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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 ending June 30, 1999
Commission File Number 33-45522
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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
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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 bank
was required to file such reports), and (2) has been subjected to such filing
requirements for the past 90 days.
Yes X No
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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 July 31, 1999
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Common Stock, $1.25 par value 7,568,375
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<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 Consolidated Interim Financial Statements 6.-7.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7.-22.
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22.-23.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24.
Item 2. Changes in Securities and Use of Proceeds 24.
Item 3. Defaults Upon Senior Securities 24.
Item 4. Submission of Matters to a Vote of Security Holders 24.
Item 5. Other Information 24.
Item 6. Exhibits and Reports on Form 8-K 24.
SIGNATURES 25.
</TABLE>
2
<PAGE>
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>
June 30, December 31,
1999 1998
----------- ------------
Assets (Unaudited)
<S> <C> <C>
Cash and due from banks $ 19,266 $ 16,128
Securities available for sale, at fair value 310,751 186,651
Investment securities held to maturity, at amortized cost - 113,456
Net loans & leases receivable 395,322 372,569
Accrued interest receivable 5,508 5,843
Premises and equipment, net 9,602 10,075
Other real estate owned and repossessed assets 1,272 1,099
Other assets 3,666 5,267
--------- ---------
Total assets $ 745,387 $ 711,088
========= =========
Liabilities and Stockholders' Equity
Noninterest-bearing deposits $ 63,720 $ 66,339
Interest-bearing deposits 544,046 561,803
--------- ---------
Total deposits 607,766 628,142
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Short-term borrowings:
Securities sold under agreements to repurchase 10,693 12,347
Borrowings from the Federal Home Loan Bank of New York 52,700 -
Borrowings from the U.S. Treasury 511 304
--------- ---------
Total short-term borrowings 63,904 12,651
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Long-term borrowings 6,286 6,530
Other liabilities 8,930 8,199
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Total liabilities 686,886 655,522
--------- ---------
Stockholders' equity:
Common stock, $1.25 par value, 20,000,000 shares authorized
(7,807,631 issued at June 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 46,668 44,729
Accumulated other comprehensive (loss) (110) (1,376)
Treasury stock, at cost (225,804 shares at June 30, 1999 and 224,578
at December 31, 1998) (4,015) (3,677)
--------- ---------
Total stockholders' equity 58,501 55,566
--------- ---------
Total liabilities and stockholders' equity $ 745,387 $ 711,088
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
3
<PAGE>
CNB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------------------ ------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans & leases, including fees $ 8,370 $ 8,304 $ 16,759 $ 16,175
Securities:
Taxable 3,864 4,172 7,536 7,974
Nontaxable 904 886 1,837 1,728
Federal funds sold and other 38 127 71 157
-------- -------- -------- --------
13,176 13,489 26,203 26,034
-------- -------- -------- --------
Interest expense:
Deposits 5,990 6,461 12,055 12,207
Short-term borrowings 292 229 457 476
Long-term borrowings 92 97 177 195
-------- -------- -------- --------
6,374 6,787 12,689 12,878
-------- -------- -------- --------
Net interest income 6,802 6,702 13,514 13,156
Provision for loan losses 450 140 720 290
-------- -------- -------- --------
Net interest income after provision for loan losses 6,352 6,562 12,794 12,866
-------- -------- -------- --------
Other income:
Service charges on deposit accounts 495 476 994 929
Net (loss) gain on securities transactions (723) 142 (652) 236
Other 404 363 924 815
-------- -------- -------- --------
176 981 1,266 1,980
-------- -------- -------- --------
Other expenses:
Salaries and employee benefits 2,159 2,290 4,563 4,470
Occupancy and equipment 457 521 1,029 1,046
Data processing 604 518 1,175 1,036
Professional fees 242 334 487 614
FDIC deposit insurance and related costs 19 16 37 33
Advertising and marketing 94 108 155 182
Postage and courier 124 172 252 301
Office supplies and stationary 151 112 323 247
Other real estate owned and repossessed assets 203 259 354 534
Other 723 769 1,420 1,546
-------- -------- -------- --------
4,776 5,099 9,795 10,009
-------- -------- -------- --------
Income before income tax expense 1,752 2,444 4,265 4,837
Income tax expense 457 638 1,119 1,261
-------- -------- -------- --------
Net income $ 1,295 $ 1,806 $ 3,146 $ 3,576
======== ======== ======== ========
Earnings per share:
Basic $ 0.17 $ 0.24 $ 0.41 $ 0.47
Diluted $ 0.17 $ 0.23 $ 0.41 $ 0.46
</TABLE>
See accopmanying notes to unaudited consolidated interim financial statements.
