking industry. The year 2000 problem
originates in the method used to code dates in computer software and hardware.
Most computer systems and programs use six digit date fields (YYMMDD) allowing
only two digits for the year. As we enter the year 2000, the two digit year
field will read 00. Most computer systems will interpret 00 as 1900 not as
2000. The potential impact is the inability of computer systems to function
properly since the date being read is incorrect.
A committee lead by senior management has been formed to evaluate and solve
the year 2000 problem for the subsidiary Bank. The committee has contacted all
of the bank's software and hardware vendors to request information on the status
of their year 2000 compliance status. The subsidiary Bank is also working
closely with ALLTEL Information Services, its data processing provider,
regarding year 2000 compliance. On January 26, 1998 the subsidiary Bank entered
into a new contract with ALLTEL to provide for data processing on its HORIZON
Banking system with a provision that the system will be 2000 compliant on or
before December 31, 1998. The committee has also implemented a plan to evaluate
the subsidiary Bank's commercial customers' attention to the year 2000 problem.
The committee will continue to monitor all software and hardware until
necessary updates have been installed and all systems are ready to enter the
year 2000. The subsidiary Bank is confident that we will enter the year 2000
without significant problems. The Company believes the costs of the year 2000
compliance will not have a material impact on its consolidated financial
condition or results of operations.
<TABLE>
FIVE YEAR SUMMARY OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
December 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Consolidated statement of income data
Interest Income:
Loans $ 9,989 $ 9,541 $ 9,504 $ 8,092 $ 7,200
Securities <F1> 5,428 5,369 4,727 4,170 4,341
Money market instruments 346 395 320 197 194
Total interest income 15,763 15,305 14,551 12,459 11,735
Interest expense:
Deposits 6,909 6,914 6,451 4,729 4,616
Borrowings 32 10 22 15 4
Total interest expense 6,941 6,924 6,473 4,744 4,620
Net interest income 8,822 8,381 8,078 7,715 7,115
Provision for loan losses 255 220 230 310 325
Net interest income after provision
for loan losses 8,567 8,161 7,848 7,405 6,790
Other income 783 717 748 759 612
Other expenses 4,898 4,562 4,314 4,199 4,024
Income before income taxes and cumulative
effects of changes in accounting principles 4,452 4,316 4,282 3,965 3,378
Applicable income taxes 1,351 1,271 1,279 1,140 883
Income before cumulative effects of changes
in accounting principles 3,101 3,045 3,003 2,825 2,495
Cumulative effects of changes in accounting
principles (net of income tax effect) 0 0 0 0 81
Net income $ 3,101 $ 3,045 $3,003 $ 2,825 $ 2,576
Per share data: <F2>
Basic earnings per share 1.94 1.90 1.88 1.77 1.61
Cash dividends paid .80 .74 .68 .62 .58
Selected year-end
consolidated statement of condition data:
Total assets $222,325 $214,762 $201,516 $188,093 $170,275
Securities <F1> 88,290 87,886 77,664 73,898 77,017
Net loans 117,646 105,365 102,969 99,336 82,793
Deposits 187,655 186,422 174,348 164,516 147,874
Stockholders' equity <F1> 29,679 27,747 25,979 22,925 21,857
<FN>
<F1> Securities figures include investment securities, securities available for
sale, FRB and FHLB stock. In 1997, 1996, 1995 and 1994 securities
available for sale were recorded at fair value with any net unrealized
gain or loss at December 31 included in stockholder's equity, on a net of
tax basis. Prior to 1994, securities available for sale, if any, were
recorded at the lower of amortized cost or fair value.
<F2> Per share amounts have been adjusted to reflect the 2 for 1 stock splits
effected through the 100% stock dividends declared in January 1997 and
December 1993.
</FN>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CONDITION
<CAPTION>
December 31,
ASSETS: 1997 1996
<S> <C> <C>
Cash and cash equivalents
Non-interest bearing $ 6,584,697 $ 8,323,677
Interest bearing 21,610 38,296
Federal funds sold 2,800,000 8,000,000
Total cash and cash equivalents 9,406,307 16,361,973
Securities available for sale, at fair value (note 3) 54,358,068 56,120,310
Investment securities (approximate fair value at 12/31/97-
$33,790,044; at 12/31/96 - $31,477,028) (note 4) 33,047,379 30,930,765
Investments required by law, stock in Federal Home Loan Bank
of New York and Federal Reserve Bank of New York, at cost 884,300 834,800
Loans (note 5) 128,551,564 115,048,050
Unearned income (9,413,555) (8,062,831)
Allowance for loan losses (note 6) (1,491,736) (1,620,078)
Net loans 117,646,273 105,365,141
Premises and equipment (note 7) 2,507,529 2,747,681
Accrued interest receivable 1,412,434 1,403,082
Other assets 3,062,215 998,001
Total assets $222,324,505 $214,761,753
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand (non-interest bearing) $21,391,440 $ 18,616,607
Regular savings, N.O.W. and money market accounts 81,980,001 84,212,947
Certificates and time deposits of $100,000 or more (note 8) 25,502,435 28,305,295
Other time deposits (note 8) 58,780,640 55,287,632
Total deposits 187,654,516 186,422,481
Securities sold under agreements to repurchase (note 9) 4,322,267 593
Other liabilities 668,986 591,858
Total liabilities 192,645,769 187,014,932
Commitments and contingent liabilities (notes 10 & 12)
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value, 5,000,000 shares authorized, 1,600,000 shares
issued and outstanding in 1997 - $5.00 par value
2,000,000 shares authorized, 800,000 shares issued and outstanding in 1996 4,000,000 4,000,000
Surplus 4,000,000 4,000,000
Undivided profits 21,286,487 19,465,820
Net unrealized gain on available for sale securities (net of tax effect) 392,249 281,001
Total stockholders' equity 29,678,736 27,746,821
Total liabilities and stockholders' equity $222,324,505 $214,761,753
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 9,989,520 $ 9,541,140 $ 9,504,316
Interest on federal funds sold 342,560 391,332 319,948
Interest on balances due from depository institutions 3,103 3,114 0
Interest on securities available for sale 3,356,108 3,333,142 2,985,145
Interest on investment securities 2,015,369 2,005,208 1,733,078
Dividends on FRB & FHLB stock 56,448 31,024 9,000
