Central National Bank, Canajoharie
Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly period ended September 30, 1999
Commission File Number 33-45522
CNB FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
New York 22-3203747
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 Church Street, Canajoharie N.Y. 13317
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(Address of principal executive offices - Zip code)
Registrant's telephone number, include area code (518) 673-3243
Indicated by a 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding
Class on October 31, 1999
----- -------------------
Common Stock, $1.25 par value 7,545,375
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Consolidated Interim Financial Statements (unaudited)
1. Consolidated Balance Sheets 3.
2. Consolidated Statements of Income 4.
3. Consolidated Statements of Cash Flows 5.
4. Notes to Unaudited Consolidated Interim Financial Statements 6. - 8.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8. - 23.
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23. - 25.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26.
Item 2. Changes in Securities and Use of Proceeds 26.
Item 3. Defaults Upon Senior Securities 26.
Item 4. Submission of Matters to a Vote of Security Holders 26.
Item 5. Other Information 26.
Item 6. Exhibits and Reports on Form 8-K 26.
SIGNATURES 27.
</TABLE>
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Part 1. Financial Information
Item 1. Consolidated Financial Statements
CNB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
Assets (Unaudited)
<S> <C> <C>
Cash and due from banks $ 22,488 $ 16,128
Federal funds sold 23,000 -
--------- ---------
Total cash and cash equivalents 45,488 16,128
Securities available for sale, at fair value 351,177 186,651
Investment securities held to maturity, at amortized cost - 113,456
Net loans & leases receivable 416,875 372,569
Accrued interest receivable 6,407 5,843
Premises and equipment, net 12,825 10,075
Other real estate owned and repossessed assets 1,063 1,099
Goodwill 19,742 -
Other assets 4,552 5,267
--------- ---------
Total assets $ 858,129 $ 711,088
========= =========
Liabilities, Guaranteed Preferred Beneficial Interests in Corporation's
Junior Subordinated Debentures and Stockholders' Equity
Noninterest-bearing deposits $ 66,471 $ 66,339
Interest-bearing deposits 693,181 561,803
--------- ---------
Total deposits 759,652 628,142
--------- ---------
Short-term borrowings:
Securities sold under agreements to repurchase 8,410 12,347
Borrowings from the U.S. Treasury 514 304
--------- ---------
Total short-term borrowings 8,924 12,651
--------- ---------
Long-term borrowings 6,195 6,530
Other liabilities 8,782 8,199
--------- ---------
Total liabilities 783,553 655,522
--------- ---------
Guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures 18,000 -
Stockholders' equity:
Common stock, $1.25 par value, 20,000,000 shares authorized
(7,807,631 issued at September 30, 1999 and 7,796,396
issued at December 31, 1998) 9,761 9,746
Additional paid-in capital 6,197 6,144
Retained earnings 47,681 44,729
Accumulated other comprehensive loss (2,501) (1,376)
Treasury stock, at cost (260,256 shares at September 30, 1999 and 224,578
at December 31, 1998) (4,562) (3,677)
--------- ---------
Total stockholders' equity 56,576 55,566
--------- ---------
Total liabilities, guaranteed preferred beneficial
interests in Corporation's junior subordinated
debentures and stockholders' equity $ 858,129 $ 711,088
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
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CNB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
----------------------------- ------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans & leases, including fees $ 8,722 $ 8,314 $ 25,481 $ 24,489
Securities:
Taxable 4,406 3,788 11,942 11,762
Nontaxable 800 904 2,637 2,632
Federal funds sold and other 368 38 439 195
-------- -------- -------- --------
14,296 13,044 40,499 39,078
-------- -------- -------- --------
Interest expense:
Deposits 6,259 6,201 18,314 18,408
Short-term borrowings 491 218 948 694
Long-term borrowings 88 94 265 289
-------- -------- -------- --------
6,838 6,513 19,527 19,391
-------- -------- -------- --------
Net interest income 7,458 6,531 20,972 19,687
Provision for loan losses 340 320 1,060 610
-------- -------- -------- --------
Net interest income after provision for loan losses 7,118 6,211 19,912 19,077
-------- -------- -------- --------
Other income:
Service charges on deposit accounts 547 497 1,541 1,426
Net gain (loss) on securities transactions 32 82 (620) 318
Other 451 441 1,375 1,256
-------- -------- -------- --------
1,030 1,020 2,296 3,000
-------- -------- -------- --------
Other expenses:
Salaries and employee benefits 2,579 2,141 7,142 6,611
Occupancy and equipment 567 468 1,596 1,514
Data processing 662 497 1,837 1,533
Professional fees 134 288 621 902
FDIC deposit insurance and related costs 26 18 63 51
Advertising and marketing 176 77 331 259
Postage and courier 139 140 391 441
Office supplies and stationary 218 194 541 441
Other real estate owned and repossessed assets 151 150 505 684
Goodwill amortization 110 - 110 -
Interest on junior subordinated debentures 227 - 227 -
Other 864 763 2,284 2,309
-------- -------- -------- --------
5,853 4,736 15,648 14,745
-------- -------- -------- --------
Income before income tax expense 2,295 2,495 6,560 7,332
Income tax expense 637 643 1,756 1,904
-------- -------- -------- --------
Net income $ 1,658 $ 1,852 $ 4,804 $ 5,428
======== ======== ======== ========
Earnings per share:
Basic $ 0.22 $ 0.24 $ 0.63 $ 0.71
Diluted $ 0.22 $ 0.24 $ 0.63 $ 0.71
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
4
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CNB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended,
September 30, September 30,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net Income $ 4,804 $ 5,428
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,141 1,023
Provision for loan losses 1,060 610
Net loss (gain) on securities transactions 620 (318)
Net loss on sales and writedowns of other real estate
owned and repossessed assets 118 131
Purchases of trading securities (24,257) (18,255)
Proceeds from sales of trading securities 24,304 19,504
(Increase) in accrued interest receivable (564) (738)
Net change in other assets and other liabilities 1,893 1,563
--------- ---------
Net cash provided by operating activities 9,119 8,948
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (159,899) (126,653)
Held to maturity (5,831) (22,521)
Proceeds from sales of securities:
Available for sale 74,881 52,780
Proceeds from maturities and calls of securities:
Available for sale 30,975 47,551
Held to maturity 6,417 18,213
Net loans made to customers (46,548) (26,386)
Proceeds from sales of other real estate owned and
repossessed assets 1,100 1,004
Purchase of premises and equipment
in branch transaction (2,900) -
Purchase of premises and equipment,
exclusive of branch transaction (881) (1,219)
--------- ---------
Net cash used in investing activities (102,686) (57,231)
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits, exclusive of branch transaction (24,208) 79,707
Deposits assumed in branch transaction, net
of premium 135,866 -
Net decrease in short term borrowings (3,727) (20,255)
Payments on long-term borrowings (335) (314)
Proceeds from the issuance of guaranteed preferred beneficial
interests in Corporation's junior subordinated debentures 18,000 -
Dividends paid (1,858) (1,640)
Proceeds from issuance of shares for options and Dividend Reinvestment Plan 446 298
Purchase of treasury stock (1,257) (2,698)
--------- ---------
Net cash provided by financing activities 122,927 55,098
--------- ---------
Net increase in cash and cash equivalents 29,360 6,815
Cash and cash equivalents at beginning of period 16,128 19,498
--------- ---------
Cash and cash equivalents at end of period $ 45,488 $ 26,313
========= =========
Additional disclosure relative to non-cash investing activities:
On May 1, 1999, the Company transferred its held-to-maturity investment security
portfolio to the available for sale investment security portfolio. The amortized
cost of held-to-maturity investment securities at the time of transfer amounted
to $112,870.