4
<PAGE>
CNB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended,
June 30, June 30,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net Income $ 3,146 $ 3,576
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 679 656
Provision for loan losses 720 290
Net loss (gain) on securities transactions 652 (236)
Net loss on sales and writedowns of other real estate
owned and repossessed assets 100 181
Purchases of trading securities (19,705) (9,760)
Proceeds from sales of trading securities 19,745 10,330
Decrease (increase) in accrued interest receivable 335 (280)
Net change in other assets and other liabilities 1,967 40
--------- ---------
Net cash provided by operating activities 7,639 4,797
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (95,924) (101,320)
Held to maturity (5,831) (15,068)
Proceeds from sales of securities:
Available for sale 65,794 46,801
Proceeds from maturities and calls of securities:
Available for sale 19,839 30,502
Held to maturity 6,417 13,755
Net loans made to customers (24,300) (22,588)
Proceeds from sales of other real estate owned and
repossessed assets 554 598
Capital expenditures (206) (1,119)
--------- ---------
Net cash used in investing activities (33,657) (48,439)
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits (20,376) 48,833
Net increase (decrease) in short term borrowings 51,253 (4,071)
Payments on long-term borrowings (244) (229)
Dividends paid (1,214) (1,073)
Proceeds from issuance of shares for options and Dividend Reinvestment Plan 326 290
Purchase of treasury stock (589) (1,175)
--------- ---------
Net cash provided by financing activities 29,156 42,575
--------- ---------
Net increase (decrease) in cash and cash equivalents 3,138 (1,067)
Cash and cash equivalents at beginning of period 16,128 19,498
--------- ---------
Cash and cash equivalents at end of period $ 19,266 $ 18,431
========= =========
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
<PAGE>
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 six-month and three-month period ended
June 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 six months ended June 30:
<TABLE>
<CAPTION>
Three Months Ended 6/30/99 Three Months Ended 6/30/98
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 $1,295 7,583 $0.17 $1,806 7,670 $0.24
Effect of dilutive securities:
Stock options 35 38
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Diluted EPS $1,295 7,618 $0.17 $1,806 7,708 $0.24
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<CAPTION>
Six Months Ended 6/30/99 Six Months Ended 6/30/98
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 $3,146 7,587 $0.41 $3,576 7,662 $0.47
Effect of dilutive securities:
Stock options 38 44
----------------------------------------------------------------------
Diluted EPS $3,146 7,625 $0.41 $3,576 7,704 $0.46
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</TABLE>
6
<PAGE>
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. As of June 30, 1999, accumulated other
comprehensive income, which is included in stockholders' equity, net of
tax, represents the net unrealized gain or loss on securities available for
sale.
Total comprehensive income for the six months ended June 30, 1999 and 1998
was $4,412 and $3,393, and total comprehensive income for the three months
ended June 30, 1999 and 1998 was $1,751 and $1,527, 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 recently 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.
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 branches and two financial
services centers located in Central New York in the counties of Montgomery,
Fulton, Herkimer, Otsego, Schoharie, Saratoga and Schenectady (In August 1999,
the Bank opened two additional branches located in Clifton Park and Whitesboro,
NY). In 1996 Central Asset Management, Inc. (CAM) was
7
<PAGE>
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 operating expenses, such as salaries and benefits, occupancy
expenses, 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:
8
<PAGE>
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;
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 pending 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.
Pending Acquisition of Five Astoria Federal Branches and New Branches
On April 9, 1999, the Company announced a definitive agreement to purchase 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. Under the agreement,
Central National Bank, Canajoharie will acquire all of the deposits related to
the branches. At June 30, 1999, the total amount of deposits amounted to
approximately $160,000. The transaction, which is subject to regulatory
approval, is currently expected to close in the third quarter of 1999.
9
<PAGE>
In addition to acquiring the Astoria branches, the Bank, in executing its
expansion initiative, opened a loan production office in Saratoga Springs, a
super market branch in Clifton Park, and a full service branch in Utica in 1999,
and has applied for or received approval to open branches in Halfmoon and
Herkimer. The Halfmoon and Herkimer branches are expected to open by the end of
1999.
