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, 1998 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, 1999
$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 $64,400,000.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to stockholders for the fiscal
year ended December 31, 1998.
(2) Portions of the Registrant's Proxy Statement for its Annual Meeting of
stockholders.
<PAGE>
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 and certificates of deposit; 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.
On January 25, 1999, CNB Bancorp, Inc. announced that it had entered into a
definitive agreement of merger to acquire Adirondack Financial Service
Bancorp, Inc., Gloversville, New York, parent company of Gloversville Federal
Savings and Loan Association. Completion of the transaction is subject to
approval by Adirondack's shareholders and regulatory authorities. The terms
of the acquisition call for CNB Bancorp to pay $15 million in cash in the
aggregate for all of the outstanding shares of Adirondack (subject to
possible adjustment). The transaction will be accounted for as a purchase and
is expected to close, upon shareholder and regulatory approval, in the second
quarter of 1999.
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 64 persons on a full time basis. There are
also 10 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 extensions 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.
- 1-
<PAGE>
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 management 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
To the extent allowable by law, the deposits of the subsidiary Bank are
insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). During 1995, BIF reached its statutory target of 1.25%
of total insured deposits and the BIF assessment rates were reduced from
0.23% to 0.04% for the highest rated banks. For 1996, the highest rated banks
were not assessed on the level of their deposits but rather paid a minimum
fee of $2,000 to BIF. During 1997 and 1998, BIF-assessable deposits were
subject to an assessment schedule providing for as assessment range of 0% to
0.27%, with banks in the lowest risk category paying no assessments. The
subsidiary Bank was in the lowest risk category and paid no FDIC insurance
assessments during 1997 and 1998. BIF assessment rates are subject to
semi-annual adjustment by the FDIC Board of Directors. The FDIC Board of
Directors has retained the 1997 and 1998 BIF assessment schedule through June
30, 1999.
In 1996, Congress enacted the Deposit Insurance Funds Act which establishes a
schedule to merge BIF with the Savings Association Insurance Fund ("SAIF").
The act also provides for funding Financing Corp ("FICO") bonds, to provide
funding for the Federal Savings and Loan Insurance Corporation prior to 1991.
BIF-assessable deposits are subject to assessment for payment on the FICO
bond obligation at one-fifth the rate of SAIF-assessable deposits through
year-end 1999, or until the insurance funds are merged, whichever occurs
first. The FICO assessment is adjusted quarterly based on call report
submissions to reflect changes in the assessment bases of the respective
funds. During 1998, BIF insured banks paid a rate of 0.012% for purposes of
funding FICO bond obligations, resulting in an assessment of $22,358 for the
subsidiary Bank. The assessment rate for BIF member institutions has been set
at 0.0122% on an annualized basis for the first quarter of 1999.
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.
- 2-
<PAGE>
General
In addition to historical information, this 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, polices or guidelines, and other economic, competitive,
governmental, and technological factors affecting the Company's operations,
markets, products, services and prices.
STATISTICAL DISCLOSURE REQUIRED BY BANK HOLDING COMPANIES
The following are exhibits included herewith:
Exhibit No. Exhibit
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
- 3-
<PAGE>
I. A.B. Distribution of Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differential
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- -------------------------- ---------------------------
Interest Interest Interest
(in thousands) Average Earned/ Average Earned/ Average Earned/
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 $ 68,002 $ 4,244 6.24% $ 63,741 $ 4,094 6.42% $ 63,217 $ 3,992 6.31%
State & Political
Subdivisions 21,432 1,952 9.11 21,555 2,012 9.33 22,374 2,101 9.39
Other 1,589 113 7.11 877 55 6.27 755 47 6.23
-------- ------- -------- ------- -------- -------
Total Securities 91,023 6,309 6.93 86,173 6,161 7.15 86,346 6,140 7.11
Interest Bearing Balances With
Other Financial Institutions 206 15 7.28 59 3 5.08 60 3 5.19
Federal Funds Sold 11,710 627 5.35 6,170 343 5.56 7,453 392 5.26
Loans:
Loans, Less
Unearned Income<F3> 121,252 10,598 8.74 112,785 9,990 8.86 105,814 9,541 9.02
-------- ------- -------- ------- -------- -------
Total Interest-Earning Assets 224,191 $17,549 7.83% 205,187 $16,497 8.04% 199,673 $16,076 8.05%
======= ======= =======
Cash and Due From Banks 6,328 6,175 6,184
Reserve for Loan Losses (1,541) (1,558) (1,545)
Other Assets<F4> 8,237 5,757 5,478
-------- -------- --------
Total Assets $237,215 $215,561 $209,790
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing Liabilities:
Deposits:
Savings:
Regular Savings $ 38,862 $ 1,048 2.70% $ 40,834 $ 1,136 2.78% $ 39,739 $ 1,189 2.99%
NOW 21,721 319 1.47 21,457 322 1.50 19,504 336 1.72
Money Market Accounts 13,555 427 3.15 14,630 469 3.21 15,873 547 3.45
Certificates of Deposit
$100,000 or More 39,792 2,213 5.56 33,311 1,887 5.66 35,530 1,961 5.52
Other Time Interest-Bearing 61,420 3,340 5.44 57,324 3,095 5.40 53,743 2,881 5.36
-------- ------- -------- ------- -------- -------
Total Int.-Bearing Deposits 175,350 7,347 4.19 167,556 6,909 4.12 164,389 6,914 4.21
Other Short-Term Borrowings
& Repurchase Agreements 10,229 544 5.32 592 32 5.41 278 10 3.77
Notes Payable - FHLB 548 26 4.74 0 0 0.00 0 0 0.00
-------- ------- -------- ------- -------- -------
Total Interest-Bearing
Liabilities 186,127 $ 7,917 4.25% 168,148 $ 6,941 4.13% 164,667 $ 6,924 4.21%
======= ======= =======
Demand Deposits 19,382 17,900 17,539
Other Liabilities 1,037 808 704
-------- -------- --------
Total Liabilities 206,546 186,856 182,910
Stockholders' Equity 30,669 28,705 26,880
-------- -------- --------
Total Liabilities and
Stockholders' Equity $237,215 $215,561 $209,790
======== ======== ========
<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
1998 and 1997 and 9.225% for 1996.
<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>
- 4-
<PAGE>
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)
1998 1997 1996
------- ------- -------
Average yield on interest-
earning assets* 7.83% 8.04% 8.05%
Average effective rate paid
on interest-bearing liabilities 4.25% 4.13% 4.21%
Spread between interest-earning
assets and interest-bearing
liabilities* 3.58% 3.91% 3.84%
Net interest income* (in thousands) $9,632 $9,556 $9,152
Net interest margin* 4.30% 4.66% 4.58%
*On a fully taxable equivalent
basis.
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 (in thousands)
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
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 $ 742 ($134) $ 608 $614 ($165) $449
Taxable Securities<F3> 358 (150) 208 36 74 110
Non-Taxable Securities<F3> (12) (49) (61) (78) (11) (89)
Federal Funds Sold 296 (12) 284 (73) 25 (48)
Interest-Bearing Balances
with Banks 11 2 13 0 0 0
------ ----- ------ ---- ----- ----
Total 1,395 (343) 1,052 499 (77) 422
------ ----- ------ ---- ----- ----
Interest Paid on:
Deposits 326 112 438 266 (270) (4)
Short-Term Borrowings & Repos 513 (1) 512 16 6 22
Notes Payable - FHLB 26 0 26 0 0 0
------ ----- ------ ---- ----- ----
Total 865 111 976 282 (264) 18
------ ----- ------ ---- ----- ----
Net Interest Differential<F2> $ 530 ($454) $ 76 $217 $187 $404
====== ===== ====== ==== ===== ====
<FN>
Notes to Rate Volume Analysis
<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>
- 5-
<PAGE>
1. C. Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
Maturity/Repricing Period at December 31, 1998
------------------------------------------------------------
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(RSA):
Securities<F1> $19,951 $20,681 $38,956 $27,365 $106,953
Loans, net of unearned discount 38,968 15,716 41,389 25,764 121,837
Cash & Cash Equivalents 13,942 0 0 0 13,942
------- ------- ------- ------- --------
Total rate sensitive assets $72,861 $36,397 $80,345 $53,129 $242,732
======= ======= ======= ======= ========
Rate sensitive liabilities(RSL):
Savings, NOW & MMDA accounts $25,939 $ 6,958 $ 6,626 $51,411 $90,934
Time deposits 39,437 34,859 17,888 0 92,184
All other rate sensitive liabilities 3,665 6,000 7,200 0 16,865
------- ------- ------- ------- --------
Total rate sensitive liabilities $69,041 $47,817 $31,714 $51,411 $199,983
======= ======= ======= ======= ========
<FN>
<F1> Includes securities available for sale and investment securities, at amortized cost, and FHLB and FRB stock.
</FN>
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
GAP (RSA - RSL) $3,820 ($11,420) $48,631 $ 1,718
CUMULATIVE GAP (RSA - RSL) 3,820 (7,600) 41,031 42,749
RSA divided by RSL 105.5% 76.1% 253.3% 103.3%
RSA divided by RSL - Cumulative 105.5 93.5 127.6 121.4
GAP divided by equity 12.1 (36.2) 154.3 5.5
GAP divided by equity - Cumulative 12.1 (24.1) 130.2 135.7
RSA divided by total assets 28.5 14.2 31.4 20.8
RSA divided by total assets - Cumulative 28.5 42.8 74.2 95.0
RSL divided by total assets 27.0 18.7 12.4 20.1
RSL divided by total assets - Cumulative 27.0 45.7 58.1 78.3
GAP divided by total assets 1.5 (4.5) 19.0 0.7
GAP divided by total assets - Cumulative 1.5 (3.0) 16.1 16.7
</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 (3.0)% of assets at December 31,
1998. 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, 1998 the net interest margin
exposure, expressed in dollars, for the one year cumulative gap based on a
+200bp change was an increase of approximately $259,000.
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.
- 6-
<PAGE>
II. Securities Portfolio
A. The carrying amounts of the Company's securities for the years ended December
31 are summarized below: (in thousands)
<TABLE>
<CAPTION>
Securities Available for Sale: 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
U.S. Treasury and other U.S. Government Agencies $74,865 $44,548 $45,641
State and Political Subdivisions 10,897 9,810 10,479
Corporate securities 3,395 0 0
------- ------- -------
Total $89,157 $54,358 $56,120
======= ======= =======
Investment Securities: 1998 1997 1996
------- ------- -------
Obligations of U.S. Government Agencies $ 6,105 $20,732 $18,811
State and Political Subdivisions 11,292 12,315 12,120
------- ------- -------
Total $17,397 $33,047 $30,931
======= ======= =======
Investments Required By Law: 1998 1997 1996
------- ------- -------
Federal Reserve Bank stock $ 240 $ 240 $ 240
Federal Home Loan Bank stock 735 644 595
------- ------- -------
Total $ 975 $ 884 $ 835
======= ======= =======
</TABLE>
B. Maturity Distribution of the Company's securities as of December 31, 1998:
(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 $20,842 6.16% $19,076 6.30% $18,391 6.64% $16,556 6.44
State and Political Subdivisions 1,844 10.21 3,391 9.75 5,322 7.38 340 7.61
Corporate securities 0 0.00 2,435 7.47 0 0.00 960 6.40
------- ------- ------- -------
Total<F3> $22,686 6.49% $24,902 6.86% $23,713 6.80% $17,856 6.46
======= ======= ======= =======
<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, 1998.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Maturing
------------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
--------------------- ------------------- -------------------- -------------------
Investment Securities(a) 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 $3,681 6.48% $1,977 7.06% $ 447 6.41% $ 0 0.00
State and Political Subdivisions 1,626 7.97 6,468 9.49 2,810 8.50 388 7.89
------ ------ ------- ------
Total<F3> $5,307 6.94% $8,445 8.93% $ 3,257 8.21% $ 388 7.89
====== ====== ======= ======
<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, 1998.
