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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-4552
CNB FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
NEW YORK 22-3203747
- --------------------- ----------------------
(State incorporation) (IRS Employer
Identification Number)
24 CHURCH STREET, CANAJOHARIE, NEW YORK 13317
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(Address of principal executive office including Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (518) 673-3243
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $1.25
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [X]
As of March 15, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $128,458,324.
As of March 15, 1999, 7,556,372 shares of registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part of 10-K into
Documents which incorporated
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Portions of the Annual Report to Shareholders
for the year ended December 31, 1998 I, II
Portions of Proxy Statement for Annual Meeting
of Shareholders to be held on May 20, 1999 III
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<PAGE>
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT 1998
CNB FINANCIAL CORP.
Page
PART I ----
Item 1. Business............................................................ 1
Item 2. Properties.......................................................... 9
Item 3. Legal Proceedings................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders................. 10
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters........................................................... 10
Item 6. Selected Financial Data............................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 13
Item 8. Financial Statements and Supplementary Data......................... 13
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 13
PART III
Item 10. Directors and Executive Officers of the Registrant.................. 14
Item 11. Executive Compensation.............................................. 14
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 14
Item 13. Certain Relationships and Related Transactions...................... 14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 15
<PAGE>
PART I
This Annual Report on Form 10-K contains forward-looking statements with respect
to the financial condition, results of operations and business of the
Corporation. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements are set forth herein under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" incorporated by reference in item 7 of this report.
ITEM 1. Business
GENERAL
CNB Financial Corp. (the Corporation) 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
Corporation. The Corporation maintains its headquarters in Canajoharie, New
York.
The principal business of the Corporation is to provide, through the Bank,
comprehensive banking services through its network of twenty branches and one
financial services center located in Central New York in the counties of
Montogemery, Fulton, Herkimer, Otsego, Schoharie and Schenectady.
In 1996 Central Asset Management, Inc. (CAM) was formed as a second subsidiary
of the Corporation. 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.
At December 31, 1998, the Corporation had assets of $711.1 million, deposits of
$628.1 million, net loans of $372.6 million and stockholders' equity of $55.6
million. A detailed discussion concerning the Corporation's consolidated
financial condition and results of operations are contained in Part II of this
report.
BANKING SERVICES
The Bank provides a wide range of retail and commercial banking services for
individuals and small to medium sized businesses primarily in its market area
including accepting time, demand and savings deposits, and making secured and
unsecured commercial, real estate and consumer loans. The Bank also makes
certain insurance and investment products available to its customers through a
third-party vendor. The Bank's lending activities are primarily in agricultural,
commercial, real estate and consumer loans primarily in indirect and lease
financing for automobiles and manufactured housing dealers. Other services
include safe deposit boxes, travelers checks, money orders, wire transfers,
drive-in facilities, 24-hour depositories, ATM's and trust services. The Bank's
retail approach is that of a community-oriented bank focusing on development of
long-term customer relationships, personalized service, convenient locations,
and meeting the needs of individuals and businesses in its market area.
1
<PAGE>
GROWTH STRATEGY
The Bank's continued growth is dependent on the Bank obtaining additional
customers. Toward this end, the Bank intends to continue expansion within its
existing markets, as well as certain potential markets contiguous to the current
service area. This growth may be accomplished by obtaining a greater market
share within the Bank's existing markets as well as opening or acquiring new
branches in both existing and new markets, and offering indirect consumer loan
products.
COMPETITION
The banking business in the Bank's market area is highly competitive. The Bank
competes actively with national and state chartered banks, savings banks,
savings and loan associations, credit unions, finance companies, money market
funds, mortgage banks, insurance companies, brokerage firms and other non-bank
institutions that provide one or more of the services offered.
The Bank has been able to compete effectively for deposits and loans because of
its image as a community-oriented bank, the loyalty of its customers, and its
emphasis on personalized banking services and local decision-making in its
branch offices.
CONCENTRATION OF CONSUMER LENDING
The Bank's lending activities focus on consumer loans with a concentration in
indirect financing provided through manufactured housing and automobile dealers.
At December 31, 1998, approximately 16% of the Bank's total loan portfolio was
concentrated in manufactured housing loans, 11% was concentrated in lease
financing on automobiles and approximately 11% was concentrated in automobile
loans. Accordingly, a substantial portion of the Bank's loan portfolio is
subject to the general risks associated with consumer lending. In the opinion of
the Bank's management, however, the established nature of the individual dealers
through which the Bank provides the indirect financing, as well as the Bank's
extensive experience in assessing the quality of such loans, help offset the
risks associated with these loans.
EXECUTIVE OFFICERS OF THE CORPORATION AND BANK
The following table sets forth, as of December 31, 1998, selected information
about the principal officers of the Corporation, each of whom is elected by the
Board of Directors and each of whom holds office at the discretion of the Board
of Directors:
<TABLE>
<CAPTION>
Corporate
Held Employee Shares of
Name (Age) Office and Position Since Since(1) Stock(2)
- ---------- ------------------- ------- -------- ----------
<S> <C> <C> <C> <C>
Donald L. Brass (50) President 1993 1993 19,950
Peter J. Corso (55) Executive V.P. & Treasurer 1993 1993 7,905
Michael D. Hewitt (48) Sr. V.P. & Asst. Secretary 1999 1999 100
</TABLE>
2
<PAGE>
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(1) The officers previous employment with the Bank or elsewhere for the prior
five years follows:
Mr. Brass, President and CEO, hired in 1989. Previously employed as
President of Moravia National Bank from 1987. He became CEO on January 1,
1992.
Mr. Corso, Executive Vice President and Chief Financial Officer, has been
employed by the Bank since 1986. He became Executive Vice President in
April, 1992.
Mr. Hewitt, Senior Vice President and Senior Community Bank Sales Manager,
joined the Bank in 1998 from KeyBank.
(2) Adjusted for the 2-for-1 stock split paid on June 30, 1998.
EMPLOYEES
As of December 31, 1998, the Bank employs 273 persons (full-time equivalent).
The Bank provides a variety of employment benefits and considers its
relationship with its employees to be good.
SUPERVISION AND REGULATION
GENERAL
The Corporation is a bank holding company subject to supervision and regulation
of the Board of Governors of the Federal Reserve System pursuant to the Bank
Holding Company Act (BHCA), and files with the Federal Reserve Board an annual
report and such additional reports as the Federal Reserve Board may require. As
a bank holding company, the Corporation's activities and those of its banking
subsidiary are limited to the business of banking and activities closely related
or incidental to banking.
The Office of the Comptroller of the Currency (OCC) is the primary bank
supervisor of the Bank. The deposits of the Bank are insured by, and therefore
are subject to the regulations of, the Federal Deposit Insurance Corporation
(FDIC), and are also subject to requirements and restrictions under federal and
state law, including requirements to maintain reserves against deposits,
restrictions on the types and amounts of loans that may be granted and the
interest that may be charged thereon, and limitations on the types of
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of the Bank.
SECURITIES AND EXCHANGE COMMISSION
The Corporation is subject to the jurisdiction of the Securities and Exchange
Commission ("SEC") and of various state securities administrators for matters
relating to the offering, sale and issuance of its securities. In addition, the
Corporation is required to register its Common Stock with the SEC and is subject
to certain of the SEC's rules and regulations relating to periodic reporting,
reporting to its shareholders, proxy solicitation, insider trading, and tender
offers.
3
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REGULATION OF THE CORPORATION AS A BANK HOLDING COMPANY
The BHCA requires the prior approval of the Federal Reserve Board in any case
where a bank holding company proposes to acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank (unless it owns a
majority of such bank's voting shares) or otherwise to control a bank or to
merge or consolidate with any other bank holding company. The Rigle-Neal
Interstate Banking and Efficiency Act of 1994 generally permits adequately
capitalized bank holding companies to acquire banks in any State, and preempts
State laws restricting the ownership by a bank holding company of banks in more
than one state. The Act also permits interstate branching by banks subject to
the ability of states to opt out of the interstate banking provisions.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than banking or managing or controlling
banks. Under the BHCA, the Federal Reserve Board is authorized to approve the
ownership of shares by a bank holding company in any company the activities of
which the Federal Reserve Board has determined to be so closely related to
banking or to managing or controlling banks as to be a proper incident thereto,
or to approved the conduct of such activities by the holding company, itself.
The Federal Reserve Board has by regulation determined that certain activities
are closely related to banking within the meaning of the BHCA.
OCC SUPERVISION
The Bank is supervised and regularly examined by the Office of the Comptroller
of the Currency ("OCC"). The various laws and regulations administered by the
OCC affect corporate practices such as payment of dividends, incurring debt and
acquisition of financial institutions and other companies, and affect business
practices, such as payment of interest on deposits, the charging of interest on
loans, types of business conducted and location of offices. There are no
regulatory orders or outstanding issues resulting from regulatory examinations
of the Bank.
FDIC INSURANCE ASSESSMENTS AND RELATED COSTS
The Corporation's subsidiary bank is subject to FDIC deposit insurance
assessments. Pursuant to Section 7 of the Federal Deposit Insurance Act (12
U.S.C. 1817), as amended by Section 302 of the Federal Deposit Insurance
Corporation Act of 1991, each institution has been assigned a risk based
classification that is used to determine the annual assessment rate. Under this
system an insured institution will be assessed at rates ranging from 0% to 27%
depending on its capital and supervisory classifications. However, under Section
7(b)(2)(A)(iii) of the Federal Deposit Insurance Act, the semiannual assessment
for each member of a deposit insurance fund shall not be less than $1,000
($2,000 annual). Effective January 1, 1997, institutions insured by the Bank
Insurance Fund ("BIF") of the FDIC, such as the Bank, are also required to pay
an assessment related to the cost of Financing Corporation ("FICO") bonds, in
accordance with the Deposit Insurance Funds Act of 1996. The initial FICO annual
assessment rate is approximately 0.013% of deposits for all BIF-insured
institutions and is not tied to the FDIC risk-based insurance premium rates. The
Bank's total FDIC deposit insurance and related costs for 1998 was $68,000.
4
<PAGE>
ECONOMIC AND MONETARY POLICIES
The operations of the Corporation and the Bank are affected not only by general
economic conditions, but also by the economic and monetary policies of various
regulatory authorities. In particular, the Federal Reserve Board regulates
money, credit and interest rates in order to influence general economic
conditions. These policies have a significant influence on overall growth and
distribution of loans, investments and deposits, and affect interest rates
charged on loans or paid for time and savings deposits. Federal Reserve Board
monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
The Corporation's ability to pay dividends to its shareholders is largely
dependent on the Bank's ability to pay dividends to the Corporation. The
circumstances under which the Bank may pay dividends are limited by federal
statutes, regulations and policies. For example, as a national bank subject to
the jurisdiction of the OCC, the Bank must obtain approval for any dividend if
the total of all dividends declared in any calendar year would exceed the total
of its net profits, as defined by applicable regulations, for that year,
combined with its retained net profits for the preceding two years. Furthermore,
the Bank may not pay a dividend in an amount greater than its undivided profits
then on hand after deducting its losses and bad debts, as defined by applicable
regulations. At December 31, 1998, the Bank had $14,267,000 in retained earnings
legally available for the payment of dividends.
In addition, the Federal Reserve Board and the OCC are authorized to determine
under certain circumstances that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment of such dividends. The payment of
dividends that deplete a bank's capital base could be deemed to constitute such
an unsafe or an unsound practice. The Federal Reserve Board has indicated that
banking organizations should generally pay dividends only out of current
operating earnings.