Results of Operations
(All dollar amounts in thousands other than per share data,
except when otherwise noted)
Net income for the second quarter of 1999 amounted to $1,295, compared to the
$1,806 reported for the second quarter of 1998 while net income for the six
months ended June 30, 1999 amounted to $3,146, compared to the $3,576 reported
for the six months ended June 30, 1998. Return on average assets and return on
average equity was 0.71% and 8.77% for the quarter ended June 30, 1999 and 0.86%
and 10.86% for the six months ended June 30, 1999. Diluted earnings per share
amounted to $.17 for the quarter ended June 30, 1999 compared to diluted
earnings per share of $.23 for the quarter ended June 30, 1998 and diluted
earnings per share for the six months ended June 30, 1999 amounted to $.41
compared to diluted earnings per share of $.46 for the six months ended June 30,
1998. The decrease in net income for the first half of 1999 when compared to
1998 was due 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 recognized in net (loss) gain on securities transactions.
Information about an issuer of a corporate bond became available subsequent to
June 30, 1999, which has led the Company to conclude that the value of the bond
is other than temporarily impaired 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 paragraph.
Excluding the write-down of the corporate bond, the Company recognized net
income of $2,174 or $0.29 diluted earnings per share for the quarter ended June
30, 1999, compared to $1,806 or $0.23 diluted earnings per share for the quarter
ended June 30, 1998. The Company's return on average assets was 1.19% for the
quarter ended June 30, 1999; up 16 basis points from the 1.03% for the quarter
ended June 30, 1998. The Company's return on average equity was 14.72% for the
quarter ended June 30, 1999, up 173 basis points from 12.99% for the quarter
ended June 30, 1998. Net income for the six-months ended June 30, 1999 was
$4,025 or $0.53 diluted earnings per share compared to $3,576 or $0.46 diluted
earnings per share for the six-months ended June 30, 1998. The Company's return
on average assets was 1.11% for the six-months ended June 30, 1999, up 5 basis
points from the 1.06% for the six-months ended June 30, 1998. The Company's
return on average equity was 13.90% for the six-months ended June 30, 1999, up
92 basis points from the 12.98% for the six-months ended June 30, 1998.
Net interest income for the quarter ended June 30, 1999 increased $100 (1.5%)
over the same quarter of 1998, from $6,702 to $6,802. Net interest income for
the six-months ended June 30, 1999 increased $358 (2.7%) over the six-month
period ended June 30, 1998, from $13,156 to $13,514. The increases in net
interest income were due primarily to an increase the average balance of earning
assets in the second quarter and six-month period ended 1999 when compared to
the second quarter and six-month period ended
10
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1998. (See additional discussion under the caption "Net Interest Income"). The
deposits to be acquired in the Astoria transaction carry a lower average rate
than the Company's current deposit liabilities. The Company currently intends to
invest these additional funds in government securities until it finds
appropriate lending opportunities. The Company anticipates that the Astoria
transaction will result in increased net interest income and an improvement in
net interest margin.
The provision for loan losses for the second quarter of 1999 was $450, which is
an $310 increase over the provision for loan losses for the second quarter of
1998. The provision for loan losses for the six-months ended June 30, 1999 was
$720, which is a $430 increase over the same six-month period ended for 1998.
The increase in the provision in the second quarter and six-month period ended
1999 when compared to the same periods in 1998 resulted primarily from increased
delinquencies, 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 second quarter of 1999 was $176, as decrease of $805
when compared to the same quarter in 1998, which was due to the write-down of a
corporate bond of $1,187 noted previously. Excluding the write-down, total other
income was $1,363 for the second quarter of 1999, up $382 (39%) from the $981
recognized in the second quarter of 1998. The increase in other income was due
primarily to increases from net gains on sales of securities and increases in
fiduciary income. Net gains on security transactions amounted to $464 for the
second quarter of 1999 compared to $142 for the second quarter of 1998, a $322
increase. The Company's securities available for sale portfolio is used to
maintain its liquidity position; from time to time, securities are sold when
deemed prudent by management, to adjust the interest rate sensitivity of the
Company's balance sheet. Fiduciary income increased $47 in the second quarter of
1999 due primarily to growth in assets under management for trust services and
an increase in fee income from the Company's subsidiary, Central Asset
Management, Inc.