</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, 1998 was 6.83%.
- 7-
<PAGE>
III. Loan Portfolio
A. Types of Loans
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- ------------------ -------------------
December 31 (in thousands) Balance %<F1> Balance %<F1> Balance %<F1>
-------- -------- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans<F2> $ 46,423 35.1% $ 46,750 36.4% $ 44,583 38.8%
Commercial and Commercial
Real Estate 35,877 27.2 37,265 29.0 32,685 28.4
Consumer Loans 49,727 37.7 44,537 34.6 37,780 32.8
-------- -------- --------
Total 132,027 100.0% 128,552 100.0% 115,048 100.0%
Less: Allowance for loan losses 1,580 1,492 1,620
Unearned Income 10,190 9,414 8,063
-------- -------- --------
Total $120,257 $117,646 $105,365
======== ======== ========
<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, 1998, 1997 and 1996 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, 1998, which, based on remaining
scheduled repayments or repricing of principal, are due in the periods
indicated and the relative sensitivity of such loans to changes in interest
rates:
After One
One Year But Within After
(in thousands) or Less(a)(b) Five Years Five Years Total
------------- ---------- ---------- -------
Commercial and
Commercial
Real Estate $28,779 $6,226 $872 $35,877
(a) Includes demand loans having no stated schedule of repayments and no
stated maturity and overdrafts.
(b) Includes floating rate loans of $22,791 that are repriceable at
least quarterly.
C. Risk Elements
1. Nonaccrual, Past Due, and Restructured Loans Risk elements consist of
nonaccrual, past due, and restructured loans.
(in thousands) 1998 1997 1996
---- ---- ------
Loans on a non-accrual basis $280 $283 $ 680
Loans past due 90 days or more 249 88 557
Restructured loans 0 0 0
---- ---- ------
Total non-performing loans $529 $371 $1,237
==== ==== ======
Total non-performing loans as a percent
of total loans - net of unearned income 0.4% 0.3% 1.2%
==== ==== ======
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.
- 8-
<PAGE>
III. Loan Portfolio
(cont'd)
C. Risk Elements
2. Potential Problem Loans
In addition to the total non-performing loans set forth above, loans in
the amount of $2.7 million at December 31, 1998 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 1999.
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, 1998, 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 $5.6 million, which represented 4.2% of the gross loans outstanding
at December 31, 1998.
- 9-
<PAGE>
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, 1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Amount of loans outstanding at end
of year (less unearned income) $121,837 $119,138 $106,985
Average loans outstanding during the year
(less average unearned income) $121,252 $112,785 $105,814
Balance of allowance at beginning of year $ 1,492 $ 1,620 $ 1,505
Loans charged off:
Commercial and Commercial Real Estate (17) (230) 0
Real Estate (8) (41) (24)
Consumer (124) (133) (103)
-------- -------- --------
Total loans charged off (149) (404) (127)
-------- -------- --------
Recoveries of loans previously charged off:
Commercial and Commercial Real Estate 0 1 0
Real Estate 0 0 0
Consumer 17 20 22
-------- -------- --------
Total Recoveries 17 21 22
-------- -------- --------
Net loans charged off (132) (383) (105)
Additions to allowance charged to operating expense 220 255 220
-------- -------- --------
Balance of allowance at end of year $ 1,580 $ 1,492 $ 1,620
======== ======== ========
Net charge-offs as percent of average
loans outstanding during year
(less average unearned income) 0.11% 0.34% 0.10%
Net charge-offs as percent of allowance
beginning of year 8.85% 23.64% 6.98%
Allowance as percent of loans outstanding
at end of year
(less unearned income) 1.30% 1.25% 1.51%
</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 1998, the subsidiary Bank made a provision to its reserve for loan
losses in the amount of $220,000. The subsidiary Bank's allowance for loan
losses at December 31, 1998 totaled $1,580,000 or 1.30% of total loans, net
of unearned income. Net charge offs for 1998 totaled $132,000. Certain other
commercial, financial, and agricultural loans known to have problems are not
expected to increase the subsidiary Bank's losses during 1999. At year-end
1998, there were $280,000 of loans in a non-accrual status. At December 31,
1998, $55,000 of the allowance for loan losses was allocated to the
non-accrual loans outstanding. Losses during 1999 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.
-10-
<PAGE>
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>
1998 1997 1996
----------------- ---------------- ------------------
Average Average Average
(in thousands) Balance Rate Balance Rate Balance Rate
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 19,382 $ 17,900 $ 17,539
Regular Savings, NOW, and
Money Market 74,138 2.42% 76,921 2.51% 75,116 2.76%
Certificates of Deposit and
Other Time Deposits 101,212 5.49% 90,635 5.50% 89,273 5.42%
-------- -------- --------
Total $194,732 $185,456 $181,928
======== ======== ========
</TABLE>
B. There were no foreign deposits in domestic offices at the end of any year
in the three year period ended December 31, 1998.
C. The following table indicates the maturities of time certificates of
deposit in amounts of $100,000 or more at December 31, 1998. (in
thousands)
Maturing in:
Three months or less $18,928
Over three months through six months 5,010
Over six months through twelve months 3,035
Over twelve months 3,466
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:
1998 1997 1996
------ ------ ------
Percentage of net income to:
Average total assets 1.36% 1.44% 1.45%
Average total stockholders' equity 10.52 10.81 11.34
Percentage of cash dividends paid
to net income 41.71 41.28 38.88
Percentage of average stockholders' equity
to average total assets 12.93 13.32 12.81
-11-
<PAGE>
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 32 of the registrant's 1998 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 12 of the registrant's 1998 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 pages 5
through 11 of the registrant's 1998 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 ability 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. See Financial Review" section page 8 of Company's 1998
Annual Report for additional discussion on liquidity.
The Company, on average, during 1998 sold $11.7 million of federal funds.
Capital
At December 31, 1998, stockholders' equity was $31.5 million, which
represents an increase of $1.8 million, or 6.1% over 1997. This follows an
increase of $2.0 million, or 7.2% over 1996. The increases from 1997 to 1998
and 1996 to 1997 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, 1998. The Company's
risk-based capital ratio was 24.6% and 25.3% at December 31, 1998 and 1997
respectively. Dividends per share declared in 1998 were $0.84 as compared to
$0.80 in 1997 and $0.74 in 1996 after adjusting for the 2 for 1 stock
dividend declared in January 1997.
See "Financial Review" section page 8 of Company's 1998 Annual Report for
additional discussion on capital.
Recently Issued Accounting Standards
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting
Comprehensive Income." This Statement establishes standards for reporting and
display of comprehensive income and its components. Comprehensive income
includes the reported net income of a company, adjusted for items that are
currently accounted for as direct entries to equity, such as the mark to
market adjustment on securities available for sale, foreign currency items
and minimum pension liability adjustments. At the Company comprehensive
income represents net income plus other comprehensive income, which consists
of the net change in unrealized gains and losses on securities available for
sale for the period. Accumulated other comprehensive income represents the
net unrealized gains or losses on securities available for sale as of the
consolidated statements of condition dates. Comprehensive income is shown in
the registrant's 1998 Annual Report on pages 15 and 26 for the three year
periods ending December 31, 1998, 1997 and 1996.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of and 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. On December
31, 1998 the Company adopted the provisions of SFAS No. 131. Adoption of this
statement had no material effect on the Company's consolidated financial
statements.
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Post Retirement Benefits." This Statement revises
employers' disclosures about pension and other post retirement benefit plans.
It does not change the measurement or recognition of these plans. This
Statement was adopted by the Company on December 31, 1998 and had no impact
on the Company's consolidated financial position or results of operations.
-12-
<PAGE>
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management is currently evaluating the impact of this
Statement on the Company's consolidated financial statements.
ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk
The information set forth under the heading "Financial Review - Market Risk"
pages 9 and 10 of the registrant's 1998 Annual Report is incorporated herein
by reference.
ITEM 8. Financial Statements and Supplementary Data
The information set forth on pages 13 through 31 of the registrant's 1998
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 1998 and 1997.
<TABLE>
<CAPTION>
1998 Quarters ended 1997 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 $4,084 $4,187 $4,261 $4,311 $3,874 $3,967 $3,931 $3,991
Net Interest Income 2,254 2,202 2,201 2,269 2,221 2,197 2,198 2,206
Provision for Loan
Losses 60 60 60 40 60 45 45 105
Income Before Income
Taxes 1,116 1,109 1,121 1,257 1,107 1,089 1,158 1,098
Net Income 786 784 789 863 775 763 803 760
Per Share: Basic Earnings 0.49 0.49 0.49 0.54 0.48 0.48 0.50 0.48
Per Share: Diluted Earnings 0.49 0.49 0.49 0.54 0.48 0.48 0.50 0.48
</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>
John C. Miller, 68 President, John C. Miller, Inc.
Automobile Dealer 2 1988
Frank E. Perrella, 71 President, Sira Corp.
Consultant 2 1988
Robert L. Maider, 67 Attorney-at-Law, Maider & Smith 2 1988
William N. Smith, 58 Chairman of the Board, President
and Chief Executive Officer 1 1988
of the Company and the Bank
Leon Finkle, 74 Chairman of the Board,
Finkle Distributors, Inc.
Candy and Tobacco Distribution 1 1988
George A. Morgan, 56 Vice President & Secretary
of the Company and Executive Vice President,
Cashier & Trust Officer of the Bank 3 1991
Clark Easterly, Sr., 72 Chairman of the Board
The Johnstown Knitting Mill Company
Manufacturer of Knitwear 1 1992
-13-
<PAGE>
Brian K. Hanaburgh, 49 Owner
D/B/A McDonald's Restaurants
Fast Food Restaurants 1 1994
Clark D. Subik, 44 President, Superb Leather, Inc.
Leather Merchandiser 3 1995
Deborah H. Rose, 48 Vice President, Hathaway Agency, Inc.
General Insurance 3 1996
Theodore E. Hoye, III, 50 President, First Credit Corporation 3 1998
Financing and Insuring of Manufactured Housing
</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 1998. 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 six times during 1998. All members
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 48 times during 1998 and
these functions were discussed at various times during these meetings. Its
permanent members are Messrs. Miller, 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 15 meetings during 1998.