BORROWINGS BY THE CORPORATION
There are various legal restrictions on the extent to which the Corporation can
borrow or otherwise obtain credit from the Bank. In general, these restrictions
require that any such extensions of credit be secured by designated amounts of
specific collateral and are limited, as to the Corporation, to 10% of the Bank's
capital stock and surplus, and as to the Corporation and any of its non-banking
subsidiaries in the aggregate, to 20% of the Bank's capital stock and surplus.
Federal law also requires that transactions between the Bank and the Corporation
or any non-banking subsidiaries of the Corporation, including extensions of
credit, sales of securities or assets and the provision of services, be
conducted on terms as least as favorable to the Bank as those that apply or
would apply to comparable transactions with unaffiliated parties.
5
<PAGE>
CAPITAL REQUIREMENTS
Under Federal Reserve Board policy, a bank holding company is required to serve
as a source of financial and managerial strength to its subsidiary banks and may
not conduct its operations in an unsafe or unsound manner. In addition, it is
the Federal Reserve Board's policy that, in serving as a source of strength to
its subsidiary banks, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary banks. A bank
holding company is expected to maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks.
The Federal Reserve Board has established risk-based capital guidelines which
are applicable to bank holding companies. The Federal Reserve Board guidelines
define the components of capital, categorize assets into different risk classes
and include certain off-balance sheet items in the calculation of risk-weighted
assets. The minimum ratio of qualified total capital to risk-weighted assets
(including certain off-balance sheet items, such as standby letters of credit)
is 8.0%. At least half of the total capital must be comprised of common equity,
retained earnings and a limited amount of permanent preferred stock, less
goodwill ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist of a
limited amount of subordinated debt, other preferred stock, certain other
instruments and a limited amount of the allowance for loan losses. The sum of
Tier 1 capital and Tier 2 capital is "total risk-based capital." The
Corporation's Tier 1 risk-based capital and total risk-based capital ratios as
of December 31, 1998 were 11.3% and 12.5%, respectively.
In addition, the Federal Reserve Board has established a minimum leverage ratio
of Tier 1 capital to quarterly average assets less goodwill ("Leverage Ratio")
of 3.0% for bank holding companies that meet certain specified criteria,
including that they have the highest regulatory rating. All other bank holding
companies will be required to maintain a Leverage Ratio of 3.0% plus an
additional cushion of at least 100 to 200 basis points. The Corporation's
Leverage Ratio as of December 31, 1998 was 7.9%. The guidelines also provide
that banking organizations experiencing internal growth or making acquisitions
will be expected to maintain strong capital positions substantially above the
minimum supervisory levels, without significant reliance on intangible assets.
The Bank is subject to similar capital requirements as those that apply to the
Corporation.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act of 1977, the OCC is required to assess the
record of all banks regulated by it to determine if these institutions are
meeting the credit needs of their communities (including low and moderate income
neighborhoods) and to take this record into account in its evaluation of any
application made by any such institution for, among other things, approval of
branch or other deposit facilities, office relocations, and mergers or
acquisitions of banks. The Financial Institutions Reform, Recovery and
Enforcement Act amended the Community Reinvestment Act to require, among other
things, that the OCC make available to the public an evaluation of each bank's
record of meeting the credit needs of its entire community, including low and
moderate income neighborhoods. This evaluation includes a rating of
"outstanding," "satisfactory," "needs to improve" or "substantial noncompliance"
and a statement describing the basis for the rating. The OCC has assigned a
rating of "satisfactory" to the Bank.
6
<PAGE>
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT
Federal legislation that affects the competitive environment for the Corporation
and its subsidiaries includes the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") which, among other things, provides for the
acquisition of thrift institutions by bank holding companies, increases deposit
insurance assessments for insured banks, broadens the enforcement power of
federal bank regulatory agencies, and provides that any FDIC-insured depository
institution may be liable for any loss incurred by the FDIC, or any loss which
the FDIC reasonably anticipates incurring, in connection with the default of any
commonly controlled FDIC-insured depository institution or any assistance
provided by the FDIC to any such institution in danger of default.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In 1991, the Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FDICIA substantially revises the depository
institution regulatory and funding provisions of the Federal Deposit Insurance
Act and makes revisions to several other federal banking statutes.
Among other things, FDICIA requires the federal banking regulators to take
prompt corrective action in respect of depository institutions that do not meet
minimum capital requirements. FDICIA establishes five capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
Under the regulations, a "well capitalized" institution has a minimum total
capital to total risk-weighted assets ratio of at least 10 percent, a minimum
Tier I capital to total risk-weighted assets ratio of at least 6 percent, a
minimum leverage ratio of at least 5 percent and is not subject to any written
order, agreement, or directive; an "adequately capitalized" institution has a
total capital to total risk-weighted assets ratio of at least 8 percent, a Tier
I capital to total risk-weighted assets ratio of at least 4 percent, and a
leverage ratio of at least 4 percent (3 percent if given the highest regulatory
rating and not experiencing significant growth), but does not qualify as "well
capitalized." An "undercapitalized" institution fails to meet any one of the
three minimum capital requirements. A "significantly undercapitalized"
institution has a total capital to total risk-weighted assets ratio of less than
6 percent, a Tier I capital to total risk-weighted assets ratio of less than 3
percent or a Tier I leverage ratio of less than 3 percent. A "critically
undercapitalized" institution has a Tier I leverage ratio of 2 percent or less.
Under certain circumstances, a "well capitalized," "adequately capitalized" or
"undercapitalized" institution may be required to comply with supervisory
actions as if the institution was in the next lowest capital category. The Bank
is currently classified as "well capitalized".
7
<PAGE>
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of dividend) or paying any management fee to its
holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are also subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth and activity
limitations and are required to submit "acceptable" capital restoration plans.
Such a plan will not be accepted unless, among other things, the depository
institution's holding company guarantees the capital plan, up to an amount equal
to the lesser of five percent of the depository institution's assets at the time
it becomes undercapitalized or the amount of the capital deficiency when the
institution fails to comply with the plan. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized and
may be placed into conservatorship or receivership.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, more stringent requirements to
reduce total assets, cessation of receipt of deposits from correspondent banks,
further activity restricting prohibitions on dividends to the holding company
and requirements that the holding company divest its bank subsidiary, in certain
instances. Subject to certain exceptions, critically undercapitalized depository
institutions must have a conservator or receiver appointed for them within a
certain period after becoming critically undercapitalized.
TRANSACTIONS WITH AFFILIATES
The Bank is subject to restrictions under federal law which limits the
extensions of credit to, and certain other transactions with, affiliates. Such
transactions by the Bank with the Corporation are limited in amount to 10
percent of the Bank's capital and surplus. Furthermore, such loans and
extensions of credit, as well as certain other transactions, are required to be
secured in accordance with specific statutory requirements.
STATISTICAL DISCLOSURE PURSUANT TO GUIDE 3
Information required is incorporated by reference to pages 8 through 21 of the
Registrant's 1998 Annual Report to Shareholders.
8
<PAGE>
ITEM 2. Properties
The executive offices of the Corporation are located at 24 Church Street,
Canajoharie, New York.
The Administrative and Operations Complex of the Bank is located at 20 Mohawk
Street, Canajoharie, New York.
The location of the Bank's offices, as well as certain information related to
these offices are set forth below:
Location Owned or Leased
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24 Church Street, Canajoharie, NY.................................Owned
Main Street, Cherry Valley, NY....................................Owned
Route 20, Duanesburg, NY..........................................Owned
West Street, Edmeston, NY.........................................Owned
Main Street, Fonda, NY............................................Owned
Main Street, Middleburgh, NY......................................Owned
Dutchtown Plaza, Palatine Bridge, NY.............................Leased
W. Main Street, St. Johnsville, NY................................Owned
Corner Routes 10 & 20, Sharon Springs, NY.........................Owned
Canal Street, Fort Plain, NY......................................Owned
E. Main Street, Cobleskill, NY....................................Owned
Pyramid Mall, Johnstown, NY......................................Leased
E. Main Street, Richfield Springs, NY.............................Owned
339-341 Main Street, Schoharie, NY................................Owned
Route 28 South, Cooperstown, NY.......................................*
Newport Street, Middleville, NY...................................Owned
Route 30, Amsterdam, NY...........................................Owned
Super Kmart, Route 30, Amsterdam, NY.............................Leased
198 Second Avenue Extension, Gloversville, NY....................Leased
1343 Balltown Road, Niskayuna, NY................................Leased
Wal-Mart, 1320 Altamont Avenue, Schenectady, NY..................Leased
- --------
* The Bank owns the building in which its Cooperstown office is located, but
leases the land pursuant to a long term lease
Properties and land owned and used by the Corporation and its subsidiaries at
December 31, 1998, had a net book value of $10.1 million.
The Administrative and Operations Complex was financed through issuance of
Taxable Industrial Revenue Bonds in 1995 and 1996. Final maturity on the bonds
is May 1, 2025, with a portion being redeemed annually. Interest on the bonds
will adjust weekly at a rate established by the Remarketing Agent.
9
<PAGE>
The Bank leases properties from unaffiliated parties for branch offices and
operational services. For the year ended December 31, 1998, rental fees of
$322,000 were paid on these facilities. See also note 4, "Premises and
Equipment" to the consolidated financial statements.
The premises occupied or leased are considered to be well located and suitably
equipped to serve as banking facilities. In July, 1996, construction on the new
Administrative and Operations Complex was completed in Canajoharie, New York,
and occupied by the Bank.
ITEM 3. Legal Proceedings
The Corporation is, from time to time, a defendant in legal proceedings relating
to the conduct of its business. In the best judgment of Management, the
consolidated financial position of the Company will not be affected materially
by the outcome of any pending legal proceedings.
The Corporation has an Industrial Development Agency (IDA) note of approximately
$4,630,000 and $4,690,000 at December 31, 1998 and 1997, respectively, with
payments due through 2025. This note relates to the construction and financing
of the Corporation's operations center in Canajoharie, New York. In conjunction
with this financing, the Corporation has a 30-year payment-in-lieu-of-taxes
(PILOT) agreement with the IDA under which the Company pays reduced property
taxes on the property. In 1999, the New York State Supreme Court in Montgomery
County voided this PILOT agreement, but no order was given related to the
repayment of past property taxes or the renegotiation of the PILOT. Although the
Corporation has appealed this ruling, if the appeal is unsuccessful, the
Corporation may have to pay property taxes to the applicable taxing authorities.
Management anticipates, based upon discussions with legal counsel, that the
amount of such payment, if any, will not be material to the Corporation's
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The Corporation's common stock is listed for quotation on the NASDAQ National
Market System. The following table sets forth the high and low closing prices of
the common stock of the Corporation and the dividends paid thereon during the
periods indicated, adjusted for the two-for-one stock split paid on June 30,
1998 and the three-for-two stock split paid on January 15, 1997.
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High Low Dividend
---- --- --------
1998:
First Quarter 18 15/16 14 1/2 $.070
Second Quarter 21 18 1/8 .070
Third Quarter 28 19 .075
Fourth Quarter 20 3/4 15 .115
1997:
First Quarter 11 3/8 8 3/4 $.060
Second Quarter 12 10 3/4 .060
Third Quarter 12 5/8 11 1/8 .065
Fourth Quarter 15 12 3/4 .110
DIVIDEND POLICY
Since its formation in 1993, the Corporation, as the holding company of the
Bank, has continued the payment of cash dividends in keeping with the Bank's
historical payment of cash dividends. The Corporation (or the Bank prior to
formation of the Corporation) has paid consecutive annual cash dividends for
more than 40 years. It is the present intention of the Corporation's Board of
Directors to continue the dividend payment policy, although the payment of
future dividends must necessarily depend upon earnings, financial condition,
appropriate restrictions under applicable law and regulations, and other factors
relevant at the time the Board of Directors considers any declaration of
dividends. Because substantially all of the funds available for payment of
dividends by the Corporation are derived from the Bank, future dividends will
depend on the earnings of the Bank, its financial condition, its need for funds
and applicable regulatory policies and requirements. See "Supervision and
Regulation - Limits on Dividends and Other Payments" section at Item 1, above.