Total other income for the six-months ended June 30, 1999 was $1,266, a decrease
of $714 when compared to the same period in 1998, which was due to the
write-down of a corporate bond of $1,187. Excluding the write-down, total other
income for the six-months ended June 30, 1999 amounted to $2,453, a $473 (23.9%)
increase over the six-months ended June 30, 1998 of $1,980. The increase in
other income resulted primarily from net gains on sales of securities of $299,
fiduciary income of $68, and service charges on deposit accounts of $65 that
resulted from ATM convenience fees and other miscellaneous charges.
Total other expenses for the second quarter of 1999 amounted to $4,776, a $323
(6.3%) decrease from the $5,099 reported for the second quarter of 1998. Several
factors contributed to this decrease. Salaries and employee benefits decreased
$131 from $2,290 for the second quarter of 1998 to $2,159 for the second quarter
of 1999. The decrease in salaries and benefits can be attributed to severance
payments amounting to $95 in the second quarter of 1998, a decrease in incentive
compensation expense of $43 in the second quarter of 1999. Professional fees
decreased $92, as there are no consulting
11
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projects in place for 1999. Other real estate owned and repossessed asset
expense decreased $56 due primarily to decreases in losses on the sale of
repossessed assets. Occupancy and equipment, postage and courier, and other
expense decreased due primarily to the Company's efforts to reduce and control
costs. Data processing increased $86 due primarily to technology enhancements.
Total other expenses for the six months ended June 30, 1999 amounted to $9,795,
a decrease of $214 when compared to total other expenses of $10,009 for the same
period in 1998. Several factors contributed to this decrease. Other real estate
owned and repossessed assets decreased $180, due mainly to decreases in losses
on the sale of other real estate owned and repossessed assets. Additionally,
foreclosure expense on repossessed assets on manufactured housing decreased as
the Company experienced a decline in manufactured housing repossession activity.
Professional fees decreased $127, as there are no consulting projects in place
for 1999. Other expense decreased $126 due primarily to decreases in losses on
the sale of lease vehicles and the Company's efforts to reduce and control
costs. Data processing increased $139 due primarily to technology enhancements.
The Astoria acquisition and other new branches will result in an increase in
other expense resulting from operating costs and amortization of the premium to
be paid in the Astoria acquisition.
Income tax expense was $457 for the second quarter of 1999 down $181 from the
$638 recognized in the second quarter of 1998. The effective tax rate for the
second quarter of 1999 and 1998 was 26.1% and 26.3%, respectively. Income tax
expense was $1,119 for the six months ended June 30, 1999 down $142 from the
$1,261 recognized for the same period in 1998. The effective tax rate for the
six months ended June 30, 1999 and 1998 was 26.2% and 26.1%, 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 second quarter of 1999 was 4.03%
compared to 4.18% for the second quarter of 1998, a 15 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 second quarter
of 1999 was 7.65% compared to 8.25% for the second quarter of 1998, a 60 basis
point decrease. The rate paid on interest-bearing liabilities was 4.20% for the
second quarter of 1999 compared to 4.63% for the second quarter of 1998, a 43
basis point decrease. Offsetting the decrease in net interest margin in the
second quarter of 1999 was an increase in earning assets exceeding the increase
in interest-bearing liabilities. Earning assets increased from $667,093 for the
second quarter of 1998 to $703,294 in the second quarter of 1999, a $36,201
increase, meanwhile, interest-bearing liabilities increased from $586,913 to
$607,457 for the same period, a $20,544 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. As discussed above,
the Astoria acquisition also is expected to improve the net interest margin.
12
<PAGE>
The Company's net interest margin for the six-months ended June 30, 1999 was
4.05% compared to 4.27% for the same period in 1998, a 22 basis point decrease.
The interest rate spread decreased 22 basis points, from 3.68% in 1998 to 3.46%
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 six-months ended June 30, 1999 was 7.70% compared to
8.28% for the same period in 1998, a 58 basis point decrease. The rate paid on
interest-bearing liabilities was 4.24% for the six-months ended June 30, 1999
compared to 4.60% for the same period in 1998, a 36 basis point decrease.
Offsetting the decrease in net interest margin for the six-months ended June 30,
1999 was an increase in earning assets exceeding the increase in
interest-bearing liabilities. Earning assets increased from $642,703 for the
six-months ended June 30, 1998 to $695,646 in the same period of 1999, a $52,943
(8.2%) increase, meanwhile, interest-bearing liabilities increased from $559,588
to $599,045 for the same period, a $39,457 increase.