Total interest and dividend income 15,763,108 15,304,960 14,551,487
INTEREST EXPENSE:
Interest on deposits:
Certificates and time deposits of $100,000 or more 1,886,966 1,961,242 1,609,835
Regular savings, NOW and money market accounts 1,927,419 2,072,334 2,056,015
Other time deposits 3,095,192 2,880,335 2,786,027
Interest on securities sold under agreements
to repurchase 30,628 10,341 20,060
Interest on other borrowed money 1,247 153 1,622
Total interest expense 6,941,452 6,924,405 6,473,559
NET INTEREST INCOME: 8,821,656 8,380,555 8,077,928
Provision for loan losses (note 6) 255,000 220,000 230,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,566,656 8,160,555 7,847,928
OTHER INCOME:
Income from fiduciary activities 125,569 107,824 120,046
Service charges on deposit accounts 333,192 358,085 327,161
Net gain on sale of securities available for sale 1,378 0 0
Other income 322,479 251,067 300,706
Total other income 782,618 716,976 747,913
OTHER EXPENSES:
Salaries and employee benefits 2,531,477 2,383,495 2,165,637
Occupancy expense, net 298,067 284,050 254,207
Furniture and equipment expense 317,593 310,734 288,100
External data processing expense 479,121 441,082 408,311
F.D.I.C. insurance expense 22,861 2,000 190,079
Printing, stationery and supplies 142,577 156,101 142,243
Other expense 1,106,023 983,906 865,227
Total other expenses 4,897,719 4,561,368 4,313,804
INCOME BEFORE INCOME TAXES 4,451,555 4,316,163 4,282,037
Applicable income taxes (note 11) 1,350,888 1,271,005 1,279,353
NET INCOME $ 3,100,667 $ 3,045,158 $ 3,002,684
Basic earnings per share (1,600,000 shares) <F1> $1.94 $1.90 $1.88
See accompanying notes to consolidated financial statements.
<FN>
<F1> Per share amounts have been adjusted to reflect the 2 for 1 stock split
effected through the 100% stock dividend declared in January 1997.
</FN>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
For the three years ended December 31, 1997
Net Unrealized
Gain/(Loss)
on Securities
Available for Total
Common Undivided Sale, Net Stockholders'
Stock Surplus Profits of Tax Effect Equity
<S> <C> <C> <C> <C> <C>
Beginning balance, January 1, 1995 $ 4,000,000 $ 4,000,000 $15,689,978 $ (765,037) $22,924,941
Net income - 1995 0 0 3,002,684 0 3,002,684
Change in net unrealized loss on securities
available for sale, net of tax effect 0 0 0 1,139,753 1,139,753
Cash dividends paid on common stock 0 0 (1,088,000) 0 (1,088,000)
Ending balance, December 31, 1995 4,000,000 4,000,000 17,604,662 374,716 25,979,378
Net income - 1996 0 0 3,045,158 0 3,045,158
Change in net unrealized gain on
securities available for sale, net
of tax effect 0 0 0 (93,715) (93,715)
Cash dividends paid on common stock 0 0 (1,184,000) 0 (1,184,000)
Ending balance, December 31, 1996 4,000,000 4,000,000 19,465,820 281,001 27,746,821
Net income - 1997 0 0 3,100,667 0 3,100,667
2 for 1 stock split (800,000 shares) 4,000,000 (4,000,000) 0 0 0
Reduce par value from $5.00 to $2.50 (4,000,000) 4,000,000 0 0 0
Change in net unrealized gain on
securities available for sale,
net of tax effect 0 0 0 111,248 111,248
Cash dividends paid on common stock 0 0 (1,280,000) 0 (1,280,000)
Ending balance, December 31, 1997 $ 4,000,000 $ 4,000,000 $21,286,487 $ 392,249 $29,678,736
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,100,667 $ 3,045,158 $ 3,002,684
Adjustments to reconcile net income to cash and cash
equivalents provided by operating activities:
(Increase) decrease in interest receivable (9,352) 94,707 (187,140)
(Increase) decrease in other assets (2,054,310) 181,558 4,996
Increase in other liabilities 77,128 228,397 21,522
Deferred income tax (benefit) expense 61,716 (63,403) (7,592)
Depreciation 296,311 277,759 245,660
Amortization of premiums/discounts on
securities, net 129,064 162,689 189,277
Net gain on sale of securities available for sale (1,378) 0 0
Provision for loan losses 255,000 220,000 230,000
Total adjustments (1,245,821) 1,101,707 496,723
Net cash provided by operating activities 1,854,846 4,146,865 3,499,407
Cash flows from investing activities:
Purchase of investment securities (8,968,259) (13,902,313) (11,009,829)
Purchase of securities available for sale (16,504,848) (21,584,443) (10,777,661)
Purchase of FRB and FHLB stock (49,500) (684,800) 0
Proceeds from matured investment securities 6,787,903 9,671,853 11,212,252
Proceeds from matured securities available for sale 18,133,523 15,955,203 8,538,284
Proceeds from sale of securities available for sale 253,691 0 0
Net increase in loans (12,680,572) (2,780,908) (3,980,134)
Capital expenditures, net (56,159) (915,572) (407,696)
Net cash used by investing activities (13,084,221) (14,240,980) (6,424,784)
Cash flows from financing activities:
Net increase in deposits 1,232,035 12,074,274 9,832,652
Increase (decrease) in securities sold under
agreement to repurchase 4,321,674 (824,544) 514,360
Payment of dividends (1,280,000) (1,184,000) (1,088,000)
Net cash provided by financing activities 4,273,709 10,065,730 9,259,012
Net increase (decrease) in cash and cash equivalents (6,955,666) (28,385) 6,333,635
Cash and cash equivalents beginning of year 16,361,973 16,390,358 10,056,723
Cash and cash equivalents end of year $ 9,406,307 $ 16,361,973 $ 16,390,358
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 7,118,222 $ 6,762,177 $ 6,440,536
Income taxes 1,146,076 1,390,102 1,302,499
Supplemental schedule of noncash investing activities:
Net reduction in loans resulting from the transfer
to real estate owned $144,440 $ 164,772 $ 116,711
Change in net unrealized gain/(loss) on securities
available for sale (net of deferred tax changes of
$72,820 at 12/31/97, $65,824 at 12/31/96 and
$668,544 at 12/31/95) 111,248 (93,715) 1,139,753
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CNB Bancorp, Inc. (Company) and
City National Bank and Trust Company (subsidiary Bank) conform to generally
accepted accounting principles in a consistent manner and are in accordance
with the general practices within the banking field. The following is a summary
of the significant policies used in the preparation of the consolidated
financial statements.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary after elimination
of all significant intercompany transactions. The investment in the subsidiary
Bank is carried under the equity method of accounting.