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
5
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CNB Financial Corp.
Notes to Unaudited Consolidated Interim Financial Statements
(All dollar amounts in thousands other than per share data,
except when otherwise noted)
1. The accompanying unaudited consolidated interim financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered necessary for a fair
presentation have been included. The accompanying unaudited consolidated
interim financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K as of and for the year ended December
31, 1998. Operating results for the nine-month and three-month period ended
September 30, 1999 are not necessarily indicative of the results that may
be expected for the full year.
2. Earnings Per Share - Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity (such as the Company's stock options).
The following table provides the calculation of basic and diluted EPS for
the three and nine months ended September 30:
<TABLE>
<CAPTION>
Three Months Ended 9/30/99 Three Months Ended 9/30/98
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
common stockholders $1,658 7,564 $0.22 $1,852 7,605 $0.24
Effect of dilutive securities:
Stock options 34 49
---------------------------------------------------------------
Diluted EPS $1,658 7,598 $0.22 $1,852 7,654 $0.24
===============================================================
<CAPTION>
Three Months Ended 9/30/99 Three Months Ended 9/30/98
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
common stockholders $4,804 7,579 $0.63 $5,428 7,644 $0.71
Effect of dilutive securities:
Stock options 39 44
---------------------------------------------------------------
Diluted EPS $4,804 7,618 $0.63 $5,428 7,688 $0.71
===============================================================
</TABLE>
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3. 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,
net of tax, such as the change in the net unrealized gain or loss on
securities available for sale. The accumulated other comprehensive loss is
included in stockholders' equity, represents the after-tax net unrealized
loss on securities available for sale.
Total comprehensive income for the nine months ended September 30, 1999 and
1998 was $3,679 and $5,500 and total comprehensive (loss) income for the
three months ended September 30, 1999 and 1998 was $(733) and $2,107,
respectively.
4. Recent Accounting Pronouncements:
FASB Statement 133
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure
those instruments at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. As amended, the Statement is effective for fiscal
years beginning after June 15, 2000. Management will be reviewing the
Statement to determine what impact, if any, this Statement will have on the
Company's consolidated financial statements.
5. Acquisition of Five Astoria Federal Branches and New Branches
On August 27, 1999, the Company completed the acquisition of 5 branches
located in the Upstate New York Counties of Otsego (3 branches located in
Oneonta, NY and 1 branch located in Cooperstown, NY) and Chenango (1 branch
located in Norwich, NY) from Astoria Federal Savings and Loan Association
("Astoria"), a subsidiary of Astoria Financial Corporation. The Company
purchased from Astoria approximately $2,900 in branch related assets,
including the personal property of the branches and Astoria's real property
interest in the branches. The Company assumed from Astoria, all customer
related deposits maintained at the branches totaling approximately $156,500
(including accrued interest payable), and certain other liabilities
relating to the branches. The Company paid to Astoria a pre-tax premium of
12.1%, or after-tax premium of 7.3% on the deposits transferred and
received a net cash payment of approximately $133,900. In addition, the
Company opened two branches (Clifton Park and Whitesboro, New York) in the
third quarter of 1999.
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5. Guaranteed Preferred Beneficial Interests in Corporation's Junior
Subordinated Debentures
In the third quarter of 1999, the Company established CNBF Capital Trust I
(the "Trust"), which is a statutory business trust. The Trust exists for
the exclusive purpose of issuing and selling 30 year guaranteed preferred
beneficial interests in the Company's junior subordinated debentures
("capital securities"). On August 4, 1999, the Trust issued $18,000 in
capital securities at 3-Month LIBOR plus 275 basis points, which equaled
8.12% at issuance. The rate on the capital securities resets quarterly,
equal to the 3-Month LIBOR plus 275 basis points. The Company used the net
proceeds from the sale of capital securities for general corporate purposes
and to provide equity to the Bank. The capital securities, with associated
expense that is tax deductible, qualify as Tier I capital under regulatory
definitions, subject to certain restrictions. The Company's primary source
of funds to pay interest on the debentures owed to the Trust, are current
dividends from the Bank. Accordingly, the Company's ability to service the
debentures is dependent upon the continued ability of the Bank to pay
dividends. The capital securities are not classified as debt for financial
statement purposes and the expense associated with the capital securities
is recorded as non-interest expense on the consolidated statements of
income.
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
(All dollar amounts in thousands other than per share data,
except when otherwise noted)
General
- -------
CNB Financial Corp. (the Company) is a one-bank holding company, registered
under the Bank Holding Company Act of 1956, as amended. It was organized under
the laws of the State of New York and became a bank holding company on January
5, 1993 through the consummation of a reorganization plan with Central National
Bank, Canajoharie, (Bank) which became the wholly owned subsidiary of the
Company. The Company maintains its headquarters in Canajoharie, New York. The
principal business of the Company is to provide, through the Bank, comprehensive
banking services through its network of twenty seven branches and two financial
services centers located in Central New York in the counties of Montgomery,
Fulton, Chenango, Herkimer, Otsego, Schoharie, Saratoga and Schenectady. In 1996
Central Asset Management, Inc. (CAM) was formed as a second subsidiary of the
Company. The main business activity of CAM is to offer investment management
services for a fee to a focused customer base of high net worth individuals and
businesses.
The Company's principal business is attracting deposits from customers within
its market area and investing those funds primarily in mortgage loans, consumer
loans, commercial and agricultural loans, and government and corporate debt
securities. The financial condition and operating results of the Company are
dependent on its net interest income which is the difference between the
interest and dividend income earned on its assets, primarily loans and
investments, and the interest expense paid on its liabilities, primarily
deposits and borrowings. Net income is also affected by other operating income,
such as fees on deposit related services, loan servicing income, and fiduciary
activities; other
8
<PAGE>
operating expenses, such as salaries and benefits, occupancy expenses, and data
processing expense; provision for loan losses; and federal and state income
taxes.
The Company's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government polices, changes in accounting standards and actions of
regulatory agencies. Future changes in applicable laws, regulations or
government policies may have a material impact on the Company. The demand for
and supply of real estate, competition among lenders, the level of interest
rates and the availability of funds substantially influence lending activities.
The ability to gather deposits and the cost of funds are influenced by
prevailing market interest rates, fees and terms on deposit products, as well as
the availability of alternative investments, including mutual funds and stocks.
Forward Looking Statements
- --------------------------
When used in this filing or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project",
"believe", or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. In addition, certain disclosures and information customarily provided
by financial institutions, such as an analysis of the adequacy of the allowance
for loan losses or an analysis of the interest rate sensitivity of the Company's
assets and liabilities, are inherently based upon predictions of future events
and circumstances. Furthermore, from time to time, the Company may publish other
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, and similar matters.