11
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ITEM 6. Selected Financial Data
The information required by this item appears on page 8 of the Registrant's 1998
Annual Report to Shareholders, under the caption "Financial Highlights"; and is
incorporated herein by reference. Selected unaudited quarterly financial data is
set forth in the table below.
1998
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Interest and dividend income 12,546 13,489 13,044 13,464
Interest expense 6,092 6,787 6,513 6,767
------- ------- ------- -------
Net interest income 6,454 6,702 6,531 6,697
Provision for loan losses 150 140 320 163
-------- --------- --------- --------
Net interest income after
provision for loan losses 6,304 6,562 6,211 6,534
Other income 999 981 1,020 1,530
Other expenses 4,910 5,099 4,736 5,109
------- ------- ------- -------
Income before income tax expense 2,393 2,444 2,495 2,955
Income tax expense 623 638 643 702
-------- -------- -------- --------
Net income 1,770 1,806 1,852 2,253
======= ======= ======= =======
Earnings per share:
Basic 0.23 0.24 0.24 0.30
======== ======== ======== ========
Diluted 0.23 0.23 0.24 0.30
======== ======== ======== ========
1997
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Interest and dividend income 11,586 12,182 12,175 12,692
Interest expense 5,273 5,686 5,670 6,093
------- ------- ------- -------
Net interest income 6,313 6,496 6,505 6,599
Provision for loan losses 125 - - 150
-------- ----------- ----------- --------
Net interest income after
provision for loan losses 6,188 6,496 6,505 6,449
Other income 984 758 869 1,163
Other expenses 4,375 4,400 4,528 5,008
------- ------- ------- -------
Income before income tax expense 2,597 2,854 2,846 2,604
Income tax expense 779 856 850 750
-------- -------- -------- --------
Net income 1,818 1,998 1,996 1,854
======= ======= ======= =======
Earnings per share:
Basic 0.23 0.26 0.26 0.24
======== ======== ======== ========
Diluted 0.23 0.26 0.26 0.24
======== ======== ======== ========
12
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item appears on pages 9 through 22 of the
Corporation's 1998 Annual Report to Shareholders, under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item appears on page 13 of the Corporation's
1998 Annual Report to Shareholders under the caption "Market Risk" and is
incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data
The consolidated financial statements, together with the report thereon of KPMG
LLP, dated February 19, 1999, appearing on pages 24 through 51 of the 1998
Annual Report to Shareholders are incorporated herein by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On August 25, 1997, the Board of Directors agreed to (i) engage KPMG LLP as the
independent accountants for CNB Financial Corp. and (ii) dismiss Price
Waterhouse LLP as its independent accountants.
During the two fiscal years ended December 31, 1996, and the subsequent interim
period through August 25, 1997, (i) there were no disagreements with Price
Waterhouse LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements if
not resolved to the satisfaction of Price Waterhouse LLP would have caused them
to make reference in connection with its report to the subject matter of the
disagreement, and (ii) Price Waterhouse LLP has not advised the registrant of
any reportable events as defined in paragraph (A) through (D) of Regulation S-K
Item 304(a)(1)(v).
The accountants' report of Price Waterhouse LLP on the consolidated financial
statements of CNB Financial Corp. and subsidiaries as of and for the years ended
December 31, 1996 and 1995 did not contain any adverse opinion or disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope, or
accounting principles. A letter from Price Waterhouse LLP is attached as Exhibit
16 on the previously filed Form 8-K dated August 25, 1997, and is incorporated
herein by reference.
KPMG LLP was not previously engaged regarding the application of accounting
principles on a specific transaction or the type of audit opinion that might be
rendered on the consolidated financial statements.
13
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this item, to the extent not included under the
caption "Executive Officers of the Registrant" in Part I of this report, or
below, will appear under the caption "Election of Directors" in the
Corporation's definitive proxy statement for the annual meeting of stockholders
on May 20, 1999 and is incorporated herein by reference.
ITEM 11. Executive Compensation
The information required by this item will appear under the caption "Executive
Compensation" and "Transactions with Directors and Executive Officers" in the
Corporation's definitive proxy statement for the annual meeting of stockholders
on May 20, 1999, and is incorporated
herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will appear under the caption "Common
Stock Ownership" in the Corporation's definitive proxy statement for the annual
meeting of stockholders on May 20, 1999 and is incorporated herein by reference.
ITEM 13. Certain Relationship and Related Transactions
The information required by this item will appear under the caption
"Transactions with Directors and Executive Officers" in the Corporation's
definitive proxy statement for the annual meeting of stockholders on May 20,
1999 and is incorporated herein by reference.
14
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following consolidated financial statements of CNB Financial Corp.
and subsidiaries are incorporated herein by reference to the indicated pages in
the Corporation's 1998 Annual Report to Shareholders.
CONSOLIDATED FINANCIAL STATEMENTS PAGE IN ANNUAL REPORT
- --------------------------------- ---------------------
Independent Auditors' Report 23
Consolidated Balance Sheets as of December 31,
1998 and 1997 24
Consolidated Statements of Income for the years
ended December 31, 1998, 1997 and 1996 25
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1998, 1997 and 1996 26
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 27
Notes to Consolidated Financial Statements 29
(2) Financial statement schedules are omitted because the required information
is either not applicable or is set forth elsewhere in the consolidated financial
statements.
(3) List of Exhibits
Exhibit Number Referred
to in Item 601 of Description of
Regulation S-K Exhibit
- ------------------------ ---------------
3(i) Certificate of Incorporation of Registrant,
previously filed with the Commission on March 4,
1992 as Exhibit B to the Corporation's
Registration Statement on Form S-4 (No. 33-45522),
and incorporated herein by reference.
3(ii) Bylaws of Registrant, previously filed with the
Commission on March 4, 1992 as Exhibit C to the
Corporation's Registration Statement on Form S-4
(No. 33-45522), and incorporated herein by
reference.
15
<PAGE>
10.1 Automatic Dividend Reinvestment and Stock Purchase
Plan of the Registrant, incorporated herein by
reference from Registrant's 1933 Act Registration
Statement on Form S-3 (file number 33-63176, filed
May 21, 1993).
10.2 "Senior Executive Severance Agreements" (signed as
of March 31, 1998) for Messrs. Brass and Corso as
material agreements.
11 Statements regarding computation of per share
earnings (incorporated herein by reference to
note 14 the consolidated financial statements).
13 1998 Annual Report to Shareholders
16 Letter re: Change in Certifying Accountant
(incorporated herein by reference to Exhibit 16 on
the previously filed Form 8-K dated August 25,
1997).
21 Subsidiaries of the Registrant
23A Consent of KPMG Peat Marwick LLP
23B Consent of Price Waterhouse LLP
27 Financial Data Schedule (submitted with electronic
filing only)
(b) During the three-month period ended December 31, 1998, the Registrant filed
no current report on Form 8-K.
(c) See 14(a)(3) above.
(d) See 14(a)(2) above.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CNB FINANCIAL CORP.
By:
-----------------------------
Donald L. Brass,
President
Dated: March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
- ------------------------ President and Director 3/24/99
Donald L. Brass
- ------------------------- Executive Vice 3/24/99
Peter J. Corso President and Treasurer
- ------------------------- Director 3/24/99
David J. Nolan
- ------------------------- Director 3/24/99
J. Carl Barbic
- ------------------------- Director 3/24/99
Allen H. Samuels
- ------------------------- Director 3/24/99
Joseph A. Santangelo
17
<PAGE>
- -------------------------- Director 3/24/99
C. Wendell Smith
- -------------------------- Director 3/24/99
VanNess Robinson
- --------------------------- Director 3/24/99
John P. Woods, Jr.
18
SENIOR EXECUTIVE SEVERANCE AGREEMENT
THIS AGREEMENT is made as of March 31, 1998 by and between CENTRAL
NATIONAL BANK, CANAJOHARIE, a national banking association located in
Canajoharie, New York (the "Bank"), CNB FINANCIAL CORP., the bank holding
company for the Bank (the "Corporation"), and DONALD L. BRASS (the "Executive").
WITNESSETH:
WHEREAS, the Board of Directors (the "Board") of the Corporation has
authorized the Corporation to enter into severance agreements with certain key
executives of the Corporation and the Bank; and
WHEREAS, the Executive is a key executive of the Corporation and/or
the Bank and has been selected by the Board as a key executive to be a party to
this Agreement; and
WHEREAS, should the Corporation receive any proposal from a third
person concerning any possible business combination with, or acquisition of
equity securities of, the Corporation, the Board believes it imperative that the
Corporation and the Board be able to rely upon the Executive to continue in his
position, and that the Corporation be able to receive and rely upon his advice,
if it requests it, as to the best interests of the Corporation and its
shareholders without concern that he might be distracted by the personal
uncertainties and risks created by such a proposal; and
WHEREAS, should the Corporation receive any such proposals, in
addition to the Executive's regular duties, he may be called upon to assist in
the assessment of such proposals, to advise management and the Board as to
whether such proposals would be in the best interests of the Corporation and its
shareholders, and to take such other actions as the Board might determine to be
appropriate; and
WHEREAS, the Board also desires to encourage the continued
dedication of the Executive to the Corporation and the Bank and to promote the
stability of the Corporation's and the Bank's management by providing certain
protections for the Executive in the event that a Change in Control (as
hereinafter defined) occurs with respect to the Corporation;
NOW, THEREFORE, to assure the Corporation and the Bank that they
will have the continued dedication of the Executive and the availability of his
advice and counsel notwithstanding the possibility, threat or occurrence of a
bid to take over control of the Corporation, and to induce the Executive to
remain in the employ of the Corporation, and for other good and valuable
consideration, the Corporation, the Bank and the Executive agree as follows:
1. Services During Certain Events. In the event a "person" or
"group" (as such quoted terms are defined in Section 4(a)(ii) below) begins a
tender or exchange offer, circulates a proxy to shareholders, or takes other
steps seeking to effect a Change of Control (as defined in
<PAGE>
Section 4(a) below), the Executive agrees that he will not voluntarily leave the
employ of the Corporation and will render the services contemplated in the
recitals to this Agreement until the earlier of (i) the date such person or
group has abandoned or terminated his or its efforts to effect a Change of
Control, or (ii) three (3) months after a Change of Control has occurred.
2. Termination After Change of Control.
(a) In the event of a Termination (as defined in Section
4(b)below) of the Executive's employment with the Corporation (including
the Bank) within 24 months after a Change of Control of the Corporation,
the Corporation shall be obligated, subject to the limitation contained in
Section 2(b) below, to pay the Executive, as compensation for services
rendered to the Corporation and as consideration for the covenant not to
compete set forth in Section 6, an amount equal to 2.99 times the
Executive's annualized base salary (exclusive of all bonus amounts) in
effect immediately prior to the date of Termination. Such amount shall be
payable to the Executive in eight (8) equal quarterly installments
(subject to any applicable payroll or other taxes required to be
withheld), over a two (2) year period, without interest, with the first
such payment made not later than 30 days after the Executive's last day of
employment with the Corporation and each succeeding payment being due on
the same day of every third calendar month thereafter. In the event the
Executive dies at any time during the two years following his Termination,
any remaining unpaid installments provided for by this Section 2(a) shall
be paid to his estate. Notwithstanding the foregoing, at the sole election
of the Corporation, the entire amount payable to the Executive pursuant to
this Section 2(a) may be paid in a lump sum, not later than the 30th day
following the Executive's last day of employment with the Corporation.