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 five times during
1998. Its members are Messrs. Perrella, 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; Easterly, Chairman; Hoye,
Rose and Subik. These Committees met six times in 1998. The Committees each
year verify certain assets of the subsidiary Bank. KPMG 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 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, 1998, 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, 62 Vice President 1972 1968 1,500
Ronald J. Bradt, 55 Vice President 1992 1966 1,924
George E. Doherty, 42 Vice President 1988 1983 930
Michael J. Frank, 52 Vice President and
Comptroller 1994 1990 3.050
Donald R. Houghton, 61 Vice President 1989 1955 910
David W. McGrattan, 58 Senior Vice President 1993 1988 1,300
George A. Morgan, 56 Executive Vice President,
Cashier and Trust Officer 1988 1967 10,816
William N. Smith, 58 Chairman of the Board,
President and Chief
Executive Officer 1984 1974 17,000
-14-
<PAGE>
<FN>
<F1> The number of shares owned includes exercisable stock options held as of
December 31, 1998.
</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 1998 amounted to
$136,800. 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 1998.
<TABLE>
Summary Compensation Table
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ------------ All Other
Name and Principal Position Year Salary Bonus Options Compensation<F1>
---- -------- ------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
William N. Smith, Chief
Executive Officer, 1998 $176,000 $7,040 30,000 $20,223
Chairman of the Board 1997 169,000 6,760 0 16,567
and President of both 1996 159,000 6,360 0 14,918
the Company and the
subsidiary Bank<F2>
George A. Morgan, Vice 1998 $117,000 $4,680 20,000 $16,457
President and Secretary 1997 113,000 4,520 0 14,764
of the Company and Executive 1996 106,000 4,240 0 13,054
Vice President, Cashier
and Trust Officer of the Bank<F2>
<FN>
<F1> Includes contributions to Mr. Smith's profit sharing plan account of $11,973, $9,167 and $9,068
and Board of Directors fees of $8,250, $7,400 and $5,850 for the years 1998, 1997 and 1996,
respectively and contributions to Mr. Morgan's profit sharing account of $8,207, $7,364 and $7,204
and Board of Directors fees of $8,250, $7,400 and $5,850 for the same periods.
<F2> The aggregate amount of personal benefits, on an individual basis, for these officers did not
exceed $10,000 in 1998.
</FN>
</TABLE>
Option Grants in Last Fiscal Year
The following table provides information on grants of stock options in 1998
to the named executives.
<TABLE>
<CAPTION>
Potential realizable
Number of Percent of value at assumed
securities total options annual rate of stock
underlying granted to Exercise price appreciation
options employees in or base Expiration for option term
granted(#) fiscal year price($/sh) date 5% ($) 10% ($)
----------- ------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
William N. Smith 30,000 45.8 % $35.50 10/26/08 $669,773 $1,697,336
George A. Morgan 20,000 30.5 35.50 10/26/08 446,515 1,131,557
</TABLE>
<TABLE>
Aggregated Option Exercises in 1998
and Year-end Option Values
<CAPTION>
Value of
Number of unexercised
unexercised in-the-money
options options
at year end (#) at year end ($)
Shares --------------- -----------------
acquired on Value Exercisable/ Exercisable/
exercise (#) realized ($) Unexercisable Unexercisable<F1>
------------- ------------ --------------- -----------------
<S> <C> <C> <C> <C>
William N. Smith 0 0 15,000/15,000 $26,250/$26,250
George A. Morgan 0 0 10,000/10,000 $17,500/$17,500
None of the named executive officers elected to exercise any options during the fiscal year ended December 31, 1998.
-15-
<PAGE>
<FN>
<F1> Value is based on the $37.25 closing price per share of common stock on December 31, 1998, less the exercise
price of $35.50 per share, multiplied by the total number of shares subject to exercisable or unexercisable
options, as applicable. The actual amount, if any, realized upon the exercise of stock options will depend upon
the market value of the Company's common stock relative to the exercise price per share of the optioned stock
at the time the stock option is exercised.
</FN>
</TABLE>
Employment Arrangements
The Company and the subsidiary Bank have entered into agreements with William
N. Smith and George A. Morgan which provide that if a "change of control" of
the Company or the subsidiary Bank should occur, Mr. Smith and Mr. Morgan
will be entitled to continued employment by the Company and the subsidiary
Bank for a minimum of five years following the "change of control" with the
same position and duties held at the time of a "change of control" and at
salaries which are no less than those in effect at the time the "change of
control" occurs. If, within five years of a "change of control", the Company
or the subsidiary Bank should terminate Mr. Smith's or Mr. Morgan's
employment for reasons other than "cause" or disability or if Mr. Smith or
Mr. Morgan should resign for "good reason" he would be entitled to a lump sum
termination payment equal to three times his annual compensation plus, if
applicable, a grossed up amount so that the after tax amount is equal to any
excise tax imposed on such termination payment pursuant to Internal Revenue
Code Section 4999.
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 1998, the
aggregate amount expensed for retirement contributions to the Plan equaled
approximately 2.77% 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, 1998, William N. Smith had 23
years of credited service with the subsidiary Bank and George A. Morgan had
31 years.
ESTIMATED ANNUAL BENEFITS FOR YEARS OF SERVICE INDICATED
Years of Service
Highest 5-Year Average
Base Compensation 20 30 40
------- -------- --------
$ 25,000 $ 6,300 $ 9,450 $ 12,588
50,000 14,449 21,674 28,412
75,000 23,199 34,799 45,287
100,000 31,949 47,924 62,162
125,000 40,699 61,049 79,037
150,000 49,449 74,174 95,912
175,000 58,199 87,299 112,787
200,000 66,949 100,424 129,662
250,000 84,449 126,674 163,412
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, 1998, the Trust Department of the Bank held, in various
fiduciary capacities, 10,120 shares of the Company's common stock as
co-trustee and 10,384 shares of the Company's common stock as sole trustee.
Management does not exercise voting power over these shares. These holdings
represent 1.28% of the total shares outstanding.
-16-
<PAGE>
The following table sets forth, as of December 31, 1998, 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.
Name of Individual or Shares of Company Common Percent of
Identity of Group Stock Owned (1) Class
------------------------ ----------
Leon Finkle 2,700 (2) 0.17
Robert L. Maider 17,544 1.10
John C. Miller 50,000 3.13
George A. Morgan 10,816 (3) 0.67
Frank E. Perrella 34,900 (4) 2.18
William N. Smith 17,000 (5) 1.05
Clark Easterly, Sr. 3,632 (6) 0.23
Brian K. Hanaburgh 1,200 (7) 0.08
Clark D. Subik 1,600 0.10
Deborah H. Rose 4,350 (8) 0.27
Theodore E. Hoye, III 5,360 (9) 0.34
All Directors and Principal
Officers of the Company as a
Group (12 persons) 152,152(10) 9.36
(1) 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.
(2) Includes 1,100 shares owned individually by his spouse.
(3) Includes 10,000 shares issuable upon the exercise of exercisable stock
options.
(4) Includes 34,000 shares owned individually by his spouse and 100 shares
owned by his spouse as custodian.
(5) Includes 15,000 shares issuable upon the exercise of exercisable stock
options.
(6) Includes 1,400 shares owned individually by his spouse.
(7) Includes 300 shares owned individually by his spouse.
(8) Includes 1,350 shares owned as custodian.
(9) Includes 2,400 shares in the name of First Credit Corporation and 2,760
shares in a Money Purchase and Profit Sharing Plan.
(10) Includes 750 shares issuable upon the exercise of exercisable stock
options.
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 1998, loans to directors and executive officers, together
with their business interests, reached maximum aggregate totals of
$4,357,561, 13.83% of the December 31, 1998 equity capital accounts. At
year-end, 1998, loans to directors and executive officers, together with
their business interests, were $2,230,640, 7.08% of the December 31, 1998
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.
-17-
<PAGE>
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, 1998, are incorporated herein by reference:
Financial Statements (Consolidated)
Independent Auditors' Report
Statements of Condition - Decmeber 31, 1998 and 1997
Statements of Income - Years ended December 31, 1998, 1997
and 1996
Statements of Changes in Stockholders' Equity - Years ended December 31, 1998,
1997, and 1996
Statements of Cash flows - Years ended December 31, 1998, 1997, and 1996
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.)
-18-
<PAGE>
The following are the exhibits:
Exhibit No. Exhibit
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 21, 1998 proxy materials(incorporated by reference)
EXHIBIT INDEX
Reg. S - K
Exhibit Number Description
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 21, 1998 proxy materials
-19-
<PAGE>
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 17, 1999
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/ George A. Morgan By /s/ Theodore E. Hoye III
- --------------------------- -----------------------------
-20-
CNB BANCORP, Inc.
1998 ANNUAL REPORT
City National Bank
and Trust Company
<PAGE>
DIRECTORS - CNB BANCORP, INC.
City National Bank and Trust Company
(PHOTO)
Back Row (from left): Brian K. Hanaburgh, Theodore E. Hoye III, Clark D.
Subik, Clark Easterly Sr., John C. Miller, George A. Morgan. Front Row (from
left): Robert L. Maider, William N. Smith, Deborah H. Rose, Frank E.
Perrella.
Missing from Photo: Leon Finkle.
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
Theodore E. Hoye, III
President, First Credit Corp., Financing and Insuring of
Manufactured Housing
HONORARY DIRECTORS
Lydon F. Maider Lloyd Politsch Ross H. Higier
Richard B. Parkhurst Henry Buanno Theodore E. Hoye, Jr.
Edward F. Vonderahe Alfred J. Washburn James W. St. Thomas
Henry C. Tauber Richard E. Hathaway Richard P. Tatar
Paul E. Smith
<PAGE>
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
1998 1997 1996
NET INCOME $ 3,222 $ 3,101 $ 3,045
Earnings Per Share
Basic 2.01 1.94 1.90
Diluted 2.01 1.94 1.90
CASH DIVIDENDS DECLARED $ 1,344 $ 1,280 $ 1,184
Per Share 0.84 0.80 0.74
STOCKHOLDERS' EQUITY AT
YEAR-END $ 31,511 $ 29,679 $ 27,747
Per Share 19.69 18.55 17.34
RETURN ON AVERAGE
STOCKHOLDERS' EQUITY 10.5% 10.8% 11.3%
RETURN ON AVERAGE
ASSETS 1.36% 1.44% 1.45%
TOTAL ASSETS AT YEAR-END $255,568 $222,325 $214,762
<PAGE>
PRESIDENT'S MESSAGE
I am pleased to report that 1998 proved to be another year of continued
growth for our Company.
Net income and earnings per share were $3,222,000 and $2.01 respectively
compared to $3,101,000 and $1.94 the prior year, an increase of 3.9% year to
year.
Total assets increased $33,243,000 or 15.0% resulting in total assets at
year-end of $255,568,000. Total loans, net of unearned income, increased only
$2,699,000 or 2.3%, with the bulk of the increase in the Installment Loan
Department. With the lack of significant overall loan demand, excess funds
were invested in the securities portfolio. At year-end total securities in
both the available for sale and investment securities categories were
$106,554,000, an increase of $19,149,000 or 21.9% from 1997.