A variety of factors could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements. Some of the risks and uncertainties
that may affect the operations, performance, development and results of the
Company's business, the interest rate sensitivity of its assets and liabilities,
and the adequacy of its allowance for loan losses, include but are not limited
to the following:
a. Deterioration in local, regional, national or global economic conditions
which could result, among other things, in an increase in loan
delinquencies, a decrease in property values, or a change in the housing
turnover rate;
b. Changes in market interest rates or changes in the speed at which market
interest rates change;
c. Changes in laws and regulations affecting the financial service industry;
d. Changes in competition and continued pricing pressures on loan and deposit
products;
e. Changes in consumer preferences and customer borrowing, repayment,
investment and deposit practices;
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f. The effect of certain customers and vendors of critical systems or services
failing to adequately address issues relating to becoming Year 2000
compliant;
g. The introduction, withdrawal, success and timing of business initiatives
and strategies, several of which are in early stages and therefore
susceptible to greater uncertainty than more mature businesses;
h. Risks related to the acquisition of 5 branches from Astoria Federal Savings
and Loan Association, including the ability to retain deposits, generate
revenues from the new locations, manage costs, implement integration plans;
and
i. Ability of the Bank to implement successfully its strategy to increase the
level of loans on its balance sheet at acceptable levels of risk.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including those described above, could affect the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected. The Company does not undertake, and specifically disclaims any
obligations, to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Results of Operations
- ---------------------
(All dollar amounts in thousands other than per share data,
except when otherwise noted)
Net income for the third quarter of 1999 amounted to $1,658, compared to the
$1,852 reported for the third quarter of 1998 while net income for the nine
months ended September 30, 1999 amounted to $4,804, compared to the $5,428
reported for the nine months ended September 30, 1998. Return on average assets
and return on average equity was 0.86% and 12.05% for the quarter ended
September 30, 1999 and 0.87% and 11.25% for the nine months ended September 30,
1999. Diluted earnings per share amounted to $.22 for the quarter ended
September 30, 1999 compared to diluted earnings per share of $.24 for the
quarter ended September 30, 1998 and diluted earnings per share for the nine
months ended September 30, 1999 amounted to $.63 compared to diluted earnings
per share of $.71 for the nine months ended September 30, 1998. The decrease in
net income for the first nine months of 1999 when compared to the same period in
1998 was due primarily to a write-down of $1,187 (pre-tax) on a corporate bond
held in the Company's available for sale portfolio in the second quarter of
1999. The write-down was caused by an other-than-temporary impairment of the
bond and was recognized in net (loss) gain on securities transactions and
resulted in an after-tax non-cash charge of $879. The Company considers this a
non-recurring item and has summarized its operating results excluding the
write-down in the subsequent paragraphs.
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Excluding the write-down of the corporate bond, the Company recognized net
income of $5,683 or $0.75 diluted earnings per share for the nine months ended
September 30, 1999, compared to $5,428 or $0.71 diluted earnings per share for
the nine months ended September 30, 1998. The Company's return on average
assets, excluding the write-down, was 1.02% for the nine months ended September
30, 1999; down 5 basis points from the 1.07% for the nine months ended September
30, 1998. The Company's return on average equity was 13.29% for the nine months
ended September 30, 1999, up 22 basis points from 13.07% for the nine months
ended September 30, 1998.
Net interest income for the nine months ended September 30, 1999 increased
$1,285 (6.5%) over the same period in 1998, from $19,687 to $20,972. Net
interest income for the three months ended September 30, 1999 increased $927
(14.2%) over the three months ended September 30, 1998, from $6,531 to $7,458.
The increase in net interest income is due primarily to the growth in average
earning assets during the year, which is a result of the execution of the
Company's expansion initiative. The Company acquired five branches and opened
two additional branches during the third quarter of 1999. This expansion
resulted in a $108,997 (16.8%) increase in average earning assets for the three
months ended September 30, 1999 when compared to the same period in 1998, from
$648,078 to $757,075. Average earning assets for the nine months ended September
30, 1999 were $716,123 compared to $644,495 for the nine months ended September
30, 1998, a $71,628 (11.1%) increase.
The provision for loan losses for the nine months ended September 30, 1999 was
$1,060, which is a $450 increase over the provision for loan losses for the same
period in 1998 which totaled $610. The provision for loan losses for the three
months ended September 30, 1999 was $340, which is a $20 increase over the same
three-month period ended for 1998. The increase in the provision for the nine
months ended September 30, 1999 when compared to the same period in 1998
resulted primarily from increases in non-performing loans and charge-offs,
primarily occurring in the Company's manufactured housing and credit card loan
portfolios. The Company is exploring ways to mitigate the losses from these
portfolios and has reduced the level of originations of such loans. In light of
the Company's growth plans and other factors, the Company expects continued
provisions for loan losses during 1999 at rates higher than those experienced
during 1998.
Total other income for the third quarter of 1999 was $1,030, an increase of $10
when compared to the same quarter in 1998. Excluding net gains on securities
transactions, total other income was $998 for the third quarter of 1999, up $60
(6.4%) from the $938 recognized in the third quarter of 1998. The increase in
other income was due primarily to increases from service charges on deposit
accounts, which resulted from the branch acquisition/expansion in the third
quarter of 1999. Total other income for the nine months ended September 30, 1999
was $2,296, a decrease of $704 when compared to the same period in 1998, which
was due primarily to the write-down of a corporate bond of $1,187. Excluding the
write-down, total other income for the nine months ended September 30, 1999
amounted to $3,483, a $483 (16.1%) increase over the nine months ended September
30, 1998 total of $3,000. The increase in other income resulted primarily from
an increase in net gains on securities transactions of $249, service charges on
deposit accounts of $115 that resulted from ATM convenience fees and an increase
in the number
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of transaction accounts that resulted from the branch acquisition/expansion, and
fiduciary income of $68.
Total other expenses for the third quarter of 1999 amounted to $5,853, a $1,117
(23.6%) increase from the $4,736 reported for the third quarter of 1998. Several
factors contributed to this increase. Salaries and employee benefits increased
$438 from $2,141 for the third quarter of 1998 to $2,579 for the third quarter
of 1999. The increase in salaries and benefits can be attributed to an increase
in full time equivalent employees (FTE) which increased from 269 at September
30, 1998 to 343 at September 30, 1999. The increase in FTE can be attributed
primarily to the branch acquisition/expansion that occurred in the third quarter
of 1999. The branch acquisition/expansion also resulted in increases in other
expenses categories related to occupancy and equipment, advertising and
marketing, office supplies and stationary, goodwill amortization, and interest
on junior subordinated debentures.
Occupancy and equipment increased $99 as the Company had seven additional
branches operating at the end of the third quarter of 1999 when compared to the
end of the third quarter of 1998. Advertising and marketing increased $99 and
office supplies and stationary increased $24 in the third quarter of 1999 when
compared to the same period in 1998 as a result of start-up costs associated
with acquiring and opening branches. Goodwill amortization, which amounted to
$110 (approximately one-third of the anticipated quarterly expense) and interest
on junior subordinated debentures amounting to $227 (approximately two-thirds of
anticipated quarterly expense at the current interest rate) were incurred with
the purchase of branches in the third quarter of 1999 and will be recurring
expenses. The goodwill recorded in conjunction with the Astoria transaction will
be amortized over 15 years on a straight-line basis. Data processing increased
$165 due primarily to the conversion of the Company's core data processing
system in the fourth quarter of 1998 and the installation of a check imaging
system (third quarter 1998) which have increased data processing costs. Other
expense increased $101 in the third quarter of 1999 when compared to the third
quarter of 1998, due primarily to increases in telephone and fax expenses
(related to branch acquisition/expansion), correspondent bank fees and insurance
expenses (related to surety and auto leasing). Professional fees decreased $154
in the third quarter of 1999 when compared to the third quarter of 1998, due
primarily to consulting costs incurred in assisting management with various
strategic and operational issues in 1998.