For the six months ended June 30, 1999, the yield on earning assets was 7.70%,
which is a 58 basis point decrease when compared to the yield of 8.28% for the
six months ended June 30, 1998. The yield on loans decreased from 9.15% to 8.64%
for the six-months ended June 30, 1998 to June 30, 1999. Despite a 51 basis
point decrease in the yield, interest income on loans on a tax equivalent basis
increased from $16,203 for the six months ended June 30, 1998 to $16,799 for the
six months ended June 30, 1999. The increase in interest income on loans can be
attributed to a $34,526 (9.8%) increase in the average balance of loans. The
most significant increases in the average balance of loans was in leases
receivable, which increased $20,326, from an average of $23,272 for the six
months ended June 30, 1998 to $43,598 for the six months ended June 30, 1999.
The average balance for real estate (residential, commercial, and agricultural)
and commercial loans increased $18,870 from the 1998 to 1999 period. Offsetting
the increases was a decrease in the average balance of consumer and manufactured
housing loans of $4,516 from the 1998 to 1999 period.
The decrease in the yield on loans 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, 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 7.13% for the six-months ended
June 30, 1998 to 6.34% for the six-months ended June 30, 1999. The decrease in
yield on taxable securities resulted in a decrease of $438 in interest income
despite a $14,041 increase the average balance of investment securities from the
six months ended June 30, 1998 to six months ended June 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
13
<PAGE>
securities and CMOs paid down, the amortization of premiums associated with
these securities were accelerated, and they 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 have
recently increased. 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 six-months ended
June 30, 1999 amounted to $140,300, which represents 59% of the average balance
of taxable securities.
The rate paid on interest-bearing deposits decreased 36 basis points, from 4.57%
for the six months ended June 30, 1998 to 4.21% for the six months ended June
30, 1999. The decrease in the rate paid on deposits resulted in a $152 decrease
in interest expense, despite a $39,317 increase in the average balance of
interest-bearing deposits. Several factors attributed to the decrease in
interest expense. The rate paid on time deposits, the costliest source of funds
for the Company, decreased 43 basis points from 5.77% for the six months ended
June 30, 1998 to 5.34% for the same period in 1999. Additionally, the average
balance of time deposits increased only 3.8%, from $315,750 for the six months
ended June 30, 1998 to $327,805 for the same period in 1999.
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 $17,977
for the six-months ended June 30, 1999 when compared to the same period in 1998.
Meanwhile, the rates paid on these deposit type accounts increased only
slightly. The average balance of money market accounts increased $9,285 for the
same period while the rate paid on money market accounts decreased 63 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 six-months ended June 30, 1999 when compared
to the same period in 1998. The growth in the average balance of
interest-bearing deposits for the six-months ended June 30, 1999 resulted in
relatively no change in short-term borrowings 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, are all
at average amortized cost.
14
<PAGE>
<TABLE>
<CAPTION>
Three months ended June 30, 1999 1998
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $392,751 $ 8,379 8.53% $360,139 $ 8,317 9.24%
Taxable Securities 241,688 3,864 6.40% 236,668 4,172 7.05%
Tax-exempt Securities 65,947 1,174 7.12% 61,195 1,147 7.50%
Federal Funds Sold 2,908 38 5.23% 9,091 127 5.59%
-------- ------- ---- -------- ------- ----
Total interest-earning assets 703,294 13,455 7.65% 667,093 13,763 8.25%
======== ------- ---- ======== ------- ----
Interest-bearing liabilities:
Deposits
NOW 78,905 356 1.81% 66,535 298 1.79%
Savings 110,034 750 2.73% 100,667 706 2.80%
Money Market 63,437 596 3.76% 58,281 623 4.27%
Time Deposits 322,972 4,288 5.31% 335,655 4,834 5.76%
-------- ------- ---- -------- ------- ----
Total Interest Bearing Deposits 575,348 5,990 4.16% 561,138 6,461 4.61%
-------- ------- ---- -------- ------- ----
Short-term Borrowings 25,755 292 4.54% 18,979 229 4.84%
Long-term Borrowings 6,354 92 5.78% 6,796 97 5.69%
-------- ------- ---- -------- ------- ----
Total Interest-bearing
liabilities $607,457 6,374 4.20% $586,913 6,787 4.63%
======== ------- ---- ======== ------- ----
Interest Rate Spread $ 7,081 3.45% $ 6,976 3.62%
======= =======
Net Interest Margin 4.03% 4.18%
- --------------------------------------------------------------------------------------------------
<CAPTION>
Six months ended June 30, 1999 1998
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $388,586 $16,799 8.64% $354,060 $16,203 9.15%
Taxable Securities 237,731 7,536 6.34% 223,690 7,974 7.13%
Tax-exempt Securities 66,579 2,406 7.23% 59,528 2,272 7.63%
Federal Funds Sold 2,750 71 5.17% 5,425 157 5.78%
-------- ------- ---- -------- ------- ----
Total interest-earning assets 695,646 26,792 7.70% 642,703 26,606 8.28%
======== ------- ---- ======== ------- ----
Interest-bearing liabilities:
Deposits
NOW 76,674 703 1.83% 65,570 585 1.78%
Savings 106,539 1,469 2.76% 99,664 1,391 2.79%
Money Market 61,970 1,128 3.64% 52,686 1,125 4.27%
Time Deposits 327,805 8,755 5.34% 315,750 9,106 5.77%
-------- ------- ---- -------- ------- ----
Total Interest Bearing Deposits 572,988 12,055 4.21% 533,670 12,207 4.57%
-------- ------- ---- -------- ------- ----
Short-term Borrowings 19,633 457 4.66% 19,081 477 5.00%
Long-term Borrowings 6,424 177 5.52% 6,837 195 5.70%
-------- ------- ---- -------- ------- ----
Total Interest-bearing
liabilities $599,045 12,689 4.24% $559,588 12,879 4.60%
======== ------- ---- ======== ------- ----
Interest Rate Spread $14,103 3.46% $13,727 3.68%
======= =======
Net Interest Margin 4.05% 4.27%
</TABLE>
15
<PAGE>
Financial Condition and Liquidity
The Company's total assets at June 30, 1999 were $745,387, an increase of
$34,299 from December 31, 1998. The increase includes an increase of $3,138 in
cash and cash equivalents, $10,644 in securities, and $22,753 in net loans
receivable. The increase in total assets was funded primarily through an
increase in short-term borrowings.
Securities
The carrying value of securities available for sale at June 30, 1999 amounted to
$310,751, which is a $124,100 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 net unrealized loss on securities available for sale decreased from $1,853
at December 31, 1998 to $157 at June 30, 1999. The decrease in net unrealized
losses resulted primarily from the write-down of a corporate bond of $1,187 in
the second quarter of 1999, as well as the above noted transfer of securities
from held-to-maturity to available for sale. Information became available
subsequent to June 30, 1999 and prior to the issuance of the Company's financial
statements for June 30, 1999 about the issuer of the corporate bond, which has
led the Company to conclude that the value of the bond is other than temporarily
impaired. Excluding the write-down of the corporate bond, and including the
increase in the fair value of available for sale securities on May 1, 1999 of
$4,877 as a result of the transfer noted above, net unrealized losses on
securities available for sale increased as a result of the increase in long-term
interest rates experienced in the second quarter of 1999.
The composition of the securities available for sale portfolio at June 30, 1999
was as follows:
Collateralized mortgage obligations $107,893
Nontaxable municipal bonds 63,281
Corporate bonds 54,476
U.S. government agency securities 36,638
Mortgaged backed securities 31,754
U.S. treasury securities 6,012
Taxable municipal bonds 4,719
Other equity securities 5,978
--------
$310,751
========
The average life of debt securities available for sale at June 30, 1999 was 7.0
years.