Deposits increased by $18,731,000 or 10.0% to a new high of
$206,386,000, exceeding $200,000,000 for the first time. The largest
increase, $8,954,000, was in the category of regular savings, N.O.W. and
money market accounts.
Stockholders' equity increased to $31,511,000, an increase of $1,832,000
or 6.2%. This strong internal generation of capital resulted in a year-end
stockholders' equity to total assets ratio of 12.3%. This ratio compares very
favorably to our regulatory bank holding company peer group's average of 9.9%
as of September 30, 1998.
In January, the Board increased the dividend for the thirty-second
consecutive year. The dividend per share for the year was $0.84, an increase
of 5.0%, as compared to $0.80 in 1997. Total dividend paid to stockholders
for the year amounted to $1,344,000. At year-end the bid price per share of
stock was $37.25, an increase of $4.25 or 12.9% from the prior year.
Several personnel changes were made during the year. Bill Argotsinger
was hired as an Assistant Vice President in charge of our Residential
Mortgage Loan Department. He brings over twenty years of experience in
mortgage lending to the Bank. In addition, two officers were promoted and
four new officers were named during the year in recognition of their assuming
new responsibilities. Tammy Warner was promoted to Manager of the Johnstown
Office. In the Main Office, Darrin Ambridge was promoted to a Mortgage Loan
Officer, Denise Cerasia to Operations Officer and Paula Tucker to Systems
Officer. Amy Praught was named a Branch Officer in the Johnstown Office and
Joanne Shy was named a Branch Officer in the Fifth Avenue Office.
In January, Theodore E. Hoye, III was appointed a Director to complete
the unexpired term of his father, Theodore E. Hoye, Jr. who resigned after
serving as a director of the Company and the subsidiary bank for a period of
36 years. We thank Ted for his wise counsel and dedicated service over this
long period of time.
At the end of the year, Beverly Lorey retired as an employee of the Bank
after 20 years of dedicated service. We wish her well in her retirement
years.
As we move closer to the new millennium, the Bank's Year 2000 Committee
has been working diligently to be in compliance with all aspects of the
Bank's operations. Of primary concern is the Bank's application data
processing. Since 1992 we have outsourced our data processing to ALLTEL
Information Services, Inc. ALLTEL is a national firm and a leader in
providing data processing services to many banks across the country. In July
of 1998 we converted all application software from ALLTEL's main frame system
to their community bank system called "Horizon". I am happy to report that in
December of 1998 the last in a series of year 2000 compliant applications of
Horizon was installed making the system fully year 2000 compliant.
Self-testing of the system will begin in March of this year and the Bank is
on schedule to meet complete testing by June 30, 1999.
During this past year the Bank bacame part of the "World Wide Web" by
creating our own web site. There is more work to be done, but if you have
Internet access, you will find us at www.citynatlbank.com.
The last quarter of 1998 saw the installation of an automatic teller
machine at Nathan Littauer Hospital and the first quarter of 1999 will see
the completion of the installation of an ATM at the Holiday Inn, Johnstown,
NY. If we have success at these two locations, the opportunity exists for ATM
installations at other sites.
In December we were approached by Adirondack Financial Services Bancorp,
Inc., the parent company of Gloversville Federal Savings and Loan
Association, and asked if we would consider making an offer to purchase their
company, which we did. In January 1999, we were informed that their Board of
Directors had accepted our offer. I am very excited by this opportunity to
increase and protect our local market share while also gaining entry for us
into the Saratoga Springs' market. This transaction will have to be approved
by regulatory authorities and the stockholders of Adirondack. It is
anticipated that the merger will be completed in the second quarter of 1999.
As always, I would like to thank our dedicated staff and Board of
Directors for another year of record performance.
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 of the Board, President and Chief Executive,
Officer of the Company and the subsidiary Bank
<PAGE>
Year-End Total Assets
Five Years (1994-1998)
1994 $188,093
1995 $201,516
1996 $214,762
1997 $222,325
1998 $255,568
Net Income
Five Years (1994-1998)
1994 $2,825
1995 $3,003
1996 $3,045
1997 $3,101
1998 $3,222
<PAGE>
Bid Price Per Common
Share Year End
Five Years (1994-1998)
1994 $20.38
1995 $22.50
1996 $24.88
1997 $33.00
1998 $37.25
Dividend Paid Per
Common Share
Five Years (1994-1998)
1994 $0.62
1995 $0.68
1996 $0.74
1997 $0.80
1998 $0.84
<PAGE>
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.
Financial Condition: The table below presents a comparison of average
and year-end balance sheet categories over the past three years (in
thousands).
<TABLE>
<CAPTION>
Increase/(Decrease)
Average Balance Sheet 1998 1997 1996 1998/1997 1997/1996
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 6,328 $ 6,175 $ 6,184 $ 153 $ (9)
Federal funds sold 11,710 6,170 7,453 5,540 (1,283)
Total securities 91,816 86,622 86,735 5,194 (113)
Loans, net of allowance 119,711 111,227 104,269 8,484 6,958
Other assets 7,650 5,367 5,149 2,283 218
Total Assets $237,215 $215,561 $209,790 $21,654 $ 5,771
Liabilities:
Demand deposits $ 19,382 $ 17,900 $ 17,539 $ 1,482 $ 361
Savings, NOW and money
market accounts 73,503 76,386 74,654 (2,883) 1,732
Time deposits 101,827 91,151 89,717 10,676 1,434
Borrowed funds
and repos 10,777 592 278 10,185 314
Other liabilities 1,057 827 722 230 105
Stockholders' Equity 30,669 28,705 26,880 1,964 1,825
Total Liabilities
and Equity $237,215 $215,561 $209,790 $21,654 $ 5,771
</TABLE>
<PAGE>
FINANCIAL REVIEW (Continued)
<TABLE>
<CAPTION>
Year-End Balance Sheet 1998 1997 1996 1998/1997 1997/1996
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 6,422 $ 6,585 $ 8,324 $ (163) $(1,739)
Federal funds sold 13,900 2,800 8,000 11,100 (5,200)
Total securities 107,529 88,289 87,886 19,240 403
Loans, net of allowance 120,257 117,646 105,365 2,611 12,281
Other assets 7,460 7,005 5,187 455 1,818
Total Assets $255,568 $222,325 $214,762 $33,243 $ 7,563
Liabilities:
Demand deposits $ 23,268 $ 21,391 $ 18,616 $ 1,877 $ 2,775
Savings, NOW and money
market accounts 90,934 81,980 84,213 8,954 (2,233)
Time deposits 92,184 84,284 83,593 7,900 691
Borrowed funds
and repos 16,844 4,322 1 12,522 4,321
Other liabilities 827 669 592 158 77
Stockholders' Equity 31,511 29,679 27,747 1,832 1,932
Total Liabilities
and Equity $255,568 $222,325 $214,762 $33,243 $ 7,563
</TABLE>
Total assets at December 31, 1998 reached $255.6 million as compared to
$222.3 million at December 31, 1997, an increase of 15.0%. The 1998 asset
growth was funded with a $18.7 million increase in deposits and a $12.5
million increase in borrowings and repurchase agreements. Average assets for
1998 totaled $237.2 million, an increase of $21.6 million or 10.0% from the
1997 average of $215.6 million.
Loans are the subsidiary Bank's largest segment of earning assets and at
December 31, 1998 represented 47.1% of total assets. Net loans grew
approximately $2.6 million or 2.2%. The subsidiary Bank continued to see good
loan growth during 1998 as average loans increased $8.5 million or 7.6%. One
of the primary reasons for the growth was an increase of $5.0 million in
consumer loans, which, was primarily attributable to an increase in new and
used car lending through the purchases of dealer paper. Average commercial
and real estate loans were also up for year, increasing by $2.4 and $1.1
million, respectively.
Federal funds sold, which is a source of liquidity for the Bank,
increased year to year $11.1 million or 396.4% and $5.5 million or 89.8% on
average. A higher level of these funds was kept throughout the year to offset
the increase in $100,000 and over short term certificate of deposits which
increased on average $6.5 million from the previous year.
During 1998 the subsidiary Bank continued its capital leveraging
strategies increasing its borrowings through the Federal Home Loan Bank from
$4.1 million to $16.2 million. Proceeds from the borrowings were primarily
used to purchase mortgage backed securities which resulted in total
securities increasing $19.2 million or 21.8% for the year. Average securities
increased $5.2 million or 6.0%.
Deposits continue to be the subsidiary Bank's primary source of funding.
Total deposits at December 31, 1998 reached $206.4 million, an increase of
$18.7 million or 10.0% over the previous year end. Core deposits which
consist of demand, savings, N.O.W., and money market accounts, grew by $10.8
million or 10.5%, and time deposits increased $7.9 million or 9.4%. Average
deposits increased during the year to $194.7 million from $185.4 million, an
increase of $9.3 million or 5.0%.
Stockholder's equity at year-end 1998 was $31.5 million as compared to
$29.7 million at year-end 1997, an increase of $1.8 million. Most of the
increase was accounted for through net retained earnings. The consolidated
statements of changes in shareholders' equity of this annual report detail
the changes in equity capital, including payments to shareholders in the form
of cash dividends.
<PAGE>
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 1998 of $3,222,000, as compared to $3,101,000
for 1997, an increase of 3.9% over the previous year. Net income for 1997
increased by 1.8% over that of 1996. The return on average assets for the
three years ended December 31, 1998, 1997 and 1996 was 1.36%, 1.44% and
1.45%, respectively. The return on average equity for the same periods was
10.5%, 10.8% and 11.3%.
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 $76,000 or
0.8%, as compared to an increase of $404,000 or 4.4% for the previous year.
The slight increase in 1998 was attributable to higher volumes of loans
throughout the year, but offset with a decreasing net interest margin going
from 4.66% to 4.30%. Interest and fees on loans for 1998 increased by
$608,000 or 6.1% from the previous year, as compared to an increase of
$449,000 or 4.7%, for 1997 over 1996. The increase for 1998 was due primarily
to higher volumes of consumer loans, which increased on average by $5.0
million for the year. Interest on securities increased $146,000 or 2.4% for
the year, as compared to a marginal increase of only $21,000 for 1997 over
1996. The increase in 1998 was due to the average volumes of securities
increasing by $5.2 million or 6.0% for the year. Interest on federal funds
sold increased $284,000 or 82.8%, as compared to a decrease of $49,000 or
12.5% for 1997 over 1996. The increase in 1998 was due to a higher volume of
funds maintained due to a flat or inverted yield curve for most of the year.
For comparison purposes, the table below shows interest income converted
to a fully taxable basis to recognize the income tax savings between taxable
and tax-exempt assets (in thousands).
% Change % Change
1998 1997 1996 1998/1997 1997/1996
Total interest income $16,843 $15,763 $15,305 6.9% 3.0%
Total interest expense 7,917 6,941 6,924 14.1 0.2
Net interest income 8,926 8,822 8,381 1.2 5.3
Tax equivalent adjustment 706 734 771 (3.8) (4.7)
Net interest income taxable
equivalent basis $ 9,632 $9,556 $ 9,152 0.8% 4.4%
Total interest expense increased $976,000 in 1998 or 14.1% over that of
1997 as compared to an increase of $17,000 or 0.2% for 1997 over 1996. The
increase in 1998 was due primarily to higher volumes of borrowed funds and
repurchase agreements.