SECURITIES - Management determines the appropriate classification of
securities at the time of purchase. If management has the positive intent and
ability to hold securities to maturity, they are classified as investment
securities and are stated at amortized cost. If securities are purchased for
the purpose of selling them in the near term, they are classified as trading
securities and they are reported at fair value with unrealized holding gains
and losses reflected in current earnings. All other securities are classified
as securities available for sale and are reported at the fair value, with net
unrealized gains or losses reported, net of income taxes, as a separate
component of stockholders' equity. A decline in the fair value of any security
below cost that is deemed other than temporary is charged to earnings resulting
in the establishment of a new cost basis for the security.
Nonmarketable equity securities such as Federal Reserve Bank stock, and
Federal Home Loan Bank stock, are carried at cost. These investments are
required for membership.
Gains and losses on the disposition of all securities are based on the
adjusted cost of the specific security sold. The adjusted cost of each debt
security sold is determined by taking the stated cost and adjusting for any
amortization of premiums or accretion of discount to the earlier of call or
maturity date. At December 31, 1997 and 1996 the subsidiary Bank did not have
any securities classified as trading securities.
LOANS - Loans are shown at their principal amount outstanding, less any
unearned discount and the allowance for loan losses. Interest income on
commercial and real estate loans is accrued on the basis of unpaid principal.
Interest on installment loans is accrued based on methods that approximate the
interest method.
Loan income is recognized on the accrual basis of accounting. When, in the
opinion of management, the collection of interest and/or principal is in doubt,
the loan is categorized as non-accrual. Generally, loans past due greater than
90 days are categorized as non-accrual. Thereafter, no interest is taken into
income until received in cash or until such time as the borrower demonstrates
the ability to make scheduled payments of interest and principal.
Management considers a loan to be impaired if, based on current information,
it is probable that the subsidiary Bank will be unable to collect all scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. When a loan is considered to be impaired, the amount of
the impairment is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price of the fair value of
collateral if the loan is collateral dependent. Except for loans restructured
in a troubled debt restructuring subsequent to January 1, 1995, management
excludes large groups of smaller balance homogeneous loans such as residential
mortgages and consumer loans which are collectively evaluated. Impairment
losses, if any, are recorded through a charge to the provision for loan losses.
ALLOWANCE FOR LOAN LOSSES - The allowance is increased by provisions for
loan losses charged to operating expense and decreased by loan charge-offs net
of recoveries. Adequacy of the allowance and determination of the amount to be
charged to operating expense are based on an evaluation of the loan portfolio,
its overall composition, size of the individual loans, concentration by
industry, past due and non-accrual loan statistics, historical loss experience
and general economic conditions in the Company's market area.
While management uses all of the above information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for losses on loans. Such agencies may require the Company to recognize
additions to the allowance based on their judgments or information available to
them at the time of their examination which may not be presently available.
OTHER REAL ESTATE OWNED - Included in other assets is other real estate
owned which consists of properties acquired through foreclosure or by
acceptance of a deed in lieu of foreclosure. These assets are recorded at the
lower of the recorded investment in the loan or fair value of the property,
less any estimated costs of disposal. Loan losses arising from the acquisition
of such assets are charged to the allowance for loan losses and subsequent
valuation write-downs are charged to non interest expense. Operating costs
associated with the properties are charged to expense as incurred. Gains on the
sale of other real estate owned are included in income when title has passed
and the sale has met the minimum down payment requirements prescribed by
Generally Accepted Accounting Principles.
BANK PREMISES AND EQUIPMENT - These assets are reported at cost less
accumulated depreciation. Depreciation is charged to operating expense over the
useful lives of the assets using the straight line method. Maintenance and
repairs are charged to operating expense as incurred.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company's policy is that deferred
tax assets are reduced by a valuation reserve if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. In considering if it is more likely than not
that some or all of the deferred tax assets will be realized, the Company
considers temporary taxable differences, historical taxes and estimates of
future taxable income.
DIVIDEND RESTRICTIONS - Certain restrictions exist regarding the ability of
the subsidiary Bank to transfer funds to the Company in the form of cash
dividends. The approval of the Comptroller of the Currency is required to pay
dividends in excess of the subsidiary Bank's earnings retained in the current
year plus retained net profits, as defined, for the preceding two years.
CASH FLOWS - Cash and cash equivalents as shown in the consolidated
statements of condition and consolidated statements of cash flows consists of
cash, due from banks, and federal funds sold.
FINANCIAL INSTRUMENTS - The Company is a party to certain financial
instruments with off-balance sheet risk, such as commitments to extend credit,
unused lines of credit, standby letters of credit and commercial letters of
credit. The Company's policy is to record such instruments when funded.
USE OF ESTIMATES - The preparation of the consolidated financial statements,
in conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS No. 128), which establishes
standards for computing, presenting and disclosing earnings per share (EPS)
for entitles with publically held common stock. This Statement supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share" are related
interpretations.
The Company has computed basic earnings per share by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding, retroactively adjusted for stock splits and dividends. On
December 31, 1997, the Company adopted the provisions of SFAS No. 128. Adoption
of this statement had no effect on the Company as it has no potentially
dilutive securities.
PER SHARE INFORMATION - In January 1997, the Company declared a two-for-one
stock split, effected by means of a stock dividend paid on February 18, 1997.
All share and per share data included in the consolidated financial statements
and in the related notes thereto have been retroactively adjusted to reflect
the stock split.
RECLASSIFICATIONS - Amounts in the prior years' consolidated financial
statements are reclassified, whenever necessary, to conform to the presentation
in the current years' consolidated financial statements.
Note 2: RESERVE REQUIREMENTS
The subsidiary Bank is required to maintain certain reserves of cash and/or
deposits with the Federal Reserve Bank. The amount of this reserve requirement,
included in cash and cash equivalents, was approximately $1,169,000 and
$1,155,000 at December 31, 1997 and 1996, respectively.