(b) Notwithstanding anything in this Agreement to the
contrary, in the event that the amount payable to the Executive pursuant
to Section 2(a) above, when added to all other amounts paid or to be paid
to, and the value of all property received or to be received by, the
Executive in anticipation of or following a Change of Control, whether
paid or received pursuant to this Agreement or otherwise (such other
amounts and property being referred to herein as "Other Change in Control
Payments"), would constitute an excess parachute payment within the
meaning of Section 280G of the Internal Revenue Code of 1986, as amended
(or any successor or renumbered section), then the amount payable pursuant
to Section 2(a) of this Agreement or, as directed by the Executive, such
Other Change in Control Payments shall be reduced to the maximum amount
which, when added to such Other Change in Control Payments, does not
constitute an excess parachute payment. For purposes of determining the
extent to which payments pursuant to this Agreement and/or Other Change in
Control Payments must be reduced, the value of the covenant not to compete
set forth in Section 6 shall be valued by an independent certified public
accounting firm retained by the Corporation.
3. Other Employment. The Executive shall not be obligated to seek
other employment for mitigation of the amounts payable or arrangements made
under any provision of this
-2-
<PAGE>
Agreement, nor shall any payments under this Agreement be reduced on account of
any compensation, benefits or service credits for benefits from any employment
that the Executive may obtain following his Termination.
4. Definitions. For purposes of this Agreement, the following terms
shall have the following respective meanings:
(a) A "Change of Control" shall be deemed to have taken place
if either:
(i) as the result of, or in connection with any
tender or exchange offer, consolidation, merger or other
business combination, sale of assets or contested
election or any combination of the foregoing
transactions (a "Transaction"), the persons who were
directors of the Corporation before the Transaction
shall cease for any reason to constitute at least 50% of
the Board of Directors of the Corporation or any
successor to the Corporation; or
(ii) any "person" (as that term is used in Section
13(d) and 14(d)(2) of the Securities and Exchange Act of
1934 (the "Exchange Act") as in effect on the date
hereof), including a "group" as defined in Section
13(d)(3) of the Exchange Act, becomes the beneficial
owner, directly or indirectly, of shares of the
Corporation having more than 50% of the total number of
votes that may be cast for the election of Directors of
the Corporation; or
(iii) the Corporation is merged or consolidated
with another corporation and as a result of the merger
or consolidation less than 50% of the outstanding voting
securities of the surviving or resulting corporation
shall then be owned in the aggregate by the former
stockholders of the Corporation, other than affiliates
within the meaning of the Exchange Act or any party to
the merger or consolidation; or
(iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of the
Corporation representing more than 50% of the combined
voting power of the Corporation's then outstanding
voting securities; or
(v) the Bank transfers substantially all of its
assets to another Corporation which is not a direct or
indirect wholly-owned subsidiary of the Corporation.
-3-
<PAGE>
(b) "Termination" shall mean (1) termination by the
Corporation of the employment of the Executive with the Corporation
(including the Bank) for any reason other than death, Disability (as
defined in Section 4(d)) or Cause (as defined in Section 4(c)), or (2) the
resignation of the Executive upon the occurrence of either of the
following events:
(i) A reasonable determination (as defined below)
that there has been a significant change in the nature
or scope of the Executive's authority from that prior to
a Change of Control, a reduction in the Executive's
total compensation (including all bonuses, incentive
compensation and benefits) from that prior to a Change
of Control, or a change in the location where the
Executive is required to perform services from that
prior to a Change of Control; or
(ii) A reasonable determination (as defined below)
that, as a result of a Change of Control and a change in
circumstances thereafter significantly affecting the
Executive's position, he is unable to exercise the
authority, powers, function or duties attached to his
position.
(c) "Cause" shall mean the Executive's unreasonable neglect or
refusal to perform the material duties of his position, fraud,
misappropriation or intentional material damage to the property or
business of the Corporation or commission of a felony.
(d) "Disability" shall mean the Executive's absence from his
duties with the Corporation on a full time basis for six (6) successive
months, or for shorter periods aggregating seven (7) months or more in any
year, as a result of the Executive's incapacity due to physical or mental
illness, unless within 30 days after the Corporation gives written notice
of termination following such absence the Executive shall have returned to
the full time performance of his duties.
(e) "Reasonable Determination". Termination of the Executive's
employment in the judgment of the Personnel/Compensation Committee's
"reasonable determination" shall mean termination based on:
(i) subsequent to a Change in Control of the
Corporation, and without the Executive's express written
consent, the assignment to him of any duties
inconsistent with his positions, duties,
responsibilities and status with the Corporation
immediately prior to a Change in Control, or a change in
the Executive's reporting responsibilities and status
with the Corporation immediately prior to a Change in
Control, or a change in the Executive's reporting
responsibilities, or offices as in effect immediately
prior to a Change
-4-
<PAGE>
in Control, or any removal of the Executive from, or any
failure to re-elect him to, any of such positions,
except in connection with the termination of his
employment for Cause, Disability or retirement or as a
result of his death; or
(iii) subsequent to a Change in Control of the
Corporation, a failure by the Corporation to continue
any bonus plans in which the Executive is presently
entitled to participate (the "Bonus Plans") as the same
may be modified from time to time but substantially in
the forms currently in effect, or a failure by the
Corporation to continue the Executive as a participant
in the Bonus Plans on at least the same basis as he
presently participates in accordance with the Bonus
Plans; or
(iv) subsequent to a Change in Control of the
Corporation and without the Executive's express written
consent, the Corporation's requiring him to be based
anywhere other than his present office location, except
for required travel on the Corporation's business to an
extent substantially consistent with his present
business travel obligations; or
(v) subsequent to a Change in Control of the
Corporation, the failure by the Corporation to continue
in effect any benefit or compensation plan, stock
ownership plan, stock purchase plan, stock option plan,
life insurance plan, health and accident plan or
disability plan in which the Executive is participating
at the time of Change in Control of the Corporation (or
plans providing him with substantially similar
benefits), the taking of any action by the Corporation
which would adversely affect the Executive's
participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe
benefit enjoyed by him at the time of the Change in
Control, or the failure by the Corporation to provide
him with the number of paid vacation days to which he is
then entitled in accordance with the Corporation's
normal vacation policy in effect on the date hereof; or
(vi) subsequent to a Change in Control of the
Corporation, the failure by the Corporation to obtain
the assumption of the agreement to perform this
Agreement by any successor as contemplated in Section 7
hereof.
For purposes of this subsection (e), "reasonable determinations" shall be
made by an affirmative vote of at least 50% of the individuals who are
both (A) members of the Board
-5-
<PAGE>
immediately prior to the applicable Change of Control, and (B) members of
the board of directors of the successor entity by which the Executive is
employed immediately prior to his resignation. If no individual is
described in both (A) and (B) above, then "reasonable determinations"
shall be made at the sole discretion of the Executive.
5. Trade Secrets. It is recognized that the Corporation and the Bank
have acquired and developed and will continue to acquire and develop techniques,
plans, processes, computer programs, and lists of customers and their particular
requirements which may pertain to Bank related services and equipment, and
related trade secrets, know-how, research and development, which are proprietary
and confidential in nature and are and will continue to be of unique value to
the Corporation and the Bank and its business (all hereinafter referred to as
"Confidential Information"). All Confidential Information known or in the
possession of Executive shall be kept and maintained by him as confidential and
proprietary to the Corporation and the Bank. The Executive shall not disclose
any Confidential Information at any time directly or indirectly, in any manner
to any person or firm, except to other employees of the Corporation and/or the
Bank on a "need to know" basis. Upon termination of his employment for any
reason, the Executive shall without demand therefore deliver to the Corporation
all Confidential Information in his possession. The obligations of this Section
shall survive the termination of this Agreement indefinitely.
6. Covenants Not to Compete
(a) For a period of two (2) years following the termination of
the Executive's employment with the Bank for any reason, Executive
covenants and agrees that he will not at any time directly or indirectly
in any manner or under any circumstances or conditions whatsoever be or
become interested, as an individual, partner, principal, agent, clerk,
employee, stockholder, officer, director, trustee, or in any other
capacity whatsoever, except as a nominal owner of stock of a public
corporation, in any other business in any city or town where the Bank
maintains an office at the time of the Executive's termination that in any
way competes with the business of the Bank as it exists at the time of the
Executive's termination, or engage or participate in, directly or
indirectly (whether as an officer, director, employee, partner,
consultant, holder of an equity or debt investment, lender or in any other
manner or capacity), or lend his name (or any part or variant thereof) to,
any business in any city or town where the Bank maintains an office at the
time of the Executive's termination which is, or as a result of the
Executive's engagement or participation would become, competitive with any
aspect of the business of the Bank as it exists at the time of the
Executive's termination or solicit any officer, director, employee or
agent of the Bank or any subsidiary or affiliate of the Bank to become an
officer, director, employee or agent of the Executive, his respective
affiliates or anyone else; ownership, in the aggregate, of less than one
percent (1%) of the outstanding shares of capital stock of any corporation
with one or more classes of its capital stock listed on a national
securities exchange or publicly traded in the over-the-counter market
shall not constitute a violation of the foregoing provision.
-6-
<PAGE>
(b) The Executive hereby acknowledges that his services are
unique and extraordinary, and are not readily replaceable, and hereby
expressly agrees that the Bank, in enforcing the covenants contained in
Sections 5 and 6, in addition to any other remedies provided for herein or
otherwise available at law, shall be entitled in any court of equity
having jurisdiction to an injunction restraining him in the event of a
breach, actual or threatened, of the agreements and covenants contained in
these Sections.
(c) The parties hereto believe that the restrictive covenants
of these Sections are reasonable. However, if at any time it shall be
determined by any court of competent jurisdiction that these Sections or
any portion of them as written, are unenforceable because the restrictions
are unreasonable, the parties hereto agree that such portions as shall
have been determined to be unreasonably restrictive shall thereupon be
deemed so amended as to make such restrictions reasonable in the
determination of such court, and the said covenants, as so modified, shall
be enforceable between the parties to the same extent as if such
amendments had been made prior to the date of any alleged breach of said
covenants.
(d) The provisions of this Section 6 shall not apply following
the Executive's termination of employment with the Bank, if the Executive
is not entitled to payment pursuant to this Agreement as a result of such
termination.
7. Successors. This Agreement shall be binding upon and inure to the
benefit of the Executive and his estate, and the Corporation and any successors
of the Corporation, but neither this Agreement nor any rights arising hereunder
may be assigned or pledged by the Executive.
8. Miscellaneous. This Agreement represents the entire agreement
between the parties with respect to the subject matter of this Agreement and
specifically supersedes any and all oral or written agreements on its subject
matter previously entered into by the parties, including without limitation the
Change in Control Agreement, dated as of May 1, 1995, between the Bank, the
Corporation and the Executive.
9. Severability. Any provision in this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability without invalidating or affecting the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not be invalidate or render unenforceable such provision in
any other jurisdiction.
10. Controlling Law. This Agreement shall in all respects be
governed by, and construed in accordance with, the laws of the State of New
York.