Total other income for 1998 increased by $338,000 or 43.2% due to new
earnings on cash surrender value of key life insurance policies, higher
fiduciary fees, net gains on available for sale securities, and higher credit
card merchant discounts. Total other income for 1997 increased by $66,000 or
9.2% over that for 1996. Total other expense increased $326,000 or 6.7% over
the preceding year as compared to an increase of $336,000 or 7.4% for 1997
over 1996. The 1998 increase was due mainly to higher salary and benefit
costs, higher data processing costs, and one time costs associated with the
conversion of data processing software.
<PAGE>
FINANCIAL REVIEW (Continued)
Net interest spread, the difference between average earning assets yield
and the cost of average interest bearing funds, decreased from 1997 to 1998
by 33 basis points or 8.4% over the previous year, as compared to an increase
of 7 basis points or 1.8% from 1996 to 1997. Net interest margin, the amount
of net income expressed as a percentage of earning assets, decreased for the
year by 36 basis points or 7.7%, whereas the change from 1996 to 1997
increased by 8 basis points or 1.7%. The decreases in the net interest rate
spread and the net interest margin for 1998 were attributed to leveraged
borrowings and repurchase agreements through the Federal Home Loan Bank with
securities at generally lower spreads than existing interest-bearing assets
and liabilities.
<TABLE>
Interest rate spread and net interest margin (in thousands):
(Tax equivalent basis)
<CAPTION>
1998 1997 1996
Yearly Yearly Yearly
Average Rate Average Rate Average Rate
<S> <C> <C> <C> <C> <C> <C>
Earning assets $224,191 7.83% $205,186 8.04% $199,675 8.05%
Interest bearing liabilities 186,127 4.25 168,148 4.13 164,667 4.21
Net interest rate spread 3.58% 3.91% 3.84%
Net interest margin 4.30% 4.66% 4.58%
</TABLE>
Capital Resources: Stockholders' equity ended 1998 at $31,511,000 up
$1,832,000 or 6.2%. At December 31, 1998, the ratio of stockholders' equity
to total assets was 12.3%, as compared to 13.3% at December 31, 1997. 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. At December 31, 1998, the Company had Tier 1 and
total capital risk-based ratios of 23.4% and 24.6%, respectively. The Company
also maintained a leverage ratio of 12.5% as of December 31, 1998. 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.
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 1999, approximately $10 million of securities are scheduled to
mature and approximately $18 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.
<PAGE>
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 plus loans 90 days
or more past due and still accruing interest and loans in a troubled debt
restructuring, ended 1998 at $529,000 or 0.4% of loans net of unearned
income. Non-performing loans at December 31, 1997 were $371,000 or 0.3% of
loans net of unearned income. There were no troubled debt restructured loans
as of December 31, 1998 or 1997. 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 1998 was $220,000, compared to
$255,000 in 1997 and $220,000 in 1996. Net charge-offs were $132,000,
$383,000, and $105,000 for the years 1998, 1997 and 1996, respectively. The
allowance at year-end 1998 and 1997 was 1.3% of loans net of unearned income.
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 Bank's financial
condition and results of operation. The Company 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. 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, 1998, assuming an increase or
decrease of 200 basis points in interest rates (in thousands).
Change in Interest Rate Estimated net Change in Net
(basis points) Interest Margin Interest Margin
+200 $9,185 2.9%
+100 9,065 1.6
0 9,031 1.1
-100 8,764 (1.8)
-200 8,596 (3.7)
<PAGE>
FINANCIAL REVIEW (Continued)
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 maturity dates are modeled based on historical run-off
characteristics of these products in periods of rising rates. At December 31,
1998 the Company had a negative 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 sensitivity gap only as a general indicator of the potential
effects of interest rate changes on net interest income. Management believes
that the gap analysis is a useful tool only when used in conjunction with its
simulation model and other tools for analyzing and managing interest rate
risk.
As of December 31, 1998, the subsidiary Bank was in a liability
sensitive position which means that more liabilities are scheduled to mature
or reprice within the next year than assets. The following table shows the
interest rate sensitivity gaps as of December 31, 1998 highlighting the gap
percentages within one year.
<TABLE>
<CAPTION>
Balance Maturing or Subject to Repricing (in Thousands)
After 3 Mo. After One
Within But Within But Within After
AT DECEMBER 31, 1998 3 Months 1 Year Five Years Five Years Total
<S> <C> <C> <C> <C> <C>
Interest Earning Assets:
Securities<F1> $19,951 $20,681 $38,956 $27,365 $106,953
Total Loans, net of
unearned discount 38,968 15,716 41,389 25,764 121,837
Other Earning Assets 13,942 0 0 0 13,942
Total Earning
Assets 72,861 36,397 80,345 53,129 242,732
Excess Fair Value Over
Cost of Securities
Available for Sale 576
Other Assets 12,260
TOTAL ASSETS $255,568
Interest-Bearing
Liabilities:
Savings, NOW and MMDA $25,939 $ 6,958 $ 6,626 $51,411 $ 90,934
Time Deposits 39,437 34,859 17,888 0 92,184
Other Interest-Bearing
Liabilities 3,665 6,000 7,200 0 16,865
Total Interest-
Bearing
Liabilities 69,041 47,817 31,714 51,411 199,983
Demand Deposits 23,268
Other Liabilities & Equity 32,317
TOTAL LIABILITIES & EQUITY $255,568
Interest Rate Sensitivity
Gap $ 3,820 $(11,420) $48,631 $ 1,718
Cumulative Interest
Rate Sensitivity Gap $ 3,820 $ (7,600) $41,031 $42,749 $ 42,749
(3.0)%
<FN>
<F1> Includes Available for Sale Securities and Investment Securities at
amortized cost and FHLB and FRB stock at cost.
</FN>
</TABLE>
<PAGE>
Deferred tax asset valuation allowance: Deferred tax assets are recognized
subject to management's judgement 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 $163,000 and $150,000 as of December 31, 1998 and 1997,
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, 1998 and 1997 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 had used six-digit date fields
(YYMMDD) allowing only two digits for the year. As we enter the year 2000, if
not fixed, the two-digit year field would have read 00. Most computer systems
would have interpreted 00 as 1900, not as 2000.
A year 2000 committee led by senior management and composed of officers
representing all areas of operation, has been formed to evaluate and solve
the year 2000 problem for the subsidiary Bank. With the help of the federal
regulators, the Committee has focused on identifying risks posed by the year
2000 and taking the appropriate action to ensure continuity of operation.
This process has been underway for approximately eighteen months and will
continue until the effort is complete.
The federal government has designated five phases of the year 2000
project: awareness, assessment, renovation, validation, and implementation.
At this time, the Bank is in the validation phase for most vendors.
Independent testing of mission critical applications was completed in advance
of the December 31, 1998 deadline. Completion of the integrated testing of
mission critical and selected non-mission critical applications, proxy
testing of mission critical applications and independent testing of selected
non-mission critical applications is expected to be completed by March 31,
1999. The goal is to achieve full implementation by June 30, 1999. The Bank
is on schedule to meet these goals.
Of primary concern to the Bank is Alltel Information Services, Inc., the
distributor of Horizon Banking System (the data processing program being
used). On December 26, 1998, the last in the series of year 2000 compliant
applications of Horizon was installed making the system fully year 2000
compliant.
The Committee will also be taking the planning process to the final step
- -- contingency planning. Even after assurances have been made of a mission
critical vendor's year 2000 compliance, the Committee will draft a business
resumption contingency plan which will ensure the Bank's ability to
temporarily do business without the services of the mission critical vendor.
The subsidiary Bank, like all other companies, has incurred costs as a
result of preparing for the Year 2000. The portion of the project which has
required the most resources has been the data processing system. To date, the
subsidiary Bank has spent approximately $200,000 on the conversion to the
HORIZON system. The subsidiary Bank has spent a negligible amount in the
other areas. The expected additional cost to finish the project is $100,000.
The Committee will continue in its diligent efforts to ensure the
preparedness of all systems for the year 2000. The Company is confident that
the Bank will be ready to enter the year 2000 without significant operational
problems. The Company does not foresee the year 2000 having a negative impact
on its financial condition, operation or cash flows.
<PAGE>
FIVE-YEAR SUMMARY OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Consolidated statement
of income data
Interest Income:
Loans $ 10,598 $ 9,990 $ 9,541 $ 9,504 $ 8,092
Securities<F1> 5,603 5,427 5,369 4,727 4,170
Money market instruments 642 346 395 320 197
Total interest income 16,843 15,763 15,305 14,551 12,459
Interest expense:
Deposits 7,347 6,909 6,914 6,451 4,729
Borrowings 570 32 10 22 15
Total interest expense 7,917 6,941 6,924 6,473 4,744
Net interest income 8,926 8,822 8,381 8,078 7,715
Provision for loan losses 220 255 220 230 310
Net interest income
after provision
for loan losses 8,706 8,567 8,161 7,848 7,405
Other income 1,121 783 717 748 759
Other expenses 5,224 4,898 4,562 4,314 4,199
Income before income taxes 4,603 4,452 4,316 4,282 3,965
Applicable income taxes 1,381 1,351 1,271 1,279 1,140
Net income $ 3,222 $ 3,101 $ 3,045 $ 3,003 $ 2,825
Per share data:
Basic earnings per share $ 2.01 $ 1.94 $ 1.90 $ 1.88 $ 1.77
Diluted earnings per share 2.01 1.94 1.90 1.88 1.77
Cash dividends paid 0.84 0.80 0.74 0.68 0.62
Selected year-end consolidated
statement of condition data:
Total assets $255,568 $222,325 $214,762 $201,516 $188,093
Securities<F1> 107,529 88,289 87,886 77,664 73,898
Net loans 120,257 117,646 105,365 102,969 99,336
Deposits 206,386 187,655 186,422 174,348 164,516
Stockholders'
equity<F1> 31,511 29,679 27,747 25,980 22,925
<FN>
<F1> Securities figures include investment securities, securities available for
sale, FRB and FHLB stock. Securities available for sale were recorded at fair
value with any unrealized gain or loss at December 31 included in
stockholders' equity, on a net of tax basis.