Note 3: SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of securities available for sale as of December 31 are as
follows:
<TABLE>
<CAPTION>
1997
($000 Omitted)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $15,988 $ 39 $ 0 $16,027
Obligations of U.S. Government agencies 18,152 212 95 18,269
Collateralized mortgage obligations:
U.S. Government agencies 10,242 60 50 10,252
Obligations of states and political subdivisions 9,323 487 0 9,810
Total securities available for sale $53,705 $798 $145 $54,358
</TABLE>
<TABLE>
<CAPTION>
1996
($000 Omitted)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $17,987 $ 65 $ 7 $18,045
Obligations of U.S. Government agencies 17,008 111 163 16,956
Collateralized mortgage obligations:
U.S. Government agencies 10,686 39 85 10,640
Obligations of states and political subdivisions 9,970 510 1 10,479
Total securities available for sale $55,651 $725 $256 $56,120
</TABLE>
The amortized cost and estimated fair value of debt securities available for
sale at December 31, 1997, by contractual maturity, are shown in the
accompanying table. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or
without call or prepayment penalties. Mortgage backed securities are included
in this schedule based on the contractual maturity date.
<TABLE>
<CAPTION>
($000 Omitted)
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $14,839 $14,898
Due after one year through five years 11,681 11,853
Due after five years through ten years 6,104 6,321
Due after ten years 21,081 21,286
Total debt securities available for sale $53,705 $54,358
</TABLE>
Proceeds from sales of securities available for sale during 1997 were
$253,691. There were no sales of securities available for sale in 1996 and
1995. Gross gains in 1997 were $1,378. There were no losses on sales during
1997.
The fair value of all securities available for sale pledged to secure public
deposits and for other purposes as required or permitted by law at December 31,
1997 and 1996 were $33,570,922 and $33,172,200, respectively. Actual deposits
secured by these securities at December 31, 1997 and 1996 were $10,285,222 and
$15,817,857, respectively. Repurchase agreements secured by these securities at
December 31, 1997 and 1996 were $4,322,267 and $593, respectively.
Note 4: INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of investment securities as of December 31 are as
follows:
<TABLE>
<CAPTION>
1997
($000 Omitted)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Obligations of U.S. Government
agencies $20,732 $103 $ 36 $20,799
Obligations of states and political subdivisions 12,315 676 0 12,991
Total investment securities $33,047 $779 $ 36 $33,790
</TABLE>
<TABLE>
<CAPTION>
1996
($000 Omitted)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Obligations of U.S. Government
agencies $18,811 $ 55 $125 $18,741
Obligations of states and political subdivisions 12,120 633 17 12,736
Total investment securities $30,931 $688 $142 $31,477
</TABLE>
The amortized cost and estimated fair value of investment securities at
December 31, 1997, by contractual maturity, are shown in the accompanying table.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
($000 Omitted)
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 2,182 $ 2,195
Due after one year through five years 15,385 15,736
Due after five years through ten years 13,183 13,490
Due after ten years 2,297 2,369
Total investment securities $33,047 $33,790
</TABLE>
There were no sales of investment securities in 1997, 1996 or 1995.
The amortized cost of all investment securities pledged to secure public
deposits and for other purposes as required or permitted by law at December 31,
1997 and 1996 were $25,121,913 and $21,384,610, respectively. Actual deposits
secured by these securities at December 31, 1997 and 1996 were $16,937,012 and
$16,784,384, respectively.
Note 5: LOANS
Loans on the accompanying consolidated statement of financial condition are
comprised of the following at December 31,
<TABLE>
<CAPTION>
($000
Omitted)
1997 1996
<S> <C> <C>
Commercial and Commercial Real Estate $ 37,265 $ 32,685
Residential Real Estate 46,750 44,583
Installment 44,537 37,780
Total loans $128,552 $115,048
</TABLE>
Non-accrual loans at December 31, 1997, 1996 and 1995 were $282,605,
$679,914 and $681,386, respectively. The difference between the interest
collected on these loans and recognized as income and the amounts which would
have been accrued is not significant. There were loans ninety days past due and
still accruing interest of $88,404, $556,622 and $352,480 as of December 31,
1997, 1996 and 1995, respectively.
In the ordinary course of business, the subsidiary Bank has made loans to
certain directors and executive officers of the Company and the subsidiary
Bank, and other related parties. Such transactions are on substantially the
same terms, including interest rates and collateral on loans, as comparable
transactions made to others. Total loans to these persons and companies on
December 31, 1997 and 1996 amounted to $2,193,639 and $1,868,941, respectively.
During 1997, $8,964,484 of new loans were made and repayments totaled
$8,639,786.
As of December 31, 1997 and 1996 there were $277,812 and $679,914 of
commercial loans that were placed on nonaccrual status and were classified as
impaired loans, respectively. As of December 31, 1997 and 1996, $56,000 and
$272,000 of the allowance for loan losses was allocated to the impaired loans
outstanding, respectively. During, 1997, 1996 and 1995, the average balance of
impaired loans was $497,994, $655,648 and $171,184, respectively. Interest
income of $10,197, $15,974 and $14,763 was recognized on impaired loans during
1997, 1996 and1995, respectively.
The subsidiary Bank's primary business area consists of the County of Fulton
and, therefore, there are certain concentrations of loans and loan commitments
within that geographic area. Accordingly, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the economy of this region.
At December 31, 1997 and 1996, the only area of industry concentration that
existed within the subsidiary Bank's commitments were to the leather and
leather-related industries. Outstanding commitments to this segment were $4.5
million as of December 31, 1997 and $4.6 million as of December 31, 1996. These
figures represent 19.3% of the total commitments outstanding at the end of each
respective year. Loans outstanding to this segment were $5.5 million as of
December 31, 1997 and $5.4 million as of December 31, 1996. These figures
represent 4.3% and 4.7% of gross loans outstanding at the end of each
respective year.