Total other expenses for the nine months ended September 30, 1999 amounted to
$15,648, an increase of $903 when compared to total other expenses of $14,745
for the same period in 1998. Several factors contributed to this increase. The
branch acquisition/expansion that occurred in the third quarter was the primary
reason for the increase in other expenses. As noted in the preceding paragraphs,
salaries and employee benefits, occupancy and equipment, advertising and
marketing, office supplies and stationary, goodwill amortization, and interest
on junior subordinated debentures increased due to the branch
acquisition/expansion that occurred in the third quarter of 1999. The total
increases in the third quarter of 1999 for the above mentioned expenses amounted
to $997 compared to a total increase of $1,122 for the nine months ended
September 30, 1999 for the same expenses. Data processing increased $304 for the
nine months ended September 30, 1999 when compared to the same period in 1998,
due primarily to the conversion of the Company's core data processing system in
the fourth
12
<PAGE>
quarter of 1998 and the installation of a check imaging system (third quarter
1998) which have increased data processing costs. Professional fees decreased
$281 for the nine months ended September 30, 1999 when compared to the same
period in 1998, due primarily to consulting costs incurred with assisting
management with various strategic and operational issues in 1998. Other real
estate owned and repossessed assets decreased $179, due mainly to decreases in
losses on the sale of other real estate owned and repossessed assets.
Income tax expense was $637 for the third quarter of 1999 down $6 from the $643
recognized in the third quarter of 1998. The effective tax rate for the third
quarter of 1999 and 1998 was 27.8% and 25.8%, respectively. The increase in the
effective tax rate for the third quarter of 1999 was due primarily to a change
in New York State tax law, which resulted in a write-down of the New York State
net deferred tax asset. Income tax expense was $1,756 for the nine months ended
September 30, 1999 down $148 from the $1,904 recognized for the same period in
1998. The effective tax rate for the nine months ended September 30, 1999 and
1998 was 26.7% and 26.0%, respectively.
Net Interest Income
(The accompanying schedule entitled "Average Balances/Net Interest Margin -
Fully Taxable Equivalent Basis (FTE)" is the basis of and should be read in
conjunction with this discussion).
The Company's net interest margin for the third quarter of 1999 was 4.09%
compared to 4.21% for the third quarter of 1998, a 12 basis point decrease. The
decrease in net interest margin was due primarily to a greater decrease in the
yield on earning assets when compared to the decrease in the rate paid on
interest-bearing liabilities. The yield on earning assets for the third quarter
of 1999 was 7.70% compared to 8.23% for the third quarter of 1998, a 53 basis
point decrease. The rate paid on interest-bearing liabilities was 4.23% for the
third quarter of 1999 compared to 4.65% for the third quarter of 1998, a 42
basis point decrease. Offsetting the impact of the yield and rate decreases
noted above in the third quarter of 1999 was the fact that the increase in
earning assets exceeded the increase in interest-bearing liabilities. Earning
assets increased from $648,077 for the third quarter of 1998 to $757,075 in the
third quarter of 1999, a $108,998 increase, while, interest-bearing liabilities
increased from $559,986 to $646,921 for the same period, a $86,935 increase. To
mitigate the impact of the decrease in the Company's net interest margin and
interest rate spread, the Company has focused its efforts on growing earning
assets.
The Company's net interest margin for the nine months ended September 30, 1999
was 4.07% compared to 4.25% for the same period in 1998, an 18 basis point
decrease. The interest rate spread decreased 17 basis points, from 3.64% in 1998
to 3.47% in 1999. The decrease in net interest margin and interest rate spread
was due primarily to a greater decrease in the yield on earning assets when
compared to the decrease in the rate paid on interest-bearing liabilities. The
yield on earning assets for the nine months ended September 30, 1999 was 7.70%
compared to 8.26% for the same period in 1998, a 56 basis point decrease. The
rate paid on interest-bearing liabilities was 4.23% for the nine months ended
September 30, 1999 compared to 4.62% for the same period in 1998, a 39 basis
point decrease. Offsetting the impact of the yield and rate decreases noted
above for the nine months ended September 30, 1999 was the fact that the
increase in earning assets
13
<PAGE>
exceeded the increase in interest-bearing liabilities. Earning assets increased
from $644,495 for the nine months ended September 30, 1998 to $716,123 in the
same period of 1999, a $71,628 (11.1%) increase, while, interest-bearing
liabilities increased from $559,721 to $615,003 for the same period, a $55,282
increase.
For the nine months ended September 30, 1999, the yield on earning assets was
7.70%, which is a 56 basis point decrease when compared to the yield of 8.26%
for the nine months ended September 30, 1998. The yield on loans and leases
decreased from 9.12% to 8.58% for the nine months ended September 30, 1998 to
September 30, 1999. Despite a 51 basis point decrease in the yield, interest
income on loans and leases on a tax equivalent basis increased from $24,532 for
the nine months ended September 30, 1998 to $25,517 for the nine months ended
September 30, 1999. The increase in interest income on loans and leases can be
attributed to a $38,115 (10.6%) increase in the average balance of loans and
leases. The most significant increases in the average balance of loans and
leases was in leases receivable, which increased $21,876, from an average of
$25,374 for the nine months ended September 30, 1998 to $47,250 for the nine
months ended September 30, 1999. The average balance for real estate
(residential, commercial, and agricultural) and commercial loans increased
$21,572 from the 1998 to 1999 period. Partially offsetting the increases was a
decrease in the average balance of consumer and manufactured housing loans of
$5,570 from the 1998 to 1999 period.
The decrease in the yield on loans and leases can be attributed to several
factors. Higher yielding loans related to residential real estate, commercial
real estate and commercial loans have been paid off or have been re-financed and
have been replaced with new loans and leases, which yield much lower rates.
Additionally, consistent with the Company's strategy to de-emphasize lending in
consumer loans and manufactured housing loans, the loan portfolio has
experienced a decline in yield as these products typically have much higher
rates compared to lease receivables, a product which has experienced significant
growth. To mitigate the decrease in yield, the Company will continue to focus on
growth related to lease receivables, residential real estate, and commercial
real estate/commercial loans.
The yield on taxable securities decreased from 7.11% for the nine months ended
September 30, 1998 to 6.53% for the nine months ended September 30, 1999. The
decrease in yield on taxable securities can be attributed to accelerated
pay-downs on mortgage-backed securities and collaterlized mortgage obligations
(CMOs) that resulted from a substantial decrease in long-term mortgage rates
which led to a higher than normal re-finance period that occurred at the end of
the fiscal year 1998 and into the beginning of fiscal year 1999. As these
mortgage-backed securities and CMOs paid down, the amortization of associated
premiums was accelerated, and the securities were replaced with securities with
lower yields. The Company anticipates that for the remainder of the year, the
yield on these securities should increase as long-term mortgage rates continue
to increase. This is likely to result in reductions in re-financing which will
reduce pre-payments and amortization on mortgage-backed securities/CMOs, and the
opportunity to replace securities at similar or higher rates. The average
balance of mortgage-backed securities and CMOs for the nine months ended
September 30, 1999 amounted to $140,580, which represents 58% of the average
balance of taxable securities.