</FN>
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CONDITION
(In thousands, except per share data)
December 31,
ASSETS: 1998 1997
Cash and cash equivalents
Non-interest bearing $ 6,422 $ 6,585
Interest bearing 42 22
Federal funds sold 13,900 2,800
Total cash and cash equivalents 20,364 9,407
Securities available for sale, at fair value 89,157 54,358
Investment securities (approximate fair
value at December 31, 1998 - $18,125;
at December 31, 1997 - $33,790) 17,397 33,047
Investments required by law, stock in
Federal Home Loan Bank of New York and
Federal Reserve Bank of New York, at cost 975 884
Loans 132,027 128,552
Unearned income (10,190) (9,414)
Allowance for loan losses (1,580) (1,492)
Net loans 120,257 117,646
Premises and equipment, net 2,575 2,508
Accrued interest receivable 1,460 1,413
Other assets 3,383 3,062
Total assets $255,568 $222,325
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand (non-interest bearing) $ 23,268 $ 21,391
Regular savings, N.O.W. and money
market accounts 90,934 81,980
Certificates and time deposits of
$100,000 or more 30,439 25,503
Other time deposits 61,745 58,781
Total deposits 206,386 187,655
Securities sold under agreements
to repurchase 12,844 4,322
Notes payable - Federal Home Loan Bank 4,000 0
Other liabilities 827 669
Total liabilities 224,057 192,646
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value,
5,000,000 shares authorized,
1,600,000 shares issued and outstanding
in 1998 and 1997 4,000 4,000
Surplus 4,000 4,000
Undivided profits 23,165 21,287
Accumulated other comprehensive income 346 392
Total stockholders' equity 31,511 29,679
Total liabilities and
stockholders' equity $255,568 $222,325
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $10,598 $ 9,990 $ 9,541
Interest on federal funds sold 627 343 392
Interest on balances due from depository institutions 15 3 3
Interest on securities available for sale 3,985 3,356 3,323
Interest on investment securities 1,555 2,015 2,005
Dividends on FRB and FHLB stock 63 56 41
Total interest and dividend income 16,843 15,763 15,305
INTEREST EXPENSE:
Interest on deposits:
Certificates and time deposits of $100,000 2,213 1,887 1,961
or more
Regular savings, NOW and money market 1,794 1,927 2,072
Other time deposits 3,340 3,095 2,881
Interest on securities sold under agreements
to repurchase 544 31 10
Interest on other borrowed money 26 1 0
Total interest expense 7,917 6,941 6,924
NET INTEREST INCOME: 8,926 8,822 8,381
Provision for loan losses 220 255 220
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,706 8,567 8,161
OTHER INCOME:
Income from fiduciary activities 150 126 108
Service charges on deposit accounts 330 333 358
Net gain on sale of securities 116 1 0
Other income 525 323 251
Total other income 1,121 783 717
OTHER EXPENSES:
Salaries and employee benefits 2,628 2,531 2,384
Occupancy expense, net 297 298 284
Furniture and equipment expense 318 318 311
External data processing expense 694 479 441
F.D.I.C. insurance expense 22 23 2
Printing, stationary and supplies 132 143 156
Other expense 1,133 1,106 984
Total other expenses 5,224 4,898 4,562
INCOME BEFORE INCOME TAXES 4,603 4,452 4,316
Applicable income taxes 1,381 1,351 1,271
NET INCOME $ 3,222 $ 3,101 $ 3,045
Earnings per share
Basic $ 2.01 $ 1.94 $ 1.90
Diluted 2.01 1.94 1.90
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the three years ended December 31, 1998.
Accumulated
Other Total
Common Undivided Comprehensive Stockholders'
Stock Surplus Profits Income Equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $4,000 $ 4,000 $17,605 $375 $25,980
Comprehensive income:
Net income -- -- 3,045 -- 3,045
Change in net unrealized gain on securities
available for sale, net of tax -- -- -- (94) (94)
Total comprehensive income -- -- -- -- 2,951
Cash dividends ($0.74 per share) -- -- (1,184) -- (1,184)
Balance at December 31, 1996 4,000 4,000 19,466 281 27,747
Comprehensive income:
Net income -- -- 3,101 -- 3,101
Change in net unrealized gain on securities
available for sale, net of tax -- -- -- 111 111
Total comprehensive income -- -- -- -- 3,212
2-for-1 stock split (800,000 shares) 4,000 (4,000) -- -- --
Reduce par value from $5.00 to $2.50 (4,000) 4,000 -- -- --
Cash dividends ($0.80 per share) -- -- (1,280) -- (1,280)
Balance at December 31, 1997 4,000 4,000 21,287 392 29,679
Comprehensive income:
Net income -- -- 3,222 -- 3,222
Change in net unrealized gain on securities
available for sale, net of tax -- -- -- (46) (46)
Total comprehensive income -- -- -- -- 3,176
Cash dividends ($0.84 per share) -- -- (1,344) -- (1,344)
Balance at December 31, 1998 4,000 $4,000 $23,165 $346 $31,511
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,222 $ 3,101 $ 3,045
Adjustments to reconcile net income to cash
and cash equivalents provided by
operating activities:
(Increase) decrease in interest receivable (47) (9) 95
(Increase) decrease in other assets (336) 80 182
Increase in other liabilities 158 77 228
Deferred income tax (benefit) expense (24) 62 (64)
Depreciation and amortization expense 290 296 278
Net increase in cash surrender value
of bank-owned life insurance 107 0 0
Amortization of premiums/discounts on
securities, net 222 129 163
Net gain on sale of securities (116) (1) 0
Provision for loan losses 220 255 220
Total adjustments 474 889 1,102
Net cash provided by operating activities 3,696 3,990 4,147
Cash flows from investing activities:
Purchase of investment securities (1,267) (8,968) (13,902)
Purchase of securities available for sale (65,140) (16,505) (21,584)
Purchase of FRB and FHLB stock (91) (50) (685)
Proceeds from matured investment securities 16,888 6,788 9,672
Proceeds from matured securities
available for sale 27,932 18,134 15,955
Proceeds from sale of securities
available for sale 2,255 254 0
Net increase in loans (2,868) (12,681) (2,781)
Purchase of bank-owned life insurance 0 (2,135) 0
Purchases of premises and equipment, net (357) (56) (916)
Net cash used by investing activities (22,648) (15,219) (14,241)
Cash flows from financing activities:
Net increase in deposits 18,731 1,232 12,074
Increase (decrease) in securities
sold under agreement to repurchase 8,522 4,322 (824)
Increase in notes payable 4,000 0 0
Payment of dividends (1,344) (1,280) (1,184)
Net cash provided by financing activities 29,909 4,274 10,066
Net increase (decrease) in cash and
cash equivalents 10,957 (6,955) (28)
Cash and cash equivalents beginning of year 9,407 16,362 16,390
Cash and cash equivalents end of year $ 20,364 $ 9,407 $ 16,362
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 7,757 $ 7,118 $ 6,762
Income taxes 1,394 1,146 1,390
Supplemental schedule of noncash investing
activities:
Net reduction in loans resulting from the
transfer to real estate owned $ 37 $ 144 $ 165
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
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 consistant 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.
BASIS OF PRESENTATION - The Parent Company is a bank holding company
whose principal activity is the ownership of all outstanding shares of the
subsidiary Bank's stock. The subsidiary Bank is a commercial bank providing
community banking services to individuals, small businesses and local
municipal governments in Fulton County, New York. Management makes operating
decisions and assesses performance based on an ongoing review of the
subsidiary Bank's community banking operations, which constitute the
Company's only operating segment for financial reporting purposes. 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 marketable 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 shareholders' 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, 1998 and 1997, 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 or
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 of information
available to them at the time of their examination which may not be presently
available.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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.
EARNINGS PER COMMON SHARE - Basic earnings per share ("EPS") is computed
by dividing income available to common stockholders (net income less
dividends on perferred stock, if any) by the weighted average number of
common shares outstanding for the period. Entities with complex capital
structures must also present diluted EPS which reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common shares that then shared in the
earnings of the entity, such as the Company's stock options.
Basic earnings per common share were computed based on average
outstanding common shares of 1,600,000 in 1998, 1997 and 1996, respectively.
Diluted earnings per common share were computed based on average outstanding
common shares of 1,600,590 in 1998 and 1,600,000 in 1997 and 1996.
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 - On January 1, 1998, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 130 (SFAS
No. 130), "Reporting Comprehensive Income." This Statement establishes
standards for reporting and display of comprehensive income and its
components. Comprehensive income includes the reported net income of a
company, adjusted for items that are currently accounted for as direct
entries to equity, such as the mark to market adjustment on securities
available for sale, foreign currency items and minimum pension liability
adjustments. At the Company comprehensive income represents net income plus
other comprehensive income, which consists of the net change in unrealized
gains and losses on securities available for sale for the period. Accumulated
other comprehensive income represents the net unrealized gains and losses on
securities available for sale as of the consolidated statements of condition
dates. Comprehensive income is shown on the accompanying consolidated
statements of changes in stockholders' equity for the three year periods
ending December 31, 1998, 1997 and 1996.
<PAGE>
In June 1997, the Financial Accounting Standards Board (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 begining 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. On December
31, 1998, the Company adopted the provisions of SFAS No. 131. The Company has
not identified any separate operating segments requiring disclosure.
Therefore, the adoption of this statement had no material effect on the
Company's consolidated financial statements.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other Post
Retirement Benefits." This Statement revises employers' disclosures about
pension and other post retirement benefit plans. It does not change the
measurement or recognition of these plans. This Statement was adopted by the
Company on December 31, 1998 and had no impact on the Company's consolidated
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management is currently evaluating the impact of this
Statement on the Company's consolidated financial statements.
SUBSEQUENT EVENTS - On January 25, 1999, CNB Bancorp, Inc. announced
that it had entered into a definitive agreement of merger to acquire
Adirondack Financial Service Bancorp, Inc., Gloversville, New York, parent
company of Gloversville Federal Savings and Loan Association. Completion of
the transaction is subject to approval by Adirondack's shareholders and
regulatory authorities. The terms of the acquisition call for CNB Bancorp to
pay $15 million in cash in the aggregate for all of the outstanding shares of
Adirondack (subject to possible adjustment). The transaction will be
accounted for as a purchase and is expected to close, upon shareholder and
regulatory approval, in the second quarter of 1999.
RECLASSIFICATIONS - Amounts in the prior years' financial statements are
reclassified, whenever necessary, to conform to the presentation in the
current years' 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
$1,094,000 and $1,169,000 at December 31, 1998 and 1997, 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 (in thousands):
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 7,015 $ 20 $ 0 $ 7,035
Obligations of U.S. Government agencies 49,658 243 100 49,801
Collateralized mortgage obligations:
U.S. Government agencies 18,071 66 108 18,029
Corporate securities 3,351 44 0 3,395
Obligations of states and
political subdivisions 10,485 420 8 10,897
Total securities available
for sale $88,580 $793 $216 $89,157
</TABLE>
<TABLE>
<CAPTION>
1997
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>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and estimated fair value of debt securities available
for sale at December 31, 1998, by contractual maturity, are shown in the
accompanying table (in thousands). 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.
Amortized Estimated
Cost Fair Value
Due in one year or less $ 7,664 $ 7,708
Due after one year through five years 9,093 9,264
Due after five year through ten years 23,653 23,832
Due after ten years 48,170 48,353
Total debt securities available for sale $88,580 $89,157
Proceeds from sales of securities available for sale during 1998 and
1997 were $2,255,000 and $254,000, respectively. There were no sales of
securities available for sale in 1996. Gross gains in 1998 and 1997 were
$116,000 and $1,000, respectively. There were no losses on sales during 1998
and 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, 1998 and 1997 were $61,543,000 and $33,571,000, respectively.