Note 6: ALLOWANCES FOR LOAN LOSSES
A summary of the changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $1,620,078 $1,505,159 $1,338,912
Recoveries credited 21,052 21,787 35,405
Provision for loan losses 255,000 220,000 230,000
Less: Charged off loans (404,394) (126,868) (99,158)
Balance at end of year $1,491,736 $1,620,078 $1,505,159
</TABLE>
Note 7: BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Premises and equipment at December 31, 1997 1996
<S> <C> <C>
Land $ 604,085 $ 604,085
Bank Premises 2,245,011 2,245,011
Equipment, furniture and fixtures 1,914,029 1,881,601
4,763,125 4,730,697
Less: Accumulated depreciation and amortization (2,255,596) (1,983,016)
Total bank premises and equipment $ 2,507,529 $ 2,747,681
</TABLE>
Depreciation expense amounted to $296,311, $277,759 and $245,660 for the
years 1997, 1996 and 1995, respectively.
Note 8: DEPOSITS
The approximate amount of contractual maturities of certificates and time
deposit accounts for the years subsequent to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
<S> <C> <C>
1998 $65,523,124
1999 12,894,769
2000 3,605,956
2001 1,189,908
2002 1,069,318
$84,283,075
</TABLE>
Note 9: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
For the years ended December 31, 1997 and 1996, the average balance of
Securities Sold Under Agreements to Repurchase was $570,959 and $275,654,
respectively. The highest month end balances for these securities during 1997
and 1996 were $4,322,267 and $593,116, respectively.
The underlying securities associated with customer repurchase agreements
are under the control of the subsidiary Bank. The underlying securities
associated with repurchase agreements with the Federal Home Loan Bank and
brokerage firms are held in collateral accounts for our account until maturity
of the agreements.
Note 10: EMPLOYEE BENEFIT PLANS
Pension Plan - The subsidiary Bank is a member of the New York State Bankers
Retirement System and offers a non-contributory defined benefit retirement plan
to substantially all full-time employees. Benefit payments to retired employees
are based upon their length of service and percentages of average compensation
during the final three to five years of employment. Contributions are intended
to provide not only for benefits attributed to service to date, but also for
those expected to be earned in the future. Assets of the plan are primarily
invested in equity and debt securities.
The following table sets forth the plan's funded status as of a September 30
measurement date, and the amounts recognized in the accompanying consolidated
financial statements.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Actuarial present value benefit obligations:
Accumulated benefit obligation, including vested
benefits of $1,952,752 and $1,790,513
in 1997 and 1996, respectively. ($1,957,130) ($1,794,785)
Projected benefit obligation for service rendered to date ($2,589,474) ($2,332,781)
Plan assets at fair value 3,338,472 2,722,500
Plan assets in excess of the projected benefit obligation 748,998 389,719
Unrecognized prior service cost (24,833) (26,875)
Unrecognized net (gain)/loss from past experience
different from that assumed and effects of changes in assumptions (248,804) 26,399
Unrecognized net asset established October 1, 1986
and being amortized over 17.5 years (4,455) (5,141)
Prepaid pension cost $ 470,906 $ 384,102
</TABLE>
Net pension expense included the following (income)/expense components:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 123,165 $ 118,329 $ 104,480
Interest cost on projected benefit obligation 175,985 166,707 152,247
Actual return on plan assets (611,100) (336,937) (366,690)
Net amortization and deferral 380,740 123,377 180,826
Net periodic pension cost $ 68,790 $ 71,476 $ 70,863
</TABLE>
The weighted-average discount rate utilized in determining the projected
benefit obligations was 7.75% in 1997, 1996, and 1995. The rate of increase in
future compensation levels utilized in determining the projected benefit
obligations was 5.0% in 1997, 1996, and 1995. The expected long-term rate of
return on plan assets was 8.5% in 1997, 1996 and 1995.
The subsidiary Bank has a Supplemental Executive Retirement Plan for key
management personnel. The subsidiary Bank's expense for the years ended
December 31, 1997 and 1996 was approximately $55,000 and $52,000, respectively.
The subsidiary Bank has also established a Supplemental Life Insurance Plan
for certain officers with at least ten years of service to the Company, for
which benefits will continue through the death of the participants. The Company
purchased life insurance contracts for each participating officer in order to
fund these benefits. The cash surrender value of the purchased life insurance
contracts totaled approximately $2,000,000 and is included in other assets in
the consolidated statement of condition.
The subsidiary Bank has a non-contributory deferred profit sharing plan
under which contributions are made by the subsidiary Bank to a separate trust
for the benefit of the subsidiary Bank's participating employees. Annual
contributions to the plan are determined by the board of directors of the
subsidiary Bank. Earnings are accrued during the year and are distributed by
December 31st of each year. The subsidiary Bank's contribution to the plan for
1997, 1996, and 1995 was $102,000, $96,000 and $90,000, respectively.
Other than the Supplemental Life Insurance Plan and certain life insurance
benefits which are provided to a closed group of retirees, the Company does not
provide post-retirement benefits to employees. The costs associated with the
life insurance to the closed group of retirees is not significant in 1997, 1996
or 1995.
Note 11: INCOME TAXES
The following is a summary of the components of income tax expense for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current tax expense:
Federal $ 964,630 $999,781 $ 954,431
State 324,542 334,627 332,514
Total current tax expense 1,289,172 1,334,408 1,286,945
Deferred tax expense (benefit):
Federal 51,119 (54,609) (16,630)
State 10,597 (8,794) 9,038
Total deferred tax expense (benefit) 61,716 (63,403) (7,592)
Provision for income taxes 1,350,888 $1,271,005 $1,279,353
</TABLE>
The provision for income taxes is less than the amount computed by applying
the U.S. Federal income tax rate of 34% to income before taxes as follows:
<TABLE>
<CAPTION>
1997 1996 1995
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Tax expense at
statutory rate $1,513,529 34.0% $1,467,495 34.0% $1,455,893 34.0%
Increase (decrease)
resulting from:
Tax-exempt interest income (442,525) (9.9) (462,156) (10.7) (456,043) (10.6)
State tax expense, net of
federal deductions 214,816 4.8 211,745 4.9 227,193 5.3
Interest expense incurred
to carry tax-exempt bonds 47,186 1.1 50,211 1.2 48,779 1.1
Other 17,882 0.4 3,710 0.1 3,531 0.1
Provision for income taxes $1,350,888 30.4% $1,271,005 29.4% $1,279,353 29.9%
</TABLE>
Significant temporary differences that give rise to the deferred tax assets
and liabilities as of December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 641,446 $ 700,279
Director's deferred compensation 8,472 8,077
Post-retirement benefits 65,380 22,265
Total gross deferred tax assets 715,298 730,621
Less valuation allowance (149,713) (155,928)
Net deferred tax assets 565,585 574,693
Deferred tax liabilities:
Premised and equipment, primarily
due to accelerated depreciation (80,856) (92,612)
Securities discount accretion (46,866) (41,456)
Prepaid pension obligation (188,080) (129,126)
Total gross deferred tax liabilities (315,802) (263,194)
Net deferred tax asset end of year 249,783 311,499
Net deferred tax asset beginning of year 311,499 248,096
Deferred tax expense (benefit) $ 61,716 ($63,403)
</TABLE>
In addition to the deferred tax assets and liabilities described above, the
Company also has a deferred tax liability of $260,846 and $188,026 relating to
the net unrealized gain on securities available for sale as of December 31,
1997 and 1996, respectively.