-7-
<PAGE>
11. Term of Agreement.
(a) The initial term of this Agreement shall commence as of
March 31, 1998 and shall continue through December 31, 1999, unless
earlier terminated as provided herein. Thereafter, this Agreement shall be
renewed for additional one year periods, unless either party gives written
notice of non-renewal of this Agreement to the other party at least ninety
(90) days prior to the expiration of the initial term or any renewal term;
provided, however, that in no case shall this Agreement terminate; (i)
within 24 months after the occurrence of a Change of Control, or (ii)
during any period of time when the Corporation has knowledge that any
person or group (such terms are defined in Section 4(a)(ii) above) has
taken steps reasonably calculated to effect a Change in Control until, in
the opinion of the Board, such person or group has abandoned or terminated
his or its efforts to effect a Change of Control. Any determination by the
Board that such person or group has abandoned or terminated his or its
efforts to effect a Change of Control shall be conclusive and binding as
the Executive.
(b) Notwithstanding any provisions of this Agreement, this
Agreement shall not confer upon the Executive the right to be retained in
the service of the Corporation (including the Bank) nor limit the right of
the Corporation or the Bank to discharge or otherwise deal with the
Executive. It is the express understanding of the Executive, the
Corporation and the Bank that the Executive's employment shall at all
times be "at will", notwithstanding any provisions of this Agreement.
Accordingly, the Executive or the Corporation and Bank may terminate the
Executive's employment with the Bank at any time for any reason.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date specified in the first paragraph of this Agreement.
CNB FINANCIAL CORP.
By: /s/ VANNESS D. ROBINSON
------------------------------
VanNess D. Robinson, Chair
Executive Committee
CENTRAL NATIONAL BANK, CANAJOHARIE
By: /s/ DONALD L. BRASS
------------------------------
Donald L. Brass, President
EXECUTIVE:
/s/ PETER J. CORSO
------------------------------
Peter J. Corso
-9-
<PAGE>
SENIOR EXECUTIVE SEVERANCE AGREEMENT
THIS AGREEMENT is made as of March 31, 1998 by and between CENTRAL
NATIONAL BANK, CANAJOHARIE, a national banking association located in
Canajoharie, New York (the "Bank"), CNB FINANCIAL CORP., the bank holding
company for the Bank (the "Corporation"), and PETER J. CORSO (the "Executive").
WITNESSETH:
WHEREAS, the Board of Directors (the "Board") of the Corporation has
authorized the Corporation to enter into severance agreements with certain key
executives of the Corporation and the Bank; and
WHEREAS, the Executive is a key executive of the Corporation and/or
the Bank and has been selected by the Board as a key executive to be a party to
this Agreement; and
WHEREAS, should the Corporation receive any proposal from a third
person concerning any possible business combination with, or acquisition of
equity securities of, the Corporation, the Board believes it imperative that the
Corporation and the Board be able to rely upon the Executive to continue in his
position, and that the Corporation be able to receive and rely upon his advice,
if it requests it, as to the best interests of the Corporation and its
shareholders without concern that he might be distracted by the personal
uncertainties and risks created by such a proposal; and
WHEREAS, should the Corporation receive any such proposals, in
addition to the Executive's regular duties, he may be called upon to assist in
the assessment of such proposals, to advise management and the Board as to
whether such proposals would be in the best interests of the Corporation and its
shareholders, and to take such other actions as the Board might determine to be
appropriate; and
WHEREAS, the Board also desires to encourage the continued
dedication of the Executive to the Corporation and the Bank and to promote the
stability of the Corporation's and the Bank's management by providing certain
protections for the Executive in the event that a Change in Control (as
hereinafter defined) occurs with respect to the Corporation;
NOW, THEREFORE, to assure the Corporation and the Bank that they
will have the continued dedication of the Executive and the availability of his
advice and counsel notwithstanding the possibility, threat or occurrence of a
bid to take over control of the Corporation, and to induce the Executive to
remain in the employ of the Corporation, and for other good and valuable
consideration, the Corporation, the Bank and the Executive agree as follows:
1. Services During Certain Events. In the event a "person" or
"group" (as such quoted terms are defined in Section 4(a)(ii) below) begins a
tender or exchange offer, circulates a proxy to shareholders, or takes other
steps seeking to effect a Change of Control (as defined in
<PAGE>
Section 4(a) below), the Executive agrees that he will not voluntarily leave the
employ of the Corporation and will render the services contemplated in the
recitals to this Agreement until the earlier of (i) the date such person or
group has abandoned or terminated his or its efforts to effect a Change of
Control, or (ii) three (3) months after a Change of Control has occurred.
2. Termination After Change of Control.
(a) In the event of a Termination (as defined in Section
4(b)below) of the Executive's employment with the Corporation (including
the Bank) within 24 months after a Change of Control of the Corporation,
the Corporation shall be obligated, subject to the limitation contained in
Section 2(b) below, to pay the Executive, as compensation for services
rendered to the Corporation and as consideration for the covenant not to
compete set forth in Section 6, an amount equal to 2.99 times the
Executive's annualized base salary (exclusive of all bonus amounts) in
effect immediately prior to the date of Termination. Such amount shall be
payable to the Executive in eight (8) equal quarterly installments
(subject to any applicable payroll or other taxes required to be
withheld), over a two (2) year period, without interest, with the first
such payment made not later than 30 days after the Executive's last day of
employment with the Corporation and each succeeding payment being due on
the same day of every third calendar month thereafter. In the event the
Executive dies at any time during the two years following his Termination,
any remaining unpaid installments provided for by this Section 2(a) shall
be paid to his estate. Notwithstanding the foregoing, at the sole election
of the Corporation, the entire amount payable to the Executive pursuant to
this Section 2(a) may be paid in a lump sum, not later than the 30th day
following the Executive's last day of employment with the Corporation.
(b) Notwithstanding anything in this Agreement to the
contrary, in the event that the amount payable to the Executive pursuant
to Section 2(a) above, when added to all other amounts paid or to be paid
to, and the value of all property received or to be received by, the
Executive in anticipation of or following a Change of Control, whether
paid or received pursuant to this Agreement or otherwise (such other
amounts and property being referred to herein as "Other Change in Control
Payments"), would constitute an excess parachute payment within the
meaning of Section 280G of the Internal Revenue Code of 1986, as amended
(or any successor or renumbered section), then the amount payable pursuant
to Section 2(a) of this Agreement or, as directed by the Executive, such
Other Change in Control Payments shall be reduced to the maximum amount
which, when added to such Other Change in Control Payments, does not
constitute an excess parachute payment. For purposes of determining the
extent to which payments pursuant to this Agreement and/or Other Change in
Control Payments must be reduced, the value of the covenant not to compete
set forth in Section 6 shall be valued by an independent certified public
accounting firm retained by the Corporation.
3. Other Employment. The Executive shall not be obligated to seek
other employment for mitigation of the amounts payable or arrangements made
under any provision of this
-2-
<PAGE>
Agreement, nor shall any payments under this Agreement be reduced on account of
any compensation, benefits or service credits for benefits from any employment
that the Executive may obtain following his Termination.
4. Definitions. For purposes of this Agreement, the following terms
shall have the following respective meanings:
(a) A "Change of Control" shall be deemed to have taken place
if either:
(i) as the result of, or in connection with any
tender or exchange offer, consolidation, merger or other
business combination, sale of assets or contested election
or any combination of the foregoing transactions (a
"Transaction"), the persons who were directors of the
Corporation before the Transaction shall cease for any
reason to constitute at least 50% of the Board of
Directors of the Corporation or any successor to the
Corporation; or
(ii) any "person" (as that term is used in Section
13(d) and 14(d)(2) of the Securities and Exchange Act of
1934 (the "Exchange Act") as in effect on the date
hereof), including a "group" as defined in Section
13(d)(3) of the Exchange Act, becomes the beneficial
owner, directly or indirectly, of shares of the
Corporation having more than 50% of the total number of
votes that may be cast for the election of Directors of
the Corporation; or
(iii) the Corporation is merged or consolidated with
another corporation and as a result of the merger or
consolidation less than 50% of the outstanding voting
securities of the surviving or resulting corporation shall
then be owned in the aggregate by the former stockholders
of the Corporation, other than affiliates within the
meaning of the Exchange Act or any party to the merger or
consolidation; or
(iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of the
Corporation representing more than 50% of the combined
voting power of the Corporation's then outstanding voting
securities; or
(v) the Bank transfers substantially all of its
assets to another Corporation which is not a direct or
indirect wholly-owned subsidiary of the Corporation.
-3-
<PAGE>
(b) "Termination" shall mean (1) termination by the
Corporation of the employment of the Executive with the Corporation
(including the Bank) for any reason other than death, Disability (as
defined in Section 4(d)) or Cause (as defined in Section 4(c)), or (2) the
resignation of the Executive upon the occurrence of either of the
following events:
(i) A reasonable determination (as defined below)
that there has been a significant change in the nature or
scope of the Executive's authority from that prior to a
Change of Control, a reduction in the Executive's total
compensation (including all bonuses, incentive
compensation and benefits) from that prior to a Change of
Control, or a change in the location where the Executive
is required to perform services from that prior to a
Change of Control; or
(ii) A reasonable determination (as defined below)
that, as a result of a Change of Control and a change in
circumstances thereafter significantly affecting the
Executive's position, he is unable to exercise the
authority, powers, function or duties attached to his
position.
(c) "Cause" shall mean the Executive's unreasonable neglect or
refusal to perform the material duties of his position, fraud,
misappropriation or intentional material damage to the property or
business of the Corporation or commission of a felony.
(d) "Disability" shall mean the Executive's absence from his
duties with the Corporation on a full time basis for six (6) successive
months, or for shorter periods aggregating seven (7) months or more in any
year, as a result of the Executive's incapacity due to physical or mental
illness, unless within 30 days after the Corporation gives written notice
of termination following such absence the Executive shall have returned to
the full time performance of his duties.
(e) "Reasonable Determination". Termination of the
Executive's employment in the judgment of the Personnel/Compensation
Committee's "reasonable determination" shall mean termination based on:
(i) subsequent to a Change in Control of the
Corporation, and without the Executive's express written
consent, the assignment to him of any duties inconsistent
with his positions, duties, responsibilities and status
with the Corporation immediately prior to a Change in
Control, or a change in the Executive's reporting
responsibilities and status with the Corporation
immediately prior to a Change in Control, or a change in
the Executive's reporting responsibilities, or offices as
in effect immediately prior to a Change
-4-
<PAGE>
in Control, or any removal of the Executive from, or any
failure to re-elect him to, any of such positions, except
in connection with the termination of his employment for
Cause, Disability or retirement or as a result of his
death; or
(iii) subsequent to a Change in Control of the
Corporation, a failure by the Corporation to continue any
bonus plans in which the Executive is presently entitled
to participate (the "Bonus Plans") as the same may be
modified from time to time but substantially in the forms
currently in effect, or a failure by the Corporation to
continue the Executive as a participant in the Bonus Plans
on at least the same basis as he presently participates in
accordance with the Bonus Plans; or
(iv) subsequent to a Change in Control of the
Corporation and without the Executive's express written
consent, the Corporation's requiring him to be based
anywhere other than his present office location, except
for required travel on the Corporation's business to an
extent substantially consistent with his present business
travel obligations; or
(v) subsequent to a Change in Control of the
Corporation, the failure by the Corporation to continue in
effect any benefit or compensation plan, stock ownership
plan, stock purchase plan, stock option plan, life
insurance plan, health and accident plan or disability
plan in which the Executive is participating at the time
of Change in Control of the Corporation (or plans
providing him with substantially similar benefits), the
taking of any action by the Corporation which would
adversely affect the Executive's participation in or
materially reduce his benefits under any of such plans or
deprive him of any material fringe benefit enjoyed by him
at the time of the Change in Control, or the failure by
the Corporation to provide him with the number of paid
vacation days to which he is then entitled in accordance
with the Corporation's normal vacation policy in effect on
the date hereof; or
(vi) subsequent to a Change in Control of the
Corporation, the failure by the Corporation to obtain the
assumption of the agreement to perform this Agreement by
any successor as contemplated in Section 7 hereof.