14
<PAGE>
The rate paid on interest-bearing deposits decreased 40 basis points, from 4.59%
for the nine months ended September 30, 1998 to 4.19% for the nine months ended
September 30, 1999. The decrease in the rate paid on deposits resulted in a $94
decrease in interest expense, despite a $48,071 increase in the average balance
of interest-bearing deposits. Several factors contributed to the decrease in
interest expense. The rate paid on time deposits, the costliest source of funds
for the Company, decreased 50 basis points from 5.80% for the nine months ended
September 30, 1998 to 5.30% for the same period in 1999. The decrease in yield
on time deposits can be attributed to run-off of a high yielding 18 month
promotional certificate of deposit product which yielded 5.92% and the
acquisition of time deposits from the Astoria branches acquired in the third
quarter of 1999 which had an average yield of 5.23%.
The Company shifted its deposit mix to lower cost of fund deposit types during
1999. The average balance for N.O.W. and savings type deposits increased $22,100
for the nine months ended September 30, 1999 when compared to the same period in
1998. Meanwhile, the rates paid on these deposit type accounts remained stable.
The average balance of money market accounts increased $8,262 for the same
period while the rate paid on money market accounts decreased 64 basis points.
The decrease in rate on money market accounts can be attributed to a substantial
number of money market accounts that are tied to the federal funds rate, which
was much lower for the nine months ended September 30, 1999 when compared to the
same period in 1998.
Average Balances/Net Interest Margin - Fully Taxable Equivalent (FTE) Basis
- ---------------------------------------------------------------------------
The following table sets forth average balance and interest rate information.
The average balances used for these tables and other statistical disclosures
were calculated using daily averages. Tax exempt income has been adjusted to a
tax equivalent basis by tax effecting such income at the Federal tax rate.
Non-accruing loans have been included in loans with interest earned recognized
on a cash basis only. Securities include securities available for sale,
investment securities held to maturity, and trading securities, if any, all at
average amortized cost.
15
<PAGE>
<TABLE>
<CAPTION>
3 months ended September 30, 1999 1998
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Interest-earning assets: ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $412,722 $ 8,738 8.47% $367,429 $ 8,328 9.07%
Taxable Securities 256,241 4,406 6.88% 214,224 3,788 7.07%
Tax-exempt Securities 58,377 1,058 7.25% 64,006 1,181 7.38%
Federal Funds Sold 29,735 368 4.95% 2,418 38 6.29%
-------- -------- ---- -------- -------- ----
Total interest-earning assets 757,075 14,570 7.70% 648,077 13,335 8.23%
======== -------- ---- ======== -------- ----
Interest-bearing liabilities:
Deposits
- --------
NOW 83,072 393 1.89% 70,172 317 1.81%
Savings 120,493 859 2.85% 103,047 728 2.83%
Money Market 55,994 521 3.72% 49,778 545 4.38%
Time Deposits 343,869 4,486 5.22% 314,854 4,611 5.86%
-------- -------- ---- -------- -------- ----
Total Interest Bearing Deposits 603,428 6,259 4.15% 537,851 6,201 4.61%
-------- -------- ---- -------- -------- ----
Short-term Borrowings 37,256 491 5.27% 15,486 218 5.63%
Long-term Borrowings 6,237 88 5.64% 6,649 94 5.65%
-------- -------- ---- -------- -------- ----
Total Interest-bearing
liabilities $646,921 6,838 4.23% $559,986 6,513 4.65%
======== -------- ---- ======== -------- ----
Interest Rate Spread $ 7,732 3.47% $ 6,822 3.58%
======== ========
Net Interest Margin 4.09% 4.21%
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
9 months ended September 30, 1999 1998
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Interest-earning assets: ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $396,632 $ 25,517 8.58% $358,517 $ 24,532 9.12%
Taxable Securities 243,901 11,942 6.53% 220,535 11,762 7.11%
Tax-exempt Securities 63,845 3,476 7.26% 61,021 3,450 7.54%
Federal Funds Sold 11,745 439 4.98% 4,422 195 5.88%
-------- -------- ---- -------- -------- ----
Total interest-earning assets 716,123 41,374 7.70% 644,495 39,939 8.26%
======== -------- ---- ======== -------- ----
Interest-bearing liabilities:
Deposits
- --------
NOW 78,806 1,095 1.85% 67,104 902 1.79%
Savings 111,190 2,328 2.79% 100,792 2,119 2.80%
Money Market 59,978 1,649 3.67% 51,716 1,670 4.31%
Time Deposits 333,160 13,242 5.30% 315,451 13,717 5.80%
-------- -------- ---- -------- -------- ----
Total Interest Bearing Deposits 583,134 18,314 4.19% 535,063 18,408 4.59%
-------- -------- ---- -------- -------- ----
Short-term Borrowings 25,507 948 4.96% 17,883 694 5.17%
Long-term Borrowings 6,362 265 5.55% 6,775 289 5.69%
-------- -------- ---- -------- -------- ----
Total Interest-bearing
liabilities $615,003 19,527 4.23% $559,721 19,391 4.62%
======== -------- ---- ======== -------- ----
Interest Rate Spread $21,847 3.47% $ 20,548 3.64%
======= ========
Net Interest Margin 4.07% 4.25%
</TABLE>
16
<PAGE>
Financial Condition and Liquidity
The Company's total assets at September 30, 1999 were $858,129, an increase of
$147,041 from December 31, 1998. The increase includes an increase of $29,360 in
cash and cash equivalents, $51,070 in securities, $44,306 in net loans
receivable, $19,742 in goodwill, and $2,750 in premises and equipment. The
increase in total assets was due primarily to the acquisition of five bank
branches and related deposit liabilities from Astoria Federal Savings and Loan
Association ("Astoria") in the third quarter of 1999. The Company acquired from
Astoria approximately $2,900 in branch-related personal and real property and
$155,700 in deposit liabilities. The Company paid a pre-tax premium of 12.1%, or
after-tax premium of 7.3% on the deposit liabilities assumed, which is the
primary component of the initial goodwill recorded of $19,852, and received a
net cash payment totaling approximately $133,900.
Securities
The carrying value of securities available for sale at September 30, 1999
amounted to $351,177, which is a $164,526 increase from the carrying amount at
December 31, 1998. The primary reason for the increase in securities available
for sale is a result of the transfer of the held-to-maturity portfolio to the
securities available for sale portfolio on May 1, 1999. On May 1, 1999, the
held-to-maturity portfolio had a an amortized cost of $112,870; the amount
transferred to the available for sale portfolio was $117,747, which represented
the approximate fair value of the held-to-maturity portfolio on May 1, 1999. The
transfer is a result of the Astoria acquisition, which will impact the Company's
asset/liability and tax planning strategies. The unrealized gain on the
held-to-maturity portfolio that was transferred to the available for sale
portfolio increased stockholders' equity by $3,413 on May 1, 1999. The
additional increase in securities available for sale is the result of the branch
acquisition from Astoria. The Company invested a portion of the funds received
from the branch acquisition in securities available for sale in the third
quarter of 1999.