Deferred tax assets are recognized subject to management's judgment that
realization is more likely than not. In considering if it is more likely than
not that some or all of the deferred tax assets will not be realized, the
Company considers temporary taxable differences, historical taxes and future
taxable income. The valuation allowance of $149,713 and $155,928 as of December
31, 1997 and 1996, respectively, relates primarily to New York State deferred
tax assets due to the lack of carryback and carryforward provisions available
in New York State. Based primarily on the sufficiency of historical taxable
income, management believes it is more likely than not that the remaining net
deferred tax asset at December 31, 1997 and 1996 will be realized.
Note 12: COMMITMENTS AND CONTINGENT LIABILITIES
Various commitments and contingent liabilities arise in the normal conduct
of the subsidiary Bank's business that include certain financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, unused lines of
credit, standby letters of credit and commercial letters of credit. Those
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized on the consolidated statements of financial condition.
The contract amounts of those instruments reflect the extent of involvement the
subsidiary Bank has in particular classes of financial instruments. The
subsidiary Bank's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit, unused lines of credit,
standby letters of credit and commercial letters of credit are represented by
the contractual notional amount of those instruments. The subsidiary Bank uses
the same credit policies in making commitments as it does for on-balance sheet
instruments.
Contract amounts of financial instruments that represent credit risk as of
December 31, 1997 and 1996 at fixed and variable rates are as follows:
<TABLE>
<CAPTION>
1997
Fixed Variable Total
<S> <C> <C> <C>
Commitments and unused lines of credit:
Home Equity loans $ 0 $ 4,750,746 $ 4,750,746
Commercial loans 419,803 15,539,577 15,959,380
Overdraft loans 1,228,203 0 1,228,203
Mortgage loans 593,678 17,000 610,678
2,241,684 20,307,323 22,549,007
Standby and Commercial letters of credit 0 767,091 767,091
Total $2,241,684 $21,074,414 $23,316,098
</TABLE>
<TABLE>
<CAPTION>
1996
Fixed Variable Total
<S> <C> <C> <C>
Commitments and unused lines of credit:
Home Equity loans $ 0 $ 4,873,192 $ 4,873,192
Commercial loans 940,241 15,597,111 16,537,352
Overdraft loans 1,143,774 0 1,143,774
Mortgage loans 279,558 62,000 341,558
2,363,573 20,532,303 22,895,876
Standby and Commercial letters of credit 0 883,703 883,703
Total $2,363,573 $21,416,006 $23,779,579
</TABLE>
Commitments to extend credit and unused lines of credit are agreements to
lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being fully drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The subsidiary Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral, if any, required by the
subsidiary Bank upon the extension of credit is based on management's credit
evaluation of the customer. Mortgage and Home Equity loan commitments are
secured by a lien on real estate. Collateral on extensions of credit for
commercial loans varies but may include accounts receivable, inventory,
property, plant and equipment, and income producing property.
Standby and Commercial letters of credit are conditional commitments issued
by the subsidiary Bank to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support borrowing arrangements.
The credit risk involved in issuing standby letters of credit and commercial
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
At December 31, 1997 and 1996 the subsidiary Bank had available lines of
credit with correspondent banks of $16,886,000 and $9,822,000, respectively.
Advances on these lines are secured by the subsidiary Bank's real estate
mortgages, investment securities and available for sale securities. There were
no advances on these lines of credit at December 31, 1997 and 1996.
The Company and its subsidiary, may from time to time, be defendants in
legal proceedings relating to the conduct of their business. In the best
judgements of management, the consolidated financial position of the Company
and its subsidiary Bank would not be affected materially by the outcome of any
pending legal procedures.
Note 13: REGULATORY CAPITAL REQUIREMENTS
National banks are required to maintain minimum levels of regulatory capital
in accordance with regulations of the Office of the Comptroller of the Currency
("OCC"). The Federal Reserve Board ("FRB") imposes similar requirements for
consolidated capital of bank holding companies. The OCC and FRB regulations
require a minimum leverage ratio of Tier 1 capital to total adjusted average
assets of 3.0% to 4.0% depending on the institution and minimum ratios of Tier
1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the OCC is required to take
certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized bank. Such actions could have a direct
material effect on a bank's financial statements. The regulations establish a
framework for the classification of banks into five categories: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Generally, a bank is
considered well capitalized it if has a leverage (Tier 1) capital ratio of at
least 5.0% (based on total adjusted average assets); a Tier 1 risk-based
capital ratio of at least 6.0%; and a total risk-based capital ratio of at
least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgements by the regulators
about capital components, risk weightings and other factors.
As of December 31, 1997 and 1996, the Company and the subsidiary Bank met
all capital adequacy requirements to which they are subject. Further, the most
recent OCC notification categorized the subsidiary Bank as a well-capitalized
bank under the prompt corrective action regulations. There have been no
conditions or events since that notification that management believes have
changed the subsidiary Bank's capital classification.