For purposes of this subsection (e), "reasonable determinations" shall
be made by an affirmative vote of at least 50% of the individuals who
are both (A) members of the Board
-5-
<PAGE>
immediately prior to the applicable Change of Control, and (B) members
of the board of directors of the successor entity by which the
Executive is employed immediately prior to his resignation. If no
individual is described in both (A) and (B) above, then "reasonable
determinations" shall be made at the sole discretion of the Executive.
5. Trade Secrets. It is recognized that the Corporation and the Bank
have acquired and developed and will continue to acquire and develop techniques,
plans, processes, computer programs, and lists of customers and their particular
requirements which may pertain to Bank related services and equipment, and
related trade secrets, know-how, research and development, which are proprietary
and confidential in nature and are and will continue to be of unique value to
the Corporation and the Bank and its business (all hereinafter referred to as
"Confidential Information"). All Confidential Information known or in the
possession of Executive shall be kept and maintained by him as confidential and
proprietary to the Corporation and the Bank. The Executive shall not disclose
any Confidential Information at any time directly or indirectly, in any manner
to any person or firm, except to other employees of the Corporation and/or the
Bank on a "need to know" basis. Upon termination of his employment for any
reason, the Executive shall without demand therefore deliver to the Corporation
all Confidential Information in his possession. The obligations of this Section
shall survive the termination of this Agreement indefinitely.
6. Covenants Not to Compete
(a) For a period of two (2) years following the termination of
the Executive's employment with the Bank for any reason, Executive
covenants and agrees that he will not at any time directly or indirectly
in any manner or under any circumstances or conditions whatsoever be or
become interested, as an individual, partner, principal, agent, clerk,
employee, stockholder, officer, director, trustee, or in any other
capacity whatsoever, except as a nominal owner of stock of a public
corporation, in any other business in any city or town where the Bank
maintains an office at the time of the Executive's termination that in any
way competes with the business of the Bank as it exists at the time of the
Executive's termination, or engage or participate in, directly or
indirectly (whether as an officer, director, employee, partner,
consultant, holder of an equity or debt investment, lender or in any other
manner or capacity), or lend his name (or any part or variant thereof) to,
any business in any city or town where the Bank maintains an office at the
time of the Executive's termination which is, or as a result of the
Executive's engagement or participation would become, competitive with any
aspect of the business of the Bank as it exists at the time of the
Executive's termination or solicit any officer, director, employee or
agent of the Bank or any subsidiary or affiliate of the Bank to become an
officer, director, employee or agent of the Executive, his respective
affiliates or anyone else; ownership, in the aggregate, of less than one
percent (1%) of the outstanding shares of capital stock of any corporation
with one or more classes of its capital stock listed on a national
securities exchange or publicly traded in the over-the-counter market
shall not constitute a violation of the foregoing provision.
-6-
<PAGE>
(b) The Executive hereby acknowledges that his services are
unique and extraordinary, and are not readily replaceable, and hereby
expressly agrees that the Bank, in enforcing the covenants contained in
Sections 5 and 6, in addition to any other remedies provided for herein or
otherwise available at law, shall be entitled in any court of equity
having jurisdiction to an injunction restraining him in the event of a
breach, actual or threatened, of the agreements and covenants contained in
these Sections.
(c) The parties hereto believe that the restrictive covenants
of these Sections are reasonable. However, if at any time it shall be
determined by any court of competent jurisdiction that these Sections or
any portion of them as written, are unenforceable because the restrictions
are unreasonable, the parties hereto agree that such portions as shall
have been determined to be unreasonably restrictive shall thereupon be
deemed so amended as to make such restrictions reasonable in the
determination of such court, and the said covenants, as so modified, shall
be enforceable between the parties to the same extent as if such
amendments had been made prior to the date of any alleged breach of said
covenants.
(d) The provisions of this Section 6 shall not apply following
the Executive's termination of employment with the Bank, if the Executive
is not entitled to payment pursuant to this Agreement as a result of such
termination.
7. Successors. This Agreement shall be binding upon and inure to the
benefit of the Executive and his estate, and the Corporation and any successors
of the Corporation, but neither this Agreement nor any rights arising hereunder
may be assigned or pledged by the Executive.
8. Miscellaneous. This Agreement represents the entire agreement
between the parties with respect to the subject matter of this Agreement and
specifically supersedes any and all oral or written agreements on its subject
matter previously entered into by the parties, including without limitation the
Change in Control Agreement, dated as of May 1, 1995, between the Bank, the
Corporation and the Executive.
9. Severability. Any provision in this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability without invalidating or affecting the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not be invalidate or render unenforceable such provision in
any other jurisdiction.
10. Controlling Law. This Agreement shall in all respects be
governed by, and construed in accordance with, the laws of the State of New
York.
-7-
<PAGE>
11. Term of Agreement.
(a) The initial term of this Agreement shall commence as of
March 31, 1998 and shall continue through December 31, 1999, unless
earlier terminated as provided herein. Thereafter, this Agreement shall be
renewed for additional one year periods, unless either party gives written
notice of non-renewal of this Agreement to the other party at least ninety
(90) days prior to the expiration of the initial term or any renewal term;
provided, however, that in no case shall this Agreement terminate; (i)
within 24 months after the occurrence of a Change of Control, or (ii)
during any period of time when the Corporation has knowledge that any
person or group (such terms are defined in Section 4(a)(ii) above) has
taken steps reasonably calculated to effect a Change in Control until, in
the opinion of the Board, such person or group has abandoned or terminated
his or its efforts to effect a Change of Control. Any determination by the
Board that such person or group has abandoned or terminated his or its
efforts to effect a Change of Control shall be conclusive and binding as
the Executive.
(b) Notwithstanding any provisions of this Agreement, this
Agreement shall not confer upon the Executive the right to be retained in
the service of the Corporation (including the Bank) nor limit the right of
the Corporation or the Bank to discharge or otherwise deal with the
Executive. It is the express understanding of the Executive, the
Corporation and the Bank that the Executive's employment shall at all
times be "at will", notwithstanding any provisions of this Agreement.
Accordingly, the Executive or the Corporation and Bank may terminate the
Executive's employment with the Bank at any time for any reason.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date specified in the first paragraph of this Agreement.
CNB FINANCIAL CORP.
By: /s/ VANNESS D. ROBINSON
------------------------------
VanNess D. Robinson, Chair
Executive Committee
CENTRAL NATIONAL BANK, CANAJOHARIE
By: /s/ DONALD L. BRASS
------------------------------
Donald L. Brass, President
EXECUTIVE:
/s/ DONALD L. BRASS
------------------------------
Donald L. Brass
-9-
CNB
FINANCIAL CORP.
[GRAPHIC]
PRIMED
FOR
GROWTH
ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
[BAR CHART]
TOTAL ASSETS
(IN MILLIONS)
1994 $484.5
1995 $564.8
1996 $586.8
1997 $634.4
1998 $711.1
-----------------------
[BAR CHART]
STOCKHOLDERS
EQUITY
1994 $ 39.9
1995 $ 47.4
1996 $ 48.4
1997 $ 54.6
1998 $ 55.6
-----------------------
[BAR CHART]
DIVIDENDS
(DOLLARS PER SHARE)
1994 $0.22
1995 $0.24
1996 $0.27
1997 $0.30
1998 $0.33
-----------------------
CONTENTS:
To Our Shareholders................. 2
Year in Review...................... 3
Financial Review.................... 6
Management's Discussion
and Analysis........................ 7
Consolidated
Financial Statements................ 24
Notes to Consolidated
Financial Statements................ 29
Corporate Directory................. 59
INSIDE BACK COVER
Shareholder Information
- --------------------------------------------------------------------------------
1
<PAGE>
Profile
Headquartered in Canajoharie, New York, CNB Financial Corp. is the
holding company for Central National Bank, Canajoharie, and Central Asset
Management, Inc. CNB Financial Corp. was formed in January 1993 and is listed on
the NASDAQ under the symbol CNBF. Central National Bank, established in 1855,
provides a broad range of deposit and loan products to area consumers,
businesses and government entities. The Bank operates 20 full-service branch
offices and one financial service center throughout six counties in Eastern and
Central New York. Central Asset Management (CAM) began providing investment
advisory services in 1996. CAM offers a skilled staff, expert at building solid
customer profiles.
Mission Statement
It is the mission of CNB Financial Corp. to operate in the best
interest of its shareholders and subsidiaries under the broad policy guidelines
established by the Board of Directors. We will continue our tradition of
strength and independence while optimizing total shareholder return, providing
capital access and coordinating management expertise among our subsidiaries. By
concentrating on service businesses, we plan to opportunistically but prudently
add subsidiaries while regularly evaluating our ability to expand the services
offered as changes in regulation allow.
To Our Shareholders . . .
New directions and many new opportunities...1998 was anything but
status quo for CNB Financial Corp. The Bank (CNB) embraced a significant level
of change in order to provide the highest standard of financial service possible
to our growing client base. Our institution has a broader vision, including the
adoption of innovative technology to better serve customers. Rest assured that,
in this transformation, we've always kept our focus on the personal touch that
is a CNB tradition. The seeds of the Bank's forward looking transition were
planted in 1997 when an in-depth analysis was completed by an outside research
firm to identify the unique opportunities available to us. As 1998 began, our
initial plans were made to develop and implement our profit enhancement program.
Though this entailed significant resources, much of our changeover was completed
by year-end and we were pleased to report a fourth quarter that was the best
single period in the history of CNBF. Consolidated fourth quarter earnings
totaled $2,253,000, an increase of 21.5% from $1,854,000 reported for the same
period in 1997. Basic and diluted earnings per share amounted to $0.30 for the
quarter, compared with $0.24 per share in the same quarter of 1997.
Net income for the full year amounted to $7,681,000, up slightly from
the $7,666,000 posted in 1997. Basic earnings per share totaled $1.01 per share
compared to $0.99 in 1997, while diluted earnings of $1.00 per share also
increased from a level of $0.99 in 1997. Total assets increased by 12% to
$711,088,000. Net loans grew to $372,569,000, up 10% over the previous year.
Deposit levels also rose by a strong 17% to $628,142,000. Total stockholders'
equity reached $55,566,000 for 1998.
We are very proud to again have been included in the annual Times
Union list of top ten business performers. CNBF was rated eighth in overall
performance among local publicly owned companies, and was one of only three
firms to have been on the Superstar Top 10 list for three consecutive years. Our
well planned reorganization positioned CNB for future growth while resulting in
a one-time anticipated expense. This expense is reflected in the operating
performance for the year. Return on average assets was 1.11% and the return on
average equity was 13.83% for 1998, compared to 1.25% and 14.99% respectively in
1997. This was fully consistent with our long-term positioning strategy. Despite
an overall downward trend among the stock prices of most of our industry peers,
CNBF was able to reward its loyal shareholders with a two-for-one stock split in
June and a dividend increase of 12%, or 3.5 cents per share. CNBF's stock price
rose 37% during 1998.