16
<PAGE>
Loans
Net loans receivable increased $22,753 from $372,569 at December 31, 1998 to
$395,322 million at June 30, 1999. The following schedule details the Company's
loan portfolio:
June 30, December 31,
1999 1998
-------- ------------
Loans secured by real estate:
Residential $ 67,056 $ 62,675
Commercial 63,868 56,466
Agricultural 16,170 17,193
Construction 1,300 3,643
Home equity 23,407 24,893
-------- --------
171,801 164,870
-------- --------
Other loans:
Commercial 39,659 33,238
Agricultural 17,860 18,399
Manufactured Housing 58,278 60,975
Lease receivables 56,740 43,486
Tax exempt 3,188 2,989
Consumer 60,214 59,573
-------- --------
235,939 218,660
-------- --------
Net deferred loan fees/cost
and unearned discount (3,966) (2,577)
Allowance for loan losses (8,452) (8,384)
-------- --------
Net loans receivable $395,322 $372,569
======== ========
The most significant area of growth in the Company's loan portfolio continues to
be in lease receivables. Lease receivables increased $13,254, from $43,486 at
December 31, 1998 to $56,740 at June 30, 1999. The Company has expanded its
leasing market area in 1999, which has led to the increase. Loans secured by
real estate increased $6,931, from $164,870 at December 31, 1998 to $171,801 at
June 30, 1999. Commercial and residential real estate increased $7,402 and
$4,381, respectively, for the first half of 1999. Meanwhile home equity loans
and agricultural real estate experienced declines in the first half of 1999.
Commercial loans increased $6,421 during the first half of 1999 and manufactured
housing decreased $2,697 during the first half of 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.
Deposits
Total deposits decreased $20,376, from $628,142 at December 31, 1998 to $607,766
at June 30, 1999. The decrease in deposits can be attributed to a decrease in
time deposits, which have decreased $26,870 from $329,843 at December 31, 1998
to $302,973 at June 30, 1999. The decrease in time deposits was primarily in
time deposits greater than $100, which decreased $25,280 in the first half of
1999. Historically, time deposits greater than $100 were a primary short-term
funding source for the Company. However, in anticipation of the Astoria branch
acquisition (approximately $160,000 in deposits) that is expected to close in
the third quarter of 1999, the Company is de-emphasizing its efforts in
obtaining time deposits greater than $100, as these deposits bear a higher rate
of interest. Excluding the decrease in time deposits, interest-bearing deposit
types
17
<PAGE>
experienced increases in the first half of 1999. This shift in the deposit mix
has lowered the Company's cost of funds.
Borrowings
Short-term borrowings increased $51,253 during the first half of 1999. The
increase in short-term borrowings is a result of the anticipated branch
acquisition expected to close in the third quarter of 1999. The Company has
obtained two sixty-day advances from the FHLB amounting to $36,300 which will
mature in the third quarter of 1999. Proceeds from the deposits acquired from
the branch acquisition will be utilized to pay-off the advances. Borrowings on
the FHLB line at June 30, 1999 amounted to $16,400. Other short-term borrowings
include repurchase agreements, which amounted to $10,693 at June 30, 1999.
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 equals 8.12%. The capital
securities reset quarterly, equal to the 3-Month LIBOR plus 275 basis points.
The Company will use 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 will not be classified as debt for
financial statement purposes and the expense associated with the capital
securities will be recorded as non-interest expense on the consolidated
statements of income.
Non-performing Assets
Non-performing assets are summarized in the following table:
June 30, December 31,
1999 1998
-------- ------------
Nonaccrual loans $4,637 $3,996
Accruing loans past due 90 days 1,646 1,279
------ ------
Total non-performing loans 6,283 5,275
Other real estate owned and
Repossessed assets 1,272 1,099
------ ------
Total non-performing assets $7,555 $6,374
====== ======
Non-performing loans as a % of total loans 1.56% 1.38%
Non-performing assets as a %
of total assets 1.01% 0.90%
Allowance for loan losses to
Nonperforming loans 134.52% 158.94%
18
<PAGE>
Non-accrual loans at June 30, 1999 were comprised of $2,487 of
commercial/commercial real estate, $981 of agricultural loans, $916 of
residential real estate, and $253 of manufactured housing loans. The increase in
non-accrual loans from December 31, 1998 to June 30, 1999 is due primarily to
one large commercial real estate credit that was placed on non-accrual status
during the second quarter of 1999. The amount outstanding on the credit at June
30, 1999 was $1,428. The Company is currently in the process of re-negotiating
the terms of the credit with the borrower. Loans past due 90 days or more and
still accruing were comprised mainly of one large agricultural credit amounting
to $792 and manufactured housing loans at June 30, 1999. The agricultural credit
is a short-term balloon loan, which has expired and is currently being renewed.
The Company anticipates that this credit will be current by the end of the third
quarter 1999.
Gross charge-offs for the six-months ended June 30, 1999 amounted to $845.