Actual deposits secured by these securities at December 31, 1998 and 1997
were $20,197,000 and $10,285,000, respectively. Repurchase agreements secured
by these securities at December 31, 1998 and 1997 were $12,844,000 and
$4,322,000, 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 (in thousands):
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Obligations of U.S. Government agencies $ 6,105 $ 73 $0 $ 6,178
Obligations of states and political subdivisions 11,292 659 4 11,947
Total investment securities $17,397 $732 $4 $18,125
</TABLE>
<TABLE>
<CAPTION>
1997
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>
The amortized cost and estimated fair value of investment securities at
December 31, 1998, by contractual maturity, are shown in the accompanying
table (in thousands). 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.
Amortized Estimated
Cost Fair Value
Due in one year or less $ 2,181 $ 2,196
Due after one year through five years 7,886 8,247
Due after five year through ten years 5,214 5,463
Due after ten years 2,116 2,219
Total investment securities $17,397 $18,125
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, 1998 and 1997 were $13,123,000 and $25,122,000, respectively. Actual
deposits secured by these securities at December 31, 1998 and 1997 were
$9,092,000 and $16,937,000, respectively.
<PAGE>
Note 5: LOANS
Loans on the accompanying consolidated statement of financial condition
are comprised of the following at December 31 (in thousands):
1998 1997
Commercial and Commercial Real Estate $ 35,877 $ 37,265
Residential Real Estate 46,423 46,750
Installment 49,727 44,537
Total loans $132,027 $128,552
Non-accrual loans at December 31, 1998, 1997 and 1996 were $280,000,
$283,000 and $680,000, 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 $249,000, $88,000 and $557,000 as of
December 31, 1998, 1997 and 1996, 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, 1998 and 1997 amounted to $2,231,000 and $2,194,000,
respectively. During 1998, $13,257,000 of new loans were made and repayments
totaled $13,220,000.
As of December 31, 1998 and 1997, respectively, there were $276,000 and
$278,000 of commercial loans that were placed on non-accrual status and were
classified as impaired loans. As of December 31, 1998 and 1997, $55,000 and
$56,000 of the allowance for loan losses was allocated to the impaired loans,
respectively. During 1998, 1997 and 1996, the average balance of impaired
loans was $270,000, $498,000, and $656,000, respectively. Interest income of
$6,000, $10,000 and $16,000 was recognized on impaired loans during 1998,
1997 and 1996, 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, 1998 and 1997, 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 $4.2 million as of December 31, 1998 and $4.5 million as
of December 31, 1997. These figures represent 16.7% and 19.3% of the total
commitments outstanding at the end of each respective year. Loans outstanding
to this segment were $5.6 million as of December 31, 1998 and $5.5 million as
of December 31, 1997. These figures represent 4.2% and 4.3% of gross loans
outstanding at the end of each respective year.
Note 6: ALLOWANCE FOR LOAN LOSSES
A summary of the changes in the allowance for loan losses is as follows
(in thousands):
1998 1997 1996
Balance at beginning of year $1,492 $1,620 $1,505
Recoveries credited 17 21 22
Provision for loan losses 220 255 220
Less: Charged off loans (149) (404) (127)
Balance at end of year $1,580 $1,492 $1,620
Note 7: BANK PREMISES AND EQUIPMENT
Premises and equipment at December 31 (in thousands), 1998 1997
Land $ 604 $ 604
Bank Premises 2,285 2,245
Equipment, furniture and fixtures 2,041 1,914
4,930 4,763
Less: Accumulated depreciation and amortization (2,355) (2,255)
Total bank premises and equipment $ 2,575 $ 2,508
Depreciation and amortization expense amounted to $290,000, $296,000,
and $278,000 for the years 1998, 1997 and 1996, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8: DEPOSITS
The approximate amount of contractual maturities of time deposit
accounts for the years subsequent to December 31, 1998 are as follows (in
thousands):
Years ended December 31,
1999 $74,296
2000 12,842
2001 2,076
2002 1,610
2003 1,360
$92,184
Note 9: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
For the years ended December 31, 1998 and 1997, the average balance of
Securities Sold Under Agreements to Repurchase was $10,225,000 and $571,000,
respectively. The highest month end balances for these securities during 1998
and 1997 were $12,844,000 and $4,322,000, respectively. The average rate paid
for these securities during 1998 and 1997 was 5.32% and 5.36%, 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: NOTES PAYABLE - FEDERAL HOME LOAN BANK
In fiscal 1998, the subsidiary Bank began using fixed rate convertible
advances and floating rate fixed term advances from the Federal Home Loan
Bank, as a source of funds. Information on the borrowings is summarized as
follows (in thousands):
Interest Rate as
Maturity Date Amount of 12/31/98 Call Date
12/08/2003 $1,000 4.870% 12/07/2001
10/23/2008 2,000 4.355 10/23/2000
11/28/2003* 1,000 5.290
* This borrowing is non-callable but retains a quarterly repricing
frequency to the current 3-month LIBOR rate plus 4 basis points. The interest
on all borrowings is calculated on an actual/360-day basis and is payable
quarterly to the Federal Home Loan Bank.
At December 31, 1998 and 1997, the subsidiary Bank had available lines
of credit with correspondent banks and the Federal Home Loan Bank of
$80,670,000 and $16,886,000, respectively. Advances on these lines are
secured by the subsidiary Bank's real estate mortgages, investment
securities, available for sale securities and Federal Home Loan Bank stock.
At December 31, 1998, $4,000,000 was outstanding in borrowings against these
lines with the Federal Home Loan Bank. There were no advances outstanding on
these lines of credit at December 31, 1997.
<PAGE>
Note 11: 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 (in thousands).
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $2,590 $2,333
Service cost 140 123
Expenses (37) (30)
Interest cost 196 176
Benefits paid (123) (120)
Assumption changes and other 177 108
Projected benefit obligation at end of year 2,943 2,590
Change in plan assets:
Fair value of plan assets at beginning of year 3,339 2,723
Actual return on plan assets 141 611
Employer contribution 159 156
Benefits paid (123) (120)
Expenses (37) (31)
Fair value of plan assets at end of year 3,479 3,339
Funded status
Unrecognized net actuarial loss/(gain) 536 749
Unrecognized prior service cost 68 (249)
Unrecognized transition asset (23) (25)
Prepaid pension cost (4) (4)
$ 577 $ 471
Weighted average assumptions as of September 30
Discount rate 7.00% 7.75%
Rate of compensation increase 4.00 5.00
Expected return on plan assets 8.50 8.50
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Components of net periodic pension cost:
Service cost $ 140 $ 123 $ 118
Interest cost 196 176 167
Expected return on plan assets (280) (228) (211)
Amortization of unrecognized prior service cost (2) (2) (2)
Amortization of unrecognized transition asset 0 0 (1)
Net periodic pension cost $ 54 $ 69 $ 71
</TABLE>
The subsidiary Bank has a Supplemental Executive Retirement Plan for key
management personnel. The subsidiary Bank's expense for the years ended
December 31, 1998, 1997 and 1996 was approximately $57,000, $55,000, and
$52,000, respectively.
The subsidiary Bank has also established a Supplemental Life Insurance
Plan/Split Dollar for all officers, vice president and above, with at least
ten years of service to the Company. The subsidiary Bank invested
approximately $2,000,000 for this coverage in 1997 and is receiving an annual
tax-free return.
Profit Sharing Plan - 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 December 31st of each year. The subsidiary
Bank's contribution to the plan for 1998, 1997 and 1996 was $108,000,
$102,000 and $96,000, respectively.
Other than 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 1998, 1997 or 1996.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12: STOCK BASED COMPENSATION
On October 20, 1998, the Company's shareholders approved the CNB
Bancorp, Inc. Stock Option Plan (Stock Option Plan) which permits the
issuance of options to selected employees. The primary objective of the Stock
Option Plan is to provide employees with a proprietary interest in the
Company and as an incentive to encourage such persons to remain with the
Company.
Under the Stock Option Plan, 160,000 shares of authorized but unissued
common stock are reserved for issuance upon option exercises. The Company
also has the alternative to fund the Stock Option Plan with treasury stock.
Options under the plan may be either non-qualified stock options or incentive
stock options. Each option entitles the holder to purchase one share of
common stock at an exercise price equal to the fair market value on the date
of the grant. Options expire no later than ten years following the date of
the grant.
On October 26, 1998, 66,500 options were awarded at an exercise price of
$35.50 per share. These shares have a ten-year term with fifty percent
vesting immediately and the remaining fifty percent vesting one year from the
grant date.
A summary of the status of the Company's stock option plans as of
December 31, 1998 and changes during the year is presented below:
998
Weighted Average
Shares Exercise Price
Options:
Outstanding at beginning of year 0 $ .00
Granted 66,500 35.50
Exercised 0 .00
Cancelled 0 .00
Outstanding at year-end 66,500 35.50
Exercisable at year-end 33,250 $35.50
SFAS No. 123 requires Companies not using a fair value based method of
accounting for employee stock options or similar plans, to provide pro forma
disclosure of net income and earnings per share as if that method of
accounting had been applied. The fair value of each option grant is estimated
on the date of the grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in fiscal 1998:
dividend yield of 2.25%; expected volatility of 25.0%; risk free interest
rate of 5.15% for the October 26, 1998 grant; and an expected life of five
years. Based on the aforementioned assumptions, the Company has estimated
that the fair value of the options granted on October 26, 1998 was $8.83. Had
the Company determined compensation cost based on the fair value at the grant
date for its options under SFAS No. 123, the pro forma disclosures for the
Company for the year ended December 31, 1998 would be as follows (in
thousands, except per share data):
Net income:
As reported $3,222
Pro forma 3,046
Basic earnings per share
As reported 2.01
Pro forma 1.90
Diluted earnings per share
As reported 2.01
Pro forma 1.90
Because the Company's employee stock options have characteristics
significantly different from those of traded options for which the
Black-Scholes model was developed, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
models, in management's opinion, do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
<PAGE>
Note 13: INCOME TAXES
The following is a summary of the components of income tax expense for
the years ended December 31 (in thousands):
1998 1997 1996
Current tax expense:
Federal $1,062 $ 965 $1,000
State 343 324 335
Total current tax expense 1,405 1,289 1,335
Deferred tax expense (benefit):
Federal (30) 51 (55)
State 6 11 (9)
Total deferred tax
expense (benefit) (24) 62 (64)
Provision for income taxes $1,381 $1,351 $1,271
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 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rate $1,565 34.0% $1,514 34.0% $1,467 34.0%
Increase (decrease) resulting from:
Tax-exempt interest income (429) (9.3) (443) (9.9) (462) (10.7)
State tax expense, net of federal deductions 224 4.9 215 4.8 212 4.9
Interest expense incurred to carry
tax-exempt bonds 49 1.1 47 1.1 50 1.2
Other (28) (0.6) 18 0.4 4 0.1
Provision for income taxes $1,381 30.1% $1,351 30.4% $1,271 29.5%
</TABLE>
Significant temporary differences that give rise to the deferred tax
assets and liabilities as of December 31, are as follows (in thousands):
1998 1997
Deferred tax assets:
Allowance for loan losses $ 680 $ 642
Director's deferred compensation 9 9
Post-retirement benefits 88 65
Total gross deferred tax assets 777 716
Less valuation allowance (163) (150)
Net deferred tax assets 614 566
Deferred tax liabilities:
Premises and equipment, primarily
due to accelerated depreciation (76) (81)
Securities discount accretion (34) (47)
Prepaid pension obligation (230) (188)
Total gross deferred tax liabilities (340) (316)
Net deferred tax asset end of year 274 250
Net deferred tax asset beginning of year 250 312
Deferred tax expense (benefit) $ (24) $ 62
In addition to the deferred tax assets and liabilities described above,
the Company also has a deferred tax liability of $230,000 and $261,000
relating to the net unrealized gain on securities available for sale as of
December 31, 1998 and 1997, respectively.