2
<PAGE>
Throughout the course of the year, we sought to improve overall
efficiencies and bottom-line results to effectively compete, while maintaining
the "small town" personal appeal of a well established community bank.
Organizational changes included a redefining of the roles of our key
employees. We also initiated a new sales program aimed at building relationships
and featuring the Bank's talented personnel more prominently as trusted advisors
to our clients, rather than solely as transactional bankers.
A major accomplishment in 1998 was the opening of our Financial
Service Center in Niskayuna. The Bank also introduced a new check imaging
program, completed a full systems conversion, and established a comprehensive
call center.
Further growth is planned for 1999. A downtown Saratoga loan office is
scheduled to open in March. Plans are also underway to strategically place new
full-service branch locations in Oneida, Otsego and Southern Saratoga Counties.
New revenue opportunities include the rollout of a new slate of
products targeted for small businesses. An emphasis on assisting this market
segment began in 1998 with our sponsorship of the Fulton Montgomery Community
College Small Business Assistance Center.
Two additional employee-based initiatives are also planned for 1999: a
company-wide revenue enhancement and expense control process, requiring
individual review and assessment of operations by each employee; and a quality
assurance system intended to help CNB provide the very best value-added service
in the business.
With regard to year 2000 computer issues, CNB plans to complete
testing and to have all system changes implemented by June 30, 1999, as required
by federal bank regulators. We will have alternative methods of doing business
in place should the need arise.
We are extremely pleased with the results of this past year, which was
made possible by the efforts of our talented staff and the support of our
dedicated shareholders. CNBF is certainly "primed for growth," as we look
forward to 1999 with great expectations and a renewed spirit of excellence.
Donald L. Brass
President
Investing in the Future
Being "primed for growth" means standing not just ready but willing
and fully able to meet the challenges of a rapidly changing financial landscape.
Following a year-long operational review, Central National Bank has the
understanding, motivation, strategies and newly instituted capabilities to offer
a platform for even greater things to come in 1999 and beyond.
Positioned for Greater Results
With the ongoing assistance of an outside research firm, CNB completed
a comprehensive study last year to identify critical needs throughout the Bank.
All areas were analyzed and targeted action was recommended and implemented on a
priority basis. Key concerns included lending, technology, sales culture, the
organizational structure of branches and support functions. The results were
far-reaching yet friendly to CNB's valued, long-time customers.
Based on sales markets, branches were grouped into three distinct
regional networks (East, Central and West) designed to improve productivity and
efficiency of operations. Qualified sales and lending personnel were
strategically placed in each market to provide more authority and immediately
available expertise to each individual branch. This decentralizing strategy
effectively offers more decision-making power at the local level. The new
structure also allows CNB to make the most of its unique status as a community
bank combining personalized service with pacesetting capabilities, including a
wide array of the most modern and effective technological advancements.
Further reinforcing the theme of increased local emphasis is an
improved focus on service to small businesses. Small to medium size companies
are receiving more attention as the commercial lending program continues to
develop under the leadership of a specialized product manager.
3
<PAGE>
Plans for 1999 include the initiation of the detailed One Touch
quality assurance system and the employee-based "Worksmart" process designed to
improve revenue and expense control.
Selling Ourselves
With the institution of a major, company-wide, client-focused sales
and service culture, every CNB employee, regardless of position, is now
thoroughly trained in "relationship selling." This concept is an overall
personal service mindset that improves performance even in functions where there
is no direct customer contact.
After completing the highly effective sales program, CNB's top
managers have now become CNB's lead trainers, putting the rest of the Bank
through the paces necessary to boost business in every realm. In addition to
individual reviews, all personnel are now further motivated by sales rallies,
sales and service awards and a new pay-for-performance plan. The Bank also has
plans for a business development call school in 1999.
CNB has provided its sales force the time and technology needed to
reach more prospects. Through greater pre-call planning and the delegation of
many administrative functions in 1998, sales people are always in the market
place. With laptop computers and new network access to comprehensive customer
data, they can make the most of their time in the field.
CNB customers now have greater access to the Bank with the addition of
a new "all-in-one" call center in 1998. A team of highly knowledgeable telephone
representatives are now available to provide fast, friendly and reliable
service. For 24-hour account information, there is a comprehensive automated
system.
Crossing New Horizons
In many of our market's smaller communities, CNB may be the only bank
in town, but that hasn't limited the appetite for significant expansion
opportunities where and when appropriate. The Bank has identified several
options for growth potential, including development of new branches and new
markets as well as strategic acquisitions of other financial institutions,
financial related service companies or individual branch offices.
Coming on the heels of our successful Gloversville branch launch in
1997 and our Financial Service Center in Niskayuna in 1998, CNB continues to
pursue other locations in 1999.
The Financial Service Center in Niskayuna is more than a loan
production office. The Niskayuna facility offers a unique blend of varied
mortgage, agriculture and commercial lending services, as well as other
financial products. Increased development and expansion of commercial lending
within the Capital District is a prime consideration.
Reaching New Heights
In its first full year of operation, the Bank's Gloversville branch
posted deposit and loan totals nearly double that of projected annual figures.
The new office also broadened our geographical reach, paving the way for more
"North Country" openings in the future.
Auto leasing continued to be a major contributor for CNB, with
year-end totals topping $40 million (an 82% jump from strong 1997 figures).
Adding to the program's profitability are delinquency levels well below national
averages. Possibly the only community bank to offer auto leasing, CNB believes
the success of the lease program is directly tied to our customer-friendly,
hometown approach.
CNB posted new record high mortgage figures in 1998, with both the
number and dollar amount of loan production up more than 100% over last year's
levels. This extraordinary growth has been attributed to new technology,
including a loan origination software package, more originators in the field and
expanded product offerings.
4
<PAGE>
Central Asset Management, Inc. (CAM), CNB's investment advisory
subsidiary, reported continued strong client and asset growth, with fees up
about 20% over the past year. A skilled staff, expert at building solid customer
portfolios, has contributed to CAM's expanding market share.
Technology Update
CNB continued to enact technological improvements in 1998 in order to
provide optimum productivity throughout its operations. A new wide area network
between the Bank's headquarters and all of its branches was further enhanced by
the installation of an upgraded electronic mail system allowing the efficient
transfer of major documents.
Last year, every CNB branch was equipped with the popular Easy
Teller(TM) automated teller systems first introduced at the Bank in 1997. CNB
has also completed a comprehensive conversion of its core operating system to
the popular Horizon program, ultimately adding several new capabilities.
"The Better Checking System" instituted last year has substantially
simplified record keeping for both the Bank and its customers, providing fully
sorted and easy-to-store digital printouts of all checks. This new digital
check imaging system offers even greater flexibility and ease of use for
customers by having this documentation available in the form of CD-ROMs.
Preparations to address the year 2000 computer issue are coming
together. CNB's Y2K committee, in place since May 1997, is working toward
the Bank's readiness. Implementation of system changes and comprehensive
testing is scheduled for completion by June 30, 1999.
Helping Hands
As usual, CNB continues to serve as an active member of each community
in which it does business. More than just a bank, CNB strives to be a good
neighbor to all those nearby in need. For example, the Bank, its employees and
its customers combined to donate nearly $4,000 to local relief efforts following
the legendary ice storm of 1998. Our contributions helped to defray the costs of
providing food and shelter to affected citizens and volunteer helpers.
CNB employees also contribute to various community causes through the
Bank's "Dress Down Days." Participating workers offer donations to local
charities in exchange for the monthly opportunity to wear more casual clothing
on the job. From progressive technology and techniques to a uniquely personal
touch, CNBF now, more than ever, is "primed for growth."
Allen H. Samuels has provided exemplary service on the Bank's board of
directors for nearly four decades. A native of Fort Plain, Allen is a highly
respected attorney at law who practiced in his hometown from 1949 to 1996. He
also had a law office in Utica for 25 years. Active as a CNB director since
1961, Allen will retire from our board in May of 1999.
5
<PAGE>
CNB FINANCIAL CORP.
FINANCIAL REVIEW
(in thousands, except per share and ratio data)
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Interest and dividend income $52,542 $48,635 $46,885 $43,615 $35,709
Interest expense 26,158 22,722 21,754 20,088 13,540
Net interest income 26,384 25,913 25,131 23,527 22,169
Provision for loan losses 773 275 635 965 1,600
Net interest income after provision
for loan losses 25,611 25,638 24,496 22,562 20,569
Other income 4,530 3,774 3,178 2,745 1,673
Other expenses 19,854 18,511 17,779 16,254 14,723
Income before income tax expense 10,287 10,901 9,895 9,053 7,519
Income tax expense 2,606 3,235 2,738 2,481 2,230
Net income 7,681 7,666 7,157 6,572 5,289
PER SHARE DATA(1):
Basic earnings per share $1.01 $0.99 $0.90 $0.82 $0.70
Diluted earnings per share 1.00 0.99 0.90 0.81 0.69
Cash dividends 0.33 0.30 0.27 0.24 0.22
Book value 7.34 7.12 6.25 5.92 4.99
PERIOD END BALANCE SHEET SUMMARY:
Total assets $711,088 $634,389 $586,075 $564,792 $484,497
Securities (2) 300,107 255,520 235,743 215,450 173,838
Total loans 380,953 346,710 321,243 316,617 291,826
Allowance for loan losses 8,384 8,378 8,367 8,463 8,292
Deposits 628,142 538,472 509,217 496,311 416,964
Stockholders' equity 55,566 54,606 48,391 47,433 39,898
SELECTED FINANCIAL RATIOS:
Return on average equity 13.83% 14.99% 14.97% 15.19% 13.69%
Return on average assets 1.11% 1.25% 1.22% 1.25% 1.12%
Dividends paid to net income 32.76% 29.64% 29.06% 29.23% 31.86%
Loans to deposits 60.65% 64.39% 63.09% 63.79% 69.99%
Non-performing loans to total loans 1.38% 1.30% 1.39% 1.25% 1.11%
Net charge-offs to average loans 0.21% 0.08% 0.23% 0.26% 0.39%
Allowance for loan losses to
total loans 2.20% 2.42% 2.60% 2.67% 2.84%
Average stockholders' equity to
average total assets 8.00% 8.31% 8.15% 8.20% 8.18%
</TABLE>
(1) Per share amounts have been restated to reflect the June 1998 two-for-one
stock split and the December 1996 three-for-two stock split.
(2) Includes securities available for sale, investment securities held to
maturity and trading securities, if any.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (in thousands except per share data and ratios)
The purpose of this discussion and analysis is to focus on significant changes
in the financial condition and results of operations of the Company. The
discussion and analysis is intended to supplement and highlight information
contained in the accompanying consolidated financial statements and the selected
financial data presented elsewhere in this report.
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.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that 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;
e. Changes in consumer preferences; and
f. The effect of certain customers and vendors of critical systems or services
failing to adequately address issues relating to becoming Year 2000
compliant.
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.
SUMMARY
Net income for 1998 was $7,681, a $15 increase over the previous year's net
income of $7,666. Net income for 1997 was 7% higher than the 1996 net income of
$7,157. The $15 increase in net income in 1998 when compared to 1997 resulted
mainly from the following:
A declining net interest margin (4.32% in 1998 compared to 4.71% in 1997),
as net interest income increased $471 in 1998, a 2% increase when compared
to 1997 while total assets increased 12% in 1998 when compared to 1997;
An increase in the provision for loan losses of $498 in 1998 when compared
to 1997;
An increase in other income of $756 in 1998, a 20% increase when compared
to 1997;
An increase in other expense of $1,343 in 1998, a 7% increase when compared
to 1997;
A decrease in income tax expense of $629 in 1998, a 19% decrease when
compared to 1997.