The net unrealized loss on securities available for sale increased from $1,853
at December 31, 1998 to $3,573 at September 30, 1999. The increase in net
unrealized losses resulted primarily from the increase in long-term interest
rates experienced in the third quarter of 1999.
The composition of the securities available for sale portfolio at September 30,
1999 was as follows:
Collateralized mortgage obligations $125,169 35.6%
Nontaxable municipal bonds 57,504 16.4%
Corporate bonds 63,748 18.2%
U.S. government agency securities 51,171 14.6%
Mortgaged backed securities 38,850 11.1%
U.S. treasury securities 6,005 1.7%
Taxable municipal bonds 3,078 0.9%
Equity securities 5,652 1.5%
-------- -----
$351,177 100.0%
======== =====
17
<PAGE>
The average life of debt securities available for sale at September 30, 1999 was
6.7 years.
Loans
Net loans receivable increased $44,306 from $372,569 at December 31, 1998 to
$416,875 at September 30, 1999. The following schedule details the Company's
loan portfolio:
September 30, December 31,
1999 1998
------------- ------------
Loans secured by real estate:
Residential $ 71,734 $ 62,675
Commercial 69,688 56,466
Agricultural 16,176 17,193
Construction 2,304 3,643
Home equity 24,632 24,893
--------- ---------
184,534 164,870
--------- ---------
Other loans:
Commercial 39,591 33,238
Agricultural 16,808 18,399
Manufactured housing 57,181 60,975
Lease receivables 67,181 43,486
Tax exempt 4,530 2,989
Consumer 60,731 59,573
--------- ---------
246,022 218,660
--------- ---------
Net deferred loan fees/costs
and unearned discount (5,173) (2,577)
Allowance for loan losses (8,508) (8,384)
--------- ---------
Net loans receivable $ 416,875 $ 372,569
========= =========
The most significant area of growth in the Company's loan portfolio continues to
be in lease receivables. Lease receivables increased $23,695, from $43,486 at
December 31, 1998 to $67,181 at September 30, 1999. The Company has expanded its
leasing market area in 1999, which has led to the increase. Loans secured by
real estate increased $19,664, from $164,870 at December 31, 1998 to $184,534 at
September 30, 1999. Commercial and residential real estate increased $13,222 and
$9,059, respectively. The expansion of the Company's market area is the primary
reason for the increase in commercial and residential real estate. Commercial
loans increased $6,353 and manufactured housing decreased $3,794 during 1999.
The Company will continue to focus its efforts in growth related to the lease
receivable, residential real estate, and commercial real estate/commercial loan
portfolios. The Company's manufactured housing portfolio should continue to
decline as the Company is de-emphasizing its efforts in originating this loan
type, as manufactured housing loans have been the primary reason for the
increase in charge-offs in 1999.
Deposits
Total deposits increased $131,150, from $628,142 at December 31, 1998 to
$759,652 at September 30, 1999. The following schedule details the Company's
deposit liabilities:
18
<PAGE>
September 30, December 31,
1999 1998
------------- ------------
Non-interest bearing deposits $ 66,471 $ 66,339
NOW accounts 94,491 76,896
Savings accounts 133,990 102,446
Money market accounts 68,646 52,618
Time deposits 396,054 329,843
-------- --------
Total deposits $759,652 $628,142
======== ========
The increase in deposits can be attributed to the Astoria branch acquisition in
the third quarter of 1999. The Company acquired $155,718 of deposit liabilities
from Astoria that were associated with branch acquisition with a
weighted-average cost of 4.30%. The breakdown of deposits liabilities acquired
in the third quarter from Astoria were $2,525 in non-interest bearing deposits,
$24,530 in NOW and money market accounts, $25,155 in savings accounts, and
$103,508 in time deposits.
Borrowings
Short-term borrowings include repurchase agreements, which amounted to $8,410 at
September 30, 1999. The average balance of short-term borrowings for nine months
ended September 30, 1999 was 25,507. Included in the average balance for
short-term borrowings were two sixty-day advances from the FHLB amounting to
$52,700 which matured in the third quarter of 1999. Proceeds from the deposits
assumed in the branch acquisition were utilized to pay-off the advances.
Non-performing Assets
Non-performing assets are summarized in the following table:
September 30, December 31,
1999 1998
------------- ------------
Nonaccrual loans $4,098 $3,996
Accruing loans past due 90 days 1,039 1,279
------ ------
Total non-performing loans 5,137 5,275
Other real estate owned and
repossessed assets 1,063 1,099
------ ------
Total non-performing assets (loan related) 6,200 6,374
Impaired corporate debt security 1,740 -
------ ------
Total non-performing assets $7,940 $6,374
====== ======
Non-performing loans as a % of total loans 1.21% 1.38%
Non-performing assets as a %
of total assets (loan related) 0.72% 0.90%
Allowance for loan losses to
nonperforming loans 165.62% 158.94%
Non-accrual loans at September 30, 1999 were comprised of $2,118 of
commercial/commercial real estate, $768 of agricultural loans, $897 of
residential real estate, and $314 of manufactured housing loans. Loans past due
90 days or more and still accruing were comprised mainly of manufactured housing
loans and residential real estate at September 30, 1999.
19
<PAGE>
The remaining carrying value of the impaired corporate debt security, which is
not accruing interest and is considered to be non-performing is $1,740. This
bond, which is not actively traded, is monitored closely by management and at
this time, management does not believe any additional write-down is required.
However, if adverse conditions resulting in the initial write-down continue or
worsen, an additional write-down may be necessary.
Gross charge-offs for the nine months ended September 30, 1999 amounted to
$1,226. Charge-offs were mainly comprised of consumer/manufactured housing loans
amounting to $601 and credit card loans amounting to $162. Recoveries for the
nine months ended September 30, 1999 amounted to $290. Provisions for loan
losses amounted to $1,060 for the nine months ended September 30, 1999. The
allowance for loan losses increased $124, from $8,384 at December 31, 1998 to
$8,508 at September 30, 1999. The allowance for loan losses is maintained at a
level deemed appropriate by management based on an evaluation of the known and
inherent risks in the portfolio, past loan loss experience, estimated value of
underlying collateral, and economic conditions that may affect borrowers'
ability to pay.
Liquidity and Capital Resources
Liquidity is the ability of the Company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining the ability to meet the
day-to-day cash flow requirements of our customers, whether they be depositors
wishing to withdraw funds or borrowers requiring funds to meet their credit
needs.
Asset and liability management functions not only to assure adequate liquidity
in order to meet the needs of our customers, but also to maintain an appropriate
balance between interest-sensitive assets and interest-sensitive liabilities in
order to generate an appropriate return to stockholders. In the banking
environment, both assets and liabilities are considered sources of liquidity
funding and both are monitored on a daily basis. The asset portion of the
balance sheet provides liquidity primarily through loans, mortgage backed
security and collateralized mortgage obligation principal repayments, maturities
and calls of securities and sales from the available for sale and trading
portfolios.
Management closely monitors the timing of cash inflows and outflows although
changes in interest rates, economic conditions and competitive forces strongly
impact the predictability of these cash flows. The Company attempts to provide
stable and flexible sources of funding through its branch network as well as
with limited use of borrowings. Management believes that the level of the
Company's liquid assets combined with daily monitoring of cash inflows and
outflows provide adequate liquidity to fund outstanding loan commitments, meet
daily withdrawal requirements of depositors, and meet all other daily
obligations of the Company.