Charge-offs were mainly comprised of consumer/manufactured housing loans
amounting to $404 and credit card loans amounting to $156. Recoveries for the
six-months ended June 30, 1999 amounted to $193. Provisions for loan losses
amounted to $720 for the six months ended June 30, 1999. The allowance for loan
losses increased slightly from $8,384 at December 31, 1998 to $8,452 at June 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 exposure, 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.
19
<PAGE>
Total stockholders' equity amounted to $58,501 at June 30, 1999, which is a
$2,935 increase over the $55,566 at December 31, 1998. The increase resulted
primarily from earnings retention of $1,932 and an increase in accumulated other
comprehensive income (loss) of $1,266, offset by treasury stock purchases of
$338. The Company paid a dividend of $0.16 per share for the six-months ended
June 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 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 six months
ended June 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.
20
<PAGE>
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.
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 provider, 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
21
<PAGE>
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 begun to develop 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. Validating such contingency plans
is anticipated to be completed during the second 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 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
22
<PAGE>
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 June 30, 1999, under this
analysis, a 200 basis point increase in interest rates resulted in a 7.3%
decrease in net interest income and a 200 basis point decrease in interest rates
resulted in 2.3% increase 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 liability sensitive, or its interest-bearing liabilities mature or re-price
more quickly that its earning assets. As a result, rising 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 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.
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.
23
<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
Election of Directors. See Form 8-K filed on June 25, 1999 for
additional information.
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 April 16, 1999, the Company filed a Form 8-K dated April 8, 1999
related to the announcement of an agreement to purchase five retail
banking offices of Astoria Federal Savings and Loan Association located
in the upstate New York counties of Otsego and Chenango.
On June 25, 1999, the Company filed a Form 8-K dated May 20, 1999,
related to the annual meeting of shareholders and the filing of the
purchase and assumption agreement for the acquisition of the Astoria
federal Savings and Loan offices.
24
<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: August 16, 1999 By: /s/ Donald L. Brass
-------------------------
Donald L. Brass
President
Date: August 16, 1999 By: /s/ Peter J. Corso
-------------------------
Peter J. Corso
Executive Vice President
25
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0000883756
<NAME> CNB Financial Corp
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JUN-30-1999 JUN-30-1998
<PERIOD-END> JUN-30-1998 JUN-30-1997
<EXCHANGE-RATE> 1.00 1.00
<CASH> 19,266 18,431
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 395,322 167,950
<INVESTMENTS-CARRYING> 0 111,637
<INVESTMENTS-MARKET> 0 116,778
<LOANS> 403,774 368,533
<ALLOWANCE> 8,452 8,394
<TOTAL-ASSETS> 745,387 681,684
<DEPOSITS> 607,766 587,305
<SHORT-TERM> 63,904 24,162
<LIABILITIES-OTHER> 8,930 7,474
<LONG-TERM> 6,286 6,702
0 0
0 0
<COMMON> 9,761 9,743
<OTHER-SE> 48,740 46,298
<TOTAL-LIABILITIES-AND-EQUITY> 745,387 681,684
<INTEREST-LOAN> 16,759 16,175
<INTEREST-INVEST> 9,373 9,702
<INTEREST-OTHER> 71 157
<INTEREST-TOTAL> 26,203 26,034
<INTEREST-DEPOSIT> 12,055 12,207
<INTEREST-EXPENSE> 12,689 12,878
<INTEREST-INCOME-NET> 13,514 13,156
<LOAN-LOSSES> 720 290
<SECURITIES-GAINS> (652) 236
<EXPENSE-OTHER> 9,795 10,009
<INCOME-PRETAX> 4,265 4,837
<INCOME-PRE-EXTRAORDINARY> 4,265 4,837
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,146 3,576
<EPS-BASIC><F1> 0.41 0.47
<EPS-DILUTED><F2> 0.41 0.46
<YIELD-ACTUAL><F3> 4.05 4.27
<LOANS-NON> 4,637 3,966
<LOANS-PAST> 1,646 1,279
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 8,384 8,378
<CHARGE-OFFS> 845 537
<RECOVERIES> 193 263
<ALLOWANCE-CLOSE> 8,452 8,394
<ALLOWANCE-DOMESTIC> 8,452 8,394
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 2,025 2,574
<FN>
<F1> Basic earnings per share under SFAS No.128
<F2> Diluted earnings per share under SFAS No. 128
<F3> Fully taxable equivalent
</FN>
</TABLE>