Deferred tax assets are recognized subject to management's judgement
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 $163,000 and $150,000 as of
December 31, 1998 and 1997, 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, 1998 and 1997 will be realized.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14: COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income (and its components) in financial statements. Comprehensive income
represents the sum of net income and items of "other comprehensive income"
which are reported directly in stockholders' equity, such as the net
unrealized gain or loss on securities available for sale. While SFAS No. 130
does not require a specific reporting format, it does require that an
enterprise display an amount representing total comprehensive income for each
period for which an income statement is presented. In accordance with SFAS
No. 130, the Company has reported its comprehensive incomes for 1998, 1997
and 1996 in the consolidated statements of changes in stockholders' equity.
The Company's accumulated other comprehensive income, which is included
in stockholders' equity, represents the after-tax net unrealized gain on
securities available for sale at the balance sheet date. The Company's other
comprehensive income, which is attributable to gains and losses on securities
available for sale, consisted of the following components for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net unrealized holding gains (losses) arising during the year,
net of taxes of ($16) in 1998, ($73) in 1997 and $66 in 1996 $ 23 $112 $(94)
Reclassification adjustment for net realized gains included in
income, net of taxes of $47 in 1998, $0 in 1997 and $0 in 1996 (69) (1) 0
Other comprehensive income (loss), net of taxes of $31 in 1998,
($73) in 1997 and $66 in 1996 $(46) $111 $(94)
</TABLE>
Note 15: 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, 1998 and 1997 at fixed and variable rates are as follows (in
thousands):
1998
Commitment and unused lines of credit: Fixed Variable Total
Home Equity loans $ 0 $ 4,678 $ 4,678
Commercial loans 137 18,064 18,201
Overdraft loans 1,256 0 1,256
Mortgage loans 900 0 900
2,293 22,742 25,035
Standby & Commercial letters of credit 0 85 85
Total $2,293 $22,827 $25,120
1997
Commitment and unused lines of credit: Fixed Variable Total
Home Equity loans $ 0 $ 4,751 $ 4,751
Commercial loans 420 15,539 15,959
Overdraft loans 1,228 0 1,228
Mortgage loans 594 17 611
2,242 20,307 22,549
Standby & Commercial letters of credit 0 767 767
Total $2,242 $21,074 $23,316
<PAGE>
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.
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 16: 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 if it 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, 1998 and 1997, 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, 1998 and 1997 for the Company (consolidated) and the
subsidiary Bank (in thousands):
1998 1997
Amount Ratio Amount Ratio
Consolidated
Leverage (Tier 1) capital $31,165 12.5% $29,287 13.4%
Risk-based capital:
Tier 1 31,165 23.4 29,287 24.0
Total 32,745 24.6 30,779 25.3
Subsidiary Bank
Leverage (Tier 1) capital $31,158 12.5% $29,278 13.4%
Risk-based capital:
Tier 1 31,158 23.4 29,278 24.0
Total 32,738 24.6 30,770 25.3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17: PARENT COMPANY ONLY FINANCIAL INFORMATION
The following presents the financial condition of the Parent Company as
of December 31, 1998 and 1997 and the results of its operations and cash
flows for the years ended December 31, 1998, 1997 and 1996 (in thousands):
CONDENSED STATEMENTS OF CONDITION (Parent only)
At December 31,
1998 1997
ASSETS:
Cash $ 7 $ 9
Investment in subsidiary 31,504 29,670
Total assets $31,511 $29,679
STOCKHOLDERS' EQUITY:
Common stock $ 4,000 $ 4,000
Surplus 4,000 4,000
Undivided profits 23,165 21,287
Accumulated other comprehensive income 346 392
Total stockholders' equity 31,511 29,679
Total liabilities and
stockholders' equity $31,511 $29,679
CONDENSED STATEMENTS OF INCOME (Parent only)
Years ended December 31,
1998 1997 1996
Income:
Dividends from subsidiary $1,344 $1,290 $1,184
Expenses:
Other Expense 3 6 2
Income before income taxes and equity in
undistributed net income of subsidiary 1,341 1,284 1,182
Income tax benefit 1 2 0
Income before equity in undistributed net income
of subsidiary 1,342 1,286 1,182
Equity in undistributed net income of subsidiary 1,880 1,815 1,863
Net income $3,222 $3,101 $3,045
CONDENSED STATEMENTS OF CASH FLOWS (Parent only)
Years ended December 31,
1998 1997 1996
Cash flows from operating activities:
Net income $ 3,222 $ 3,101 $ 3,045
Equity in undistributed earnings
of subsidiary (1,880) (1,815) (1,863)
Net cash provided by operating activities 1,342 1,286 1,182
Cash flows from financing activities: 0 0
Payment of dividends (1,344) (1,280) (1,184)
Net cash used by financing activities (1,344) (1,280) (1,184)
Net increase (decrease) in cash (2) 6 (2)
Cash beginning of year 9 3 5
Cash end of year $ 7 $ 9 $ 3
<PAGE>
Note 18: 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 & 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.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Notes Payable - Federal Home Loan Bank
For these instruments that mature in more than ninety days the current
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, 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 (in thousands):
<TABLE>
<CAPTION>
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 20,364 $ 20,364 $ 9,407 $ 9,407
Securities available for sale<F1> 90,132 90,132 55,242 55,242
Investment securities 17,397 18,125 33,047 33,790
Loans (net of unearned income) 121,837 122,552 119,138 119,391
Less allowance for loan losses 1,580 0 1,492 0
Net loans 120,257 122,552 117,646 119,391
Accrued interest receivable 1,460 1,460 1,413 1,413
Financial Liabilities:
Deposits
Non-interest bearing demand $ 23,268 $ 23,268 $ 21,391 $ 21,391
Savings, NOW and money market 90,934 90,934 81,980 81,980
Certificates of deposit and other time 92,184 92,607 84,284 84,704
Total deposits 206,386 206,809 187,655 188,075
Securities sold under agreements
to repurchase 12,844 13,004 4,322 4,322
Notes Payable - FHLB 4,000 3,989 0 0
Accrued interest payable 351 351 191 191
<FN>
<F1> Includes investments required for membership in FRB and FHLB.
</FN>
</TABLE>
<PAGE>
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 (the "Company") as of December 31, 1998 and
1997, 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, 1998. 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, 1998 and 1997, the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Albany, N.Y.
February 5, 1999
<PAGE>
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 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.
<TABLE>
<CAPTION>
1998 1997
Bid Asked Bid Asked
High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter 35.50 33.50 37.00 35.00 26.25 25.00 27.00 25.75
Second Quarter 37.00 35.50 38.00 37.00 26.50 26.50 28.75 27.50
Third Quarter 37.00 36.00 38.50 37.50 31.00 28.75 33.00 30.00
Fourth Quarter 37.50 35.50 38.50 37.50 33.00 32.00 36.00 33.50
</TABLE>
Cash dividends paid - per share
1998 1997
First Quarter $0.21 $0.20
Second Quarter 0.21 0.20
Third Quarter 0.21 0.20
Fourth Quarter 0.21 0.20
Total cash dividends per share $0.84 $0.80
Number of shareholders on December 31 694 669
A copy of Form 10K (Annual Report) for 1998, filed with the Securities and
Exchange Commission by the Company, is available to shareholders 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
<PAGE>
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 & 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
BILL ARGOTSINGER, Assistant Vice-President
DEBORAH A. BRANDIS, Assistant Vice-President
LAWRENCE D. PECK, Marketing Officer
DENISE L. CERASIA, Operations Officer
DONALD F. STANYON, JR., Financial Services Officer
DARRIN R. AMBRIDGE, Loan Officer
KATHRYN E. SMULLEN, Loan Officer
PAULA K. TUCKER, Systems Officer
BRIAN R. SEELEY, Auditor
MAIN OFFICE
LYNNE M. CIRILLO, Branch Manager
FIFTH AVENUE OFFICE
CONSTANCE A. ROBINSON, Branch Manager
JOANNE M. SHY, Branch Officer
JOHNSTOWN OFFICE
TAMMY L. WARNER, Branch Manager
AMY M. PRAUGHT, Branch Officer
NORTHVILLE OFFICE
DONALD R. HOUGHTON, Vice-President and Branch Manager
PERTH OFFICE
TIENA M. DI MATTIA, Branch Manager
<PAGE>
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 State Highway 30
Town of Perth
Amsterdam, NY 12010
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> N/A 6,422
<INT-BEARING-DEPOSITS> N/A 42
<FED-FUNDS-SOLD> N/A 13,900
<TRADING-ASSETS> N/A 0
<INVESTMENTS-HELD-FOR-SALE> N/A 89,157
<INVESTMENTS-CARRYING> N/A 17,397
<INVESTMENTS-MARKET> N/A 18,125
<LOANS> N/A 121,837
<ALLOWANCE> N/A 1,580
<TOTAL-ASSETS> N/A 255,568
<DEPOSITS> N/A 206,386
<SHORT-TERM> N/A 12,844
<LIABILITIES-OTHER> N/A 827
<LONG-TERM> N/A 4,000
N/A 0
N/A 0
<COMMON> N/A 4,000
<OTHER-SE> N/A 27,511
<TOTAL-LIABILITIES-AND-EQUITY> N/A 255,568
<INTEREST-LOAN> 2,587 10,598
<INTEREST-INVEST> 1,553 5,603
<INTEREST-OTHER> 171 642
<INTEREST-TOTAL> 4,311 16,843
<INTEREST-DEPOSIT> 1,850 7,347
<INTEREST-EXPENSE> 2,041 7,917
<INTEREST-INCOME-NET> 2,270 8,926
<LOAN-LOSSES> 40 220
<SECURITIES-GAINS> 116 116
<EXPENSE-OTHER> 1,339 5,224
<INCOME-PRETAX> 1,257 4,603
<INCOME-PRE-EXTRAORDINARY> 863 3,222
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 863 3,222
<EPS-PRIMARY> 0.54 2.01
<EPS-DILUTED> 0.54 2.01
<YIELD-ACTUAL> N/A 3.98
<LOANS-NON> N/A 280
<LOANS-PAST> N/A 249
<LOANS-TROUBLED> N/A 0
<LOANS-PROBLEM> N/A 0
<ALLOWANCE-OPEN> N/A 1,492
<CHARGE-OFFS> N/A 149
<RECOVERIES> N/A 17
<ALLOWANCE-CLOSE> N/A 1,580
<ALLOWANCE-DOMESTIC> N/A 1,230
<ALLOWANCE-FOREIGN> N/A 0
<ALLOWANCE-UNALLOCATED> N/A 350
</TABLE>