The Company and its subsidiary are currently subject to two sets of regulatory
capital measures, a leverage ratio test and risk-based capital guidelines. The
risk-based guidelines assign weightings to all assets and certain off-balance
sheet items and establish an 8% minimum ratio of qualified total capital to
risk-weighted assets. At least half of total capital must consist of "Tier 1"
capital, which comprises common equity, retained earnings and a limited amount
of minority interest in consolidated subsidiaries
20
<PAGE>
(subordinated debt), less goodwill. Up to half of total capital may consist of
so-called "Tier 2" capital, comprising a limited amount of subordinated debt,
other preferred stock, certain other instruments and a limited amount of the
allowance for loan losses. The leverage ratio test establishes minimum limits on
the ratio of Tier 1 capital to total tangible assets, without risk weighting.
For top-rated companies, the minimum leverage ratio is 4%, but lower-rated or
rapidly expanding companies may be required to meet substantially higher minimum
leverage ratios. The FDIC Improvement Act of 1991 ("FDICIA") mandated actions to
be taken by banking regulators for financial institutions that are
undercapitalized as measured by these ratios. FDICIA established five levels of
capitalization for financial institutions ranging from "critically
undercapitalized" to "well-capitalized." As of September 30, 1999, the Tier 1
leverage and risk-based capital ratios for the Company and its subsidiary were
as follows:
Summary of Capital Ratios
Tier 1 Total
Risk-Based Risk-Based
Leverage Capital Capital
Ratio Ratio Ratio
----------------------------------
CNB Financial Corp. 7.42 9.95 11.08
Central National Bank. 6.91 9.23 10.48
Regulatory Minimum 4.00 4.00 8.00
FDICIA's "Well-Capitalized" Standard 5.00 6.00 10.00
All capital ratios for the Company and its subsidiary bank at September 30, 1999
were above minimum capital standards for financial institutions. Additionally,
all Company and subsidiary banks' capital ratios at that date were above
FDICIA's "well-capitalized" standard.
Total stockholders' equity amounted to $56,576 at September 30, 1999, which is a
$1,010 increase over the $55,566 at December 31, 1998. The increase resulted
primarily from earnings retention of $2,952, offset by a increase in accumulated
other comprehensive (loss) of $1,125 and net treasury stock purchases of $885.
The Company paid dividends totaling $0.25 per share for the nine months ended
September 30, 1999.
Year 2000 Readiness
Progress made on this effort is closely monitored by the Company's regulatory
agency to ensure compliance with its Year 2000 plan. The Company's project plan
is structured after the guidelines set by the Federal Financial Institutions
Examination Council (FFIEC) regarding the installation and testing of mission
critical systems. The five phases outlined in this guidance are: 1) Awareness -
In May of 1997, the Company formed a Year 2000 Committee consisting of Senior
Officers and Managers representing all segments of its operations. The Board of
Directors is updated on a monthly basis regarding the progress of the program.
2) Assessment - During this same time, the Company contacted every business we
depend on for software, hardware or as a service
21
<PAGE>
provider. We asked each of them to complete a "Year 2000 Certification" and
project plan to assess their state of Year 2000 readiness. 3) Renovation - The
Company primarily relies on third party vendors for its primary systems. The
renovation phase for our mission critical systems was completed prior to
year-end 1998. 4) Validation - Testing of the Company's mission critical systems
was also substantially completed by year-end 1998 and was complete according to
FFIEC guidelines by June 30, 1999. 5) Implementation - During this phase of the
project plan the Company will continue to monitor its systems.
The total budget for Year 2000 testing was set at $40,000. For the nine months
ended September 30, 1999, the Company has expended $29,000 on Year 2000 testing.
These figures do not account for personnel time involved with the installation
and testing of these systems. The Company has funded, and plans to fund, its
Year 2000 related expenditures out of general operating sources and expense them
as incurred.
The Company has completed an assessment of major borrowing accounts and has
evaluated and assigned risks to each based on information obtained from the
borrower. Year 2000 preparedness is now a part of on-going loan account review.
The Company has created Contingency and Business Resumption plans to enhance its
normal Disaster Recovery policies. However there are many circumstances which
are beyond the scope and control of this organization. Some of these are the
preparedness of utility companies such as electric, telephone and governmental
agencies. As part of the Contingency and Business Resumption plans, the Company
will continue to monitor disclosures related to Year 2000 issued by such
companies and agencies upon which the Company relies for certain services which
are beyond the scope and control of the Company.
Year 2000 Risks Facing the Company and the Company's Contingency Plan:
The failure of the Company to substantially complete its Plan could result in an
interruption in or failure of certain normal business activities or operations.
Such failures could adversely effect the Company's financial condition,
liquidity or results of operations. Currently, the Plan is on schedule and
management believes that successful completion of the Plan should significantly
reduce the risks faced by the Company with respect to the Year 2000 problem. The
Company does not have any significant concentration of borrowers from any
particular industry (to the extent some industries might be particularly
susceptible toY2K concerns), and no individual borrower accounts for a
significant portion of the Company's assets. However, the Company may experience
some negative impact on the performance of various loan accounts due to failure
of the borrowers to prepare adequately for the Year 2000 problem. In a
worst-case scenario, these borrower-related difficulties might require the
Company to downgrade the affected credits in its loan classification system or
to make one or more special provisions to its loan loss allowance for resulting
losses in ensuing periods. In addition, although the Company is adopting special
measures to maintain necessary liquidity to meet funding demands in periods
surrounding the transition from 1999 to 2000, the Company could also face
increased funding costs or liquidity pressures if depositors are motivated out
of Y2K concerns to withdraw substantial amounts of deposits. The Company does
not currently expect any material impact from Y2K related issues on its costs of
funds or liquidity, but in a worst-case scenario, if funding costs do rise, net
interest margins may be negatively impacted over the relevant time frame.
22
<PAGE>
The Company could face some risk from the possible failure of one or more of its
third party vendors to continue to provide uninterrupted service through the
changeover to the Year 2000. Critical providers include the Company's core data
processing service providers, and the Company's provider of lease financing data
processing. While an evaluation of the Year 2000 preparedness of its third party
vendors has been part of the Company's Plan, the Company's ability to evaluate
these third party vendors is limited to some extent by the willingness of
vendors to supply information and the ability of vendors to verify the Y2K
preparedness of their own systems or their sub-providers. However, the Company
participates in user groups, receives assessments of Y2K preparedness of vendors
periodically from federal banking agencies, and the Company's Plan includes
third-party vendor system interface testing, accordingly the Company does not
currently anticipate that any of its significant third party vendors will fail
to provide continuing service due to the Year 2000 problem.