The following is a summary of the actual capital amounts and
ratios as of December 31, 1997 and 1996 for the Company
(consolidated) and the subsidiary Bank:
<TABLE>
<CAPTION>
1997 1996
($000 Omitted) ($000 Omitted)
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
Consolidated
Leverage (Tier 1) capital $29,287 13.4% $ 27,466 12.9%
Risk-based capital:
Tier 1 29,287 24.0 27,466 25.0
Total 30,779 25.3 28,844 26.2
Subsidiary Bank
Leverage (Tier 1) capital $29,278 13.4% $ 27,463 12.9%
Risk-based capital:
Tier 1 29,278 24.0 27,463 25.0
Total 30,770 25.3 28,841 26.2
</TABLE>
Note 14: PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CONDITION (Parent Only)
<TABLE>
<CAPTION>
At December 31,
($000 Omitted)
ASSETS: 1997 1996
<S> <C> <C>
Cash $ 9 $ 3
Investment in subsidiary 29,670 27,744
Total assets $29,679 $27,747
STOCKHOLDERS' EQUITY:
Common Stock $ 4,000 $ 4,000
Surplus 4,000 4,000
Undivided profits 21,287 19,466
Unrealized gain on available for sale securities (net of tax effect) 392 281
Total stockholders' equity 29,679 27,747
Total liabilities and stockholders' equity $29,679 $27,747
</TABLE>
CONDENSED STATEMENTS OF INCOME (Parent Only)
<TABLE>
<CAPTION>
Years ended December 31,
($000 Omitted)
1997 1996 1995
<S> <C> <C> <C>
Income:
Dividends from subsidiary $1,290 $1,184 $1,088
Expenses:
Other expense 6 2 2
Income before income taxes and equity in
undistributed net income of subsidiary 1,284 1,182 1,086
Income tax benefit 2 0 1
Income before equity in undistributed net
income of subsidiary 1,286 1,182 1,087
Equity in undistributed net income of subsidiary 1,815 1,863 1,916
Net income $3,101 $3,045 $3,003
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS (Parent only)
<TABLE>
<CAPTION>
Years ended December 31,
($000 Omitted)
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,101 $ 3,045 $ 3,003
Equity in undistributed earnings of subsidiary (1,815) (1,863) (1,916)
Net cash provided by operating activities 1,286 1,182 1,087
Cash flows from financing activities:
Payment of dividends (1,280) (1,184) (1,088)
Net cash used by financing activities (1,280) (1,184) (1,088)
Net increase (decrease) in cash 6 (2) (1)
Cash beginning of year 3 5 6
Cash end of year $ 9 $ 3 $ 5
</TABLE>
Note 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
A financial instrument is defined as cash, evidence of ownership interest in
an entity, or a contract that imposes on one entity a contractual obligation to
deliver cash or another financial instrument to a second entity or to exchange
other financial instruments on potentially unfavorable terms with a second
entity and conveys to that second entity a contractual right to receive cash or
another financial instrument from the first entity or to exchange other
financial instruments on potentially favorable terms with the first entity.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the subsidiary Bank's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the subsidiary Bank's financial instruments, fair value estimates
are based on judgments regarding future expected net cash flows, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include the net deferred tax asset
and property, plant, and equipment. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in the estimates of
fair value. In addition, there are significant intangible assets that the fair
value estimates do not recognize, such as the value of "core deposits," the
subsidiary Bank's branch network, trust relationships and other items generally
referred to as "goodwill."
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument.
Cash and Cash Equivalents
For these short-term instruments, carrying value approximates fair value.
Securities Available for Sale and Investment Securities
The fair value of securities available for sale and investment securities,
except certain state and municipal securities, is estimated on bid prices
published in financial newspapers or bid quotations received from securities
dealers. The fair value of certain state and municipal securities is not
readily available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the instruments
being valued. The estimated fair value of stock in the Federal Reserve Bank and
Federal Home Loan Bank is assumed to be its cost given the lack of a public
market for these investments.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, consumer, and
real estate. Each loan category is further segmented into fixed and adjustable
rate interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled
cash flows through the contractual estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the term of the loans to maturity,
adjusted for estimated prepayments.
Fair value for nonperforming loans is based on recent external appraisals
and discounting of cash flows. Estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific
borrower information.
Accrued Interest Receivable
For accrued interest receivable, a short-term instrument, carrying value
approximates fair value.
Deposit Liabilities
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings, NOW accounts and money market accounts is
estimated to be the amount payable on demand. The fair value of certificates
and time deposits is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for deposits
of similar remaining maturities. These fair value estimates do not include the
benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
Securities Sold Under Agreements to Repurchase
For these short-term instruments that mature in one day through ninety days,
carrying value approximates fair value. For these instruments that mature in
more than ninety days the fixed borrowing rate is compared to rates for similar
advances and a premium or discount calculated.
Accrued Interest Payable
For accrued interest payable, a short-term instrument, carrying value
approximates fair value.
Commitments to Extend Credit, Unused Lines of Credit, Standby and Commercial
Letters of Credit, and Financial Guarantees Written
The fair value of commitments to extend credit and unused lines of credit is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments, fair
value also considers the difference between current levels of interest rates
and the committed rates. The fair value of financial guarantees written and
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations
with the counterparties. Fees, such as these are not a major part of the
subsidiary Bank's business and in the subsidiary Bank's business territory are
not a "normal business practice." Therefore, based upon the above facts it is
stated that book value equals fair value and the amounts are not significant.
Financial Instruments
The estimated fair values of the Company's financial instruments at December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
($000 Omitted) ($000 Omitted)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 9,406 $ 9,406 $ 16,362 $ 16,362
Securities available for sale <F1> 55,242 55,242 56,955 56,955
Investment securities 33,047 33,790 30,931 31,477
Loans (net of unearned income) 119,138 119,391 106,985 106,550
Less allowance for loan losses 1,492 0 1,620 0
Net loans 117,646 119,391 105,365 106,550
Accrued interest receivable 1,412 1,412 1,403 1,403
Financial Liabilities:
Deposits
Non-interest bearing demand $ 21,392 $ 21,392 $ 18,617 $ 18,617
Savings, NOW and money market 81,980 81,980 84,213 84,213
Certificates of deposit
and other time 84,283 84,703 83,592 83,932
Total deposits 187,655 188,075 186,422 186,762
Securities sold under agreements
to repurchase 4,322 4,322 1 1
Accrued interest payable 191 191 368 368
<FN>
<F1> Includes investments required for membership in FRB and FHLB.
</FN>
</TABLE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of CNB Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of CNB
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CNB Bancorp,
Inc. and subsidiary at December 31, 1997 and 1996, the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Albany, NY
February 20, 1998
DESCRIPTION OF BUSINESS
CNB Bancorp, Inc., a New York corporation, organized in 1988, is a
registered bank holding company headquartered in Gloversville, New York. Its
wholly-owned subsidiary, City National Bank and Trust Company, was organized in
1887 and is also headquartered in Gloversville, New York, with four branches
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.
MARKET AND DIVIDEND INFORMATION CNB BANCORP, INC.
The common capital stock -$2.50 par value at December 31, 1997 and $5.00 par
value at December 31, 1996 is the only registered security of the Company and
is inactively traded. The range of prices of this security known to management
based on records of the Company and as supplied by Ryan, Beck and Co. on a
quarterly basis and the quarterly cash dividends paid for the most recent two
years are shown below. The figures have been adjusted to reflect the 2 for 1
stock split effected through the 100% stock dividend declared in January, 1997.
<TABLE>
<CAPTION>
1997 1996
Bid Asked Bid Asked
High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter 26.25 25.00 27.00 25.75 23.88 22.50 25.00 24.50
Second Quarter 26.50 26.50 28.75 27.50 24.00 23.75 25.50 24.75
Third Quarter 31.00 28.75 33.00 30.00 24.38 24.38 26.25 25.13
Fourth Quarter 33.00 32.00 36.00 33.50 24.88 24.75 25.63 25.50
</TABLE>
<TABLE>
<CAPTION>
Cash dividends paid - per share
1997 1996
<S> <C> <C>
First Quarter $ .20 $ .185
Second Quarter .20 .185
Third Quarter .20 .185
Fourth Quarter .20 .185
Total cash dividends per share $ .80 $ .74
Number of stockholders of record on December 31 669 639
</TABLE>
A copy of Form 10K (Annual Report) for 1997, filed with the Securities and
Exchange Commission by the Company, is available to stockholders free of charge
by written request to:
George A. Morgan, Vice President and Secretary
CNB Bancorp, Inc., 10-24 N. Main Street, P.O. Box 873, Gloversville,
NY 12078
LOGO PRINTED ON RECYCLED PAPER
CNB BANCORP, INC.
OFFICERS
WILLIAM N. SMITH, Chairman of the Board and President
GEORGE A. MORGAN, Vice-President and Secretary
MICHAEL J. FRANK, Treasurer
BRIAN R. SEELEY, Auditor
CITY NATIONAL BANK AND TRUST COMPANY
OFFICERS
WILLIAM N. SMITH, Chairman of the Board and President
GEORGE A. MORGAN, Executive Vice-President, Cashier and Trust Officer
DAVID W. McGRATTAN, Senior Vice-President
ROBERT W. BISSET, Vice-President
RONALD J. BRADT, Vice-President
GEORGE E. DOHERTY, Vice-President
MICHAEL J. FRANK, Vice-President and Comptroller
DEBORAH A. BRANDIS, Assistant Vice-President
ROBERT R. FAMIGLIETTI, Assistant Vice-President
LAWRENCE D. PECK, Marketing Officer
DONALD F. STANYON, JR., Financial Services Officer
JULIE A. BEAN, Loan Officer
KATHRYN E. SMULLEN, Loan Officer
BRIAN R. SEELEY, Auditor
MAIN OFFICE
LYNN M. CIRILLO, Branch Manager
FIFTH AVENUE OFFICE
CONSTANCE A. ROBINSON, Branch Manager
DARRIN R. AMBRIDGE, Branch Officer
JOHNSTOWN OFFICE
ELIZABETH J. HRANITZ, Branch Manager
TAMMY L. WARNER, Branch Officer
NORTHVILLE OFFICE
DONALD R. HOUGHTON, Vice-President and Branch Manager
PERTH OFFICE
TIENA M. DI MATTIA, Branch Manager
City
National
Bank
and Trust Company
BANKING OFFICES
MAIN OFFICE
10-24 North Main Street
P.O. Box 873
Gloversville, NY 12078
FIFTH AVENUE OFFICE
185 Fifth Avenue
Gloversville, NY 12078
JOHNSTOWN OFFICE
142 North Comrie Avenue
Johnstown, NY 12095
NORTHVILLE OFFICE
231 Bridge Street
Northville, NY 12134
PERTH OFFICE
4178 St Hwy 30
Town of Perth
Amsterdam, NY 12010
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
CNB BANCORP, INC.
FINANCIAL DATA SCHEDULE
(UNAUDITED)
DECEMBER 31, 1997
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,584,697
<INT-BEARING-DEPOSITS> 21,610
<FED-FUNDS-SOLD> 2,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,358,068
<INVESTMENTS-CARRYING> 33,047,379
<INVESTMENTS-MARKET> 33,790,044
<LOANS> 119,138,009
<ALLOWANCE> 1,491,736
<TOTAL-ASSETS> 222,324,505
<DEPOSITS> 187,654,516
<SHORT-TERM> 4,322,267
<LIABILITIES-OTHER> 668,986
<LONG-TERM> 0
0
0
<COMMON> 4,000,000
<OTHER-SE> 25,678,736
<TOTAL-LIABILITIES-AND-EQUITY> 222,324,505
<INTEREST-LOAN> 2,545,124 9,989,520
<INTEREST-INVEST> 1,337,958 5,427,925
<INTEREST-OTHER> 108,108 345,663
<INTEREST-TOTAL> 3,991,190 15,763,108
<INTEREST-DEPOSIT> 1,758,201 6,909,577
<INTEREST-EXPENSE> 1,785,510 6,941,452
<INTEREST-INCOME-NET> 2,205,680 8,821,656
<LOAN-LOSSES> 105,000 255,000
<SECURITIES-GAINS> 1,378 1,378
<EXPENSE-OTHER> 1,185,527 4,897,719
<INCOME-PRETAX> 1,097,232 4,451,555
<INCOME-PRE-EXTRAORDINARY> 1,097,232 4,451,555
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 759,396 3,100,667
<EPS-PRIMARY> 0.48 1.94
<EPS-DILUTED> 0.48 1.94
<YIELD-ACTUAL> 4.30
<LOANS-NON> 282,605
<LOANS-PAST> 88,404
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,639,501
<ALLOWANCE-OPEN> 1,620,078
<CHARGE-OFFS> 404,394
<RECOVERIES> 21,052
<ALLOWANCE-CLOSE> 1,491,736
<ALLOWANCE-DOMESTIC> 1,453,101
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 38,635
</TABLE>