The Company, like similarly situated enterprises, is subject to certain risks as
a result of possible industry-wide or area-wide failures triggered by the Year
2000 problem. For example, the failure of certain utility providers (gas,
electric, tele-communications) or governmental agencies (the Federal Reserve
System, the Federal Home Loan Bank) to avoid disruption of service in connection
with the transition from 1999 to 2000 could materially adversely affect the
Company's financial condition, liquidity and results of operations. In
management's estimate, such a system-wide or area-wide failure represents
significant risk to the Company in connection with the Year 2000 problem because
the resulting disruption may be entirely beyond the ability of the Company to
cure. The significance of any such disruption would depend on its duration and
systematic and geographic magnitude. Any such disruption would likely impact
businesses other than the Company. In order to reduce the risks enumerated
above, the Company's Year 2000 Committee has developed contingency and business
resumption plans in accordance with guidance issued by the federal bank
regulators. The Committee has evaluated options, selected a contingency
strategy, and assigned responsibilities for such contingency plans. The
validation of such contingency plans was completed during the third quarter of
1999. Certain catastrophic events (such as the loss of utilities or the failure
of certain governmental bodies to function) are outside the scope of the
Company's contingency plans, although the Company anticipates that it would
respond to any such catastrophe in a manner designed to minimize disruptions in
customer service, and in full cooperation with peer providers, community leaders
and service organizations.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity risk, do not arise in the normal course of the Company's business
activities.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on the Company's net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or re-price more quickly than
earning assets in a given period, a significant increase in
23
<PAGE>
market rates of interest could adversely affect net interest income. Similarly,
when earning assets mature or re-price more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
An important element of both earnings performance and liquidity is management of
interest rate sensitivity. Interest rate sensitivity management involves
comparison between the maturity and re-pricing dates of earning assets and
interest-bearing liabilities, with the goal being to minimize the impact on net
interest income in periods of extreme fluctuations in interest rates. Quarterly,
the change in net interest income, as well as several other strategic
measurement ratios, are presented to the Company's Asset/Liability Committee
(ALCO) and Board of Directors and compared to Company-established guidelines.
The Company consistently maintains the ratios within the acceptable ranges of
the guidelines established. On a weekly basis, the ALCO, which is comprised of
Senior Management, meets to monitor the interest rate sensitivity and liquidity
position.
The ALCO utilizes the results of a detailed and dynamic simulation model to
quantify the estimated exposure of net interest income to sustained interest
rate changes. While ALCO routinely monitors simulated net interest income
sensitivity over a one-year period, it also utilizes additional tools to monitor
longer-term interest rate risk. The simulation model captures the impact of
changing interest rates on the interest income received and interest expensed
paid on all earning assets and interest-bearing liabilities reflected on the
Company's balance sheet. This sensitivity analysis is compared to ALCO policy
limits which specify a maximum tolerance level for net interest income exposure
over a one year horizon, assuming no balance sheet growth, a 200 basis point
upward and downward shift in interest rates, and the use of convexity factors
which estimate the change in interest rate risk caused by changes in the
Company's structure in response to the rate change. As of September 30, 1999,
under this analysis, a 200 basis point increase in interest rates resulted in no
change in net interest income and a 200 basis point decrease in interest rates
resulted in 3.1% decrease in net interest income. These amounts were within the
Company's ALCO policy limits.
Interest rate risk analyses performed by the Company indicate that the Company
is asset sensitive, or its earning assets re-price more quickly than its
interest-bearing liabilities. As a result, falling interest rates could result
in a decrease in net income. The Company has taken steps to manage its interest
rate risk by attempting to match the re-pricing periods of earning assets to its
interest-bearing liabilities. The interest rate risk analyses results were
different than previous quarters due primarily to the Astoria branch
acquisition. The funds received from the acquisition were primarily invested in
investments with short-terms or with short-term re-pricing frequencies.
Additionally, the concentration in CMOs, which are sensitive to rate changes,
will likely result in accelerated pay-downs in a falling rate environment. This
change in the Company's balance sheet resulted in a change in the Company's
maturity/re-pricing gap, which resulted in the asset sensitivity. The Company's
current emphasis in growing loans with terms less than five years and selling
long-term fixed rate loans are methods the Company has utilized to manage
interest rate risk. Management continuously evaluates various alternatives to
address interest rate risk.
24
<PAGE>
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cash flows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make assurances as to the predictive
nature of these assumptions including how customer preferences or competitor
influences might change. Also, as market conditions vary from those assumed in
the sensitivity analysis, actual results will differ due to:
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate changes on caps and floors on adjustable rate assets,
the potential effect of changing debt service levels on customers with
adjustable rate loans, depositor early withdrawals and product preference
changes, and other internal/external variables. Furthermore, the sensitivity
analysis does not reflect actions that ALCO might take in responding to or
anticipating changes in interest rates.
25
<PAGE>
CNB Financial Corp.
Part II - Other Information
Item 1 - Legal Proceedings
No material changes since filing of the Registrant's Form 10-K for the
year end December 31, 1998
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and reports on Form 8-K
(A) Exhibits
Exhibit 27 - Financial Data Schedule (electronic filing only)
(B) Current Reports filed on Form 8-K
On August 4, 1999, the Company filed a Form 8-K dated August 2, 1999
related to the announcement of revised operating results for the three
and six month periods ended June 30, 1999.
On September 10, 1999, the Company filed a Form 8-K dated August 27,
1999, related to the acquisition of 5 bank branches located in Central
New York State from Astoria Federal Savings and Loan Association.
26
<PAGE>
SIGNATURES
Pursuant to the requirements 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 FINANCIAL CORP.
Registrant
Date: NOVEMBER 15, 1999 By: /s/ DONALD L. BRASS
----------------- -------------------------------
Donald L. Brass
President
Date: NOVEMBER 15,1999 By: /s/ PETER J. CORSO
----------------- -------------------------------
Peter J. Corso
Executive Vice President
27
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 883756
<NAME> CNB Financial Corp.
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-1-1999 JAN-1-1999
<PERIOD-END> SEP-30-1999 SEP-30-1998
<EXCHANGE-RATE> 1.000 1.000
<CASH> 22,488 23,688
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 23,000 2,625
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 351,177 170,660
<INVESTMENTS-CARRYING> 0 114,667
<INVESTMENTS-MARKET> 0 120,685
<LOANS> 425,383 371,561
<ALLOWANCE> 8,508 8,403
<TOTAL-ASSETS> 858,129 696,958
<DEPOSITS> 759,652 618,719
<SHORT-TERM> 8,924 7,978
<LIABILITIES-OTHER> 8,782 8,117
<LONG-TERM> 24,195 6,617
0 0
0 0
<COMMON> 9,761 9,744
<OTHER-SE> 46,815 46,323
<TOTAL-LIABILITIES-AND-EQUITY> 858,129 696,958
<INTEREST-LOAN> 25,481 24,489
<INTEREST-INVEST> 14,579 14,394
<INTEREST-OTHER> 439 195
<INTEREST-TOTAL> 40,499 39,078
<INTEREST-DEPOSIT> 18,314 18,408
<INTEREST-EXPENSE> 19,527 19,391
<INTEREST-INCOME-NET> 20,972 19,687
<LOAN-LOSSES> 1,060 610
<SECURITIES-GAINS> (620) 318
<EXPENSE-OTHER> 15,648 14,745
<INCOME-PRETAX> 6,560 7,332
<INCOME-PRE-EXTRAORDINARY> 6,560 7,332
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,804 5,428
<EPS-BASIC><F1> 0.63 0.71
<EPS-DILUTED><F2> 0.63 0.71
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<LOANS-NON> 4,098 3,874
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<FN>
(1) Basic earnings per share under SFAS No.128
(2) Diluted earnings per share under SFAS No. 128
(3) Fully taxable equivalent
</FN>
</TABLE>