Diluted earnings per share, after restatement for the two-for-one stock split
approved at the May 1998 Annual Meeting was $1.00 per share for 1998, a 1%
increase over the $0.99 earned in 1997.
7
<PAGE>
Total assets at December 31, 1998 grew to $711,088, a 12% increase from the 1997
year-end total of $634,389. Net loans receivable increased to $372,569, a 10%
increase from the 1997 year-end total of $338,332. The available-for-sale
portion of the securities portfolio grew to $186,651, a 30% increase from the
1997 year-end total of $144,077. At December 31, 1998 there was a net unrealized
loss of $1,853 in the available-for-sale portfolio compared to a net unrealized
gain of $720 in 1997. The held-to-maturity portion of the securities portfolio
increased $3,132 (3%) from $110,324 at December 31, 1997 to $113,456 at December
31, 1998. There were no transfers between the two portfolios in 1998.
The growth in total assets in 1998 was funded primarily through a $89,670 (17%)
increase in deposits offset by a decrease in short-term borrowings of $15,582
(55%). Non-interest bearing deposits increased $16,981 (34%) from $49,358 at
December 31, 1997 to $66,339 at December 31, 1998. Interest bearing deposits
increased $72,689 (15%) from $489,114 at December 31, 1997 to $561,803 at
December 31, 1998.
Stockholders' equity of $55,566 increased by $960 (2%) during 1998. The increase
in stockholders' equity in 1998 was primarily due to the Company's earnings of
$7,681 offset by dividend payments of $2,516, a decrease in accumulated other
comprehensive income of $1,769 (mainly from a decrease in the fair market value
of available-for-sale securities), and a net treasury stock increase of $2,745.
In May 1998, the Board of Directors approved a two-for-one stock split, which
was paid on June 30, 1998. All share and per share data has been restated for
the two-for-one split in June 1998.
NET INTEREST INCOME
The Company's net income is primarily dependent upon net interest income. Net
interest income is a function of the relative amounts of the Company's earning
assets versus interest bearing liabilities, as well as the difference ("spread")
between the average yield earned on loans, securities, interest earning
deposits, and federal funds sold and the average rate paid on deposits and
borrowings. The interest rate spread is affected by economic and competitive
factors that influence interest rates, loan demand and deposit flows. The
Company, like other financial institutions, is subject to interest rate risk to
the degree that its interest bearing liabilities mature or reprice at different
times, or on a different basis, than its earning assets.
Net interest income on a tax equivalent basis for 1998 was $28,322, up $656 (2%)
from the $27,666 earned in 1997. The increase was primarily volume related, as
the Company increased its average earning assets $68,347 (12%) during 1998 which
was slightly lower than the increase in average interest bearing liabilities of
$67,869 (13%) during 1998. The Company's interest rate spread decreased 33 basis
points from 4.06% in 1997 to 3.73% in 1998. The decrease in the interest rate
spread resulted from a 27 basis point decrease in the average yield on earning
assets plus a 6 basis point increase in the average rate paid on interest
bearing liabilities. The Company's net interest margin decreased from 4.71% in
1997 to 4.32% in 1998. The decrease in the Company's interest rate spread and
net interest margin primarily reflects the trend in decreasing long-term rates
related to mortgage type products in 1998. Meanwhile, short-term rates on
deposit products remained relatively unchanged. The average rate paid on other
time deposits, which comprised 31% of total interest bearing liabilities in
1998, increased 6 basis points.
Interest income on a tax equivalent basis amounted to $54,480, up $4,092 (8%)
from the $50,388 earned in 1997. Interest income from loans on a tax equivalent
basis increased $2,140 (7%) from $30,931 in 1997 to $33,071 in 1998. The
increase in interest income on loans from 1997 to 1998 was primarily related to
volume. The average balance of total loans increased $31,927 (10%) during 1998.
Offsetting the increase in volume on loans was a 23 basis point decrease in the
tax equivalent yield from 9.36% to 9.13% in 1998. Interest income on securities
on a tax equivalent basis increased $2,106 (11%) from $19,038 in 1997 to $21,144
in 1998. The increase in interest income on securities was volume driven as the
average balance of total securities increased $39,094 (16%) from $249,231 for
1997 to $288,325 for 1998. Offsetting the increase in volume on securities was a
decrease in the tax equivalent yield on securities of 31 basis points from 7.64%
in 1997 to 7.33% in 1998.
Interest expense amounted to $26,158, up $3,436 (15%) from the $22,722 in
interest expense recognized in 1997. The increase in interest expense was
primarily volume driven. Interest expense on interest bearing deposits amounted
to $24,910 in 1998, up $3,399 (16%) from the $21,511 in interest expense
recognized in 1997. The average balance in interest bearing deposits increased
$67,320 (14%) from $479,511 for 1997 to $546,831 for 1998. Interest expense on
time deposits greater than $100 increased $1,307 (18%) from $7,260 in 1997 to
$8,567 in 1998. Interest expense on other time deposits increased $1,660 (20%)
from $8,308 in 1997 to $9,968 in 1998. The average balance for time deposits
greater than $100 and other time deposits increased 19% in 1998, respectively.
The average rate paid on time deposits greater than $100 decreased 7 basis
points in 1998 while the average rate paid on other time deposits increased 6
basis points in 1998. Interest expense and the average balance of borrowings
remained relatively unchanged from 1997 to 1998.
8
<PAGE>
The following table presents the total dollar amount of interest and dividend
income earned on average earning assets and the resultant yields, as well as the
total dollar amount of interest expense on average interest-bearing liabilities
and the resultant rates for the periods indicated. 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 amortized cost.
<TABLE>
AVERAGE BALANCES AND INTEREST RATES
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1998
<CAPTION>
AVERAGE INCOME/ YIELDS/
BALANCE EXPENSE RATES
<S> <C> <C> <C>
Assets:
Loans:
Taxable $358,823 $ 32,830 9.15%
Tax-exempt 3,581 241 6.73%
-------- -------- ----
Total loans 362,404 33,071 9.13%
-------- -------- ----
Securities:
Taxable 226,128 15,710 6.95%
Tax-exempt 62,197 5,434 8.74%
-------- -------- ----
Total securities 288,325 21,144 7.33%
-------- -------- ----
Federal lftmds sold and other 4,904 265 5.40%
-------- -------- ----
Total caming assets 655,633 54,480 8.31%
Other assets 38,170
--------
Total assets $693,803
========
Liabilities and Stockholders'Equity:
Interest-bearing deposits:
NOW accounts $68,633 1,217 1.77%
Money market 54,265 2,315 4.27%
Savings 100,852 2,843 2.82%
Time > $100,000 147,582 8,567 5.80%
Other time 175,499 9,968 5.68%
-------- -------- ----
Total interest-bearing deposits 546,831 24,910 4.56%
-------- -------- ----
Short-term borrowings 17,120 868 5.07%
Long-term borrowings 6,722 380 5.65%
-------- -------- ----
Total borrowings 23,842 1,248 5.23%
-------- -------- ----
Total interest-bearing liabilities 570,673 26,158 4.58%
-------- -------- ----
Non-interest bearing deposits 56,952
Other liabilities 10,651
Stockholders' eqwty 55,527
--------
Total liabilities and stockholders' equity $693,803
========
Net interest income (FTE) $28,322
=======
Interest Rate Spread 3.73%
====
Net interest margin 4.32%
====
</TABLE>
9
<PAGE>
<TABLE>
(Dollars in thousands) (Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1997
<CAPTION>
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
BALANCE EXPENSE RATES BALANCE EXPENSE RATES
<S> <C> <C> <C> <C> <C>
$325,886 $ 30,584 9.38% $311,376 $30,002 9.64%
4,591 347 7.56% 5,049 364 7.21%
-------- -------- ---- -------- ------- ----
330,477 30,931 9.36% 316,425 30,366 9.60%
-------- -------- ---- -------- ------- ----
195,084 14,230 7.29% 181,919 13,167 7.24%
54,147 4,808 8.88% 48,231 4,347 9.01%
-------- -------- ---- -------- ------- ----
249,231 19,038 7.64% 230,150 17,514 7.61%
-------- -------- ---- -------- ------- ----
7,578 419 5.53% 11,452 607 5.30%
-------- -------- ---- -------- ------- ----
587,286 50,388 8.58% 558,027 48,487 8.69%
28,105 28,136
-------- --------
$615,391 $586,163
======== ========
$61,768 1,112 1.80% $54,984 985 1.79%
47,501 2,023 4.26% 51,044 2,153 4.22%
98,664 2,808 2.85% 98,335 2,858 2.91%
123,698 7,260 5.87% 98,448 5,482 5.57%
147,880 8,308 5.62% 154,693 9,172 5.93%
-------- -------- ---- -------- ------- ----
479,511 21,511 4.49% 457,504 20,650 4.51%
-------- -------- ---- -------- ------- ----
16,189 810 5.00% 17,794 843 4.74%
7,104 401 5.64% 6,993 261 3.73%
-------- -------- ---- -------- ------- ----
23,293 1,211 5.20% 24,787 1,104 4.45%
-------- -------- ---- -------- ------- ----
502,804 22,722 4.52% 482,291 21,754 4.51%
-------- -------- ---- -------- ------- ----
50,287 45,910
11,166 10,165
51,134 47,797
-------- --------
$615,391 $586,163
======== ========
$27,666 $26,733
======== =======
4.06% 4.18%
==== ====
4.71% 4.79%
==== ====
</TABLE>
10
<PAGE>
The table below sets forth certain information regarding changes in interest and
dividend income and interest expense of the Company for the periods indicated.
For each category of earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by old rate) and (ii) changes in rates (changes in
rate multiplied by old volume). Increase and decreases due to both volume and
rate, which cannot be segregated, have been allocated to the change due to rate.
VOLUME RATE ANALYSIS
<TABLE>
(In thousands) (In thousands)
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
<CAPTION>
VOLUME RATE TOTAL VOLUME RATE TOTAL
<S> <C> <C> <C> <C> <C> <C>
Total Loans $2,988 $ (848) $2,140 $1,349 $(784) $ 565
Total securities 2,986 (880) 2,106 1,452 72 1,524
Federal funds
sold and other (148) (6) (154) (205) 17 (188)
------ ------- ------ ------ ----- -----
Total interest
and dividend
income 5,826 (1,734) 4,092 2,596 (695) 1,901
------ ------- ------ ------ ----- -----
NOW accounts 124 (19) 105 121 6 127
Money market 288 4 292 (149) 19 (130)
Savings 62 (27) 35 10 (60) (50)
Time >
$100,000 1,402 (95) 1,307 1,406 372 1,778
Other time 1,552 108 1,660 (404) (460) (864)
Short-term
borrowings 47 11 58 (76) 43 (33)
Long-term
borrowings (22) 1 (21) 4 136 140
------ ------- ------ ------ ----- -----
Total interest
expense 3,453 (17) 3,436 912 56 968
------ ------- ------ ------ ----- -----
Net change in
net interest
income $2,373 $ (1,717) $ 656 $1,684 $(751) $ 933
====== ======== ====== ====== ===== =====
</TABLE>
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 reprice 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 reprice more quickly than interest-bearing liabilities, falling
interest rates could result in a decrease in net income.
11
<PAGE>
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 repricing 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 December 31, 1998,
under this analysis, a 200 basis point increase in interest rates resulted in a
3.9% decrease in net interest income and a 200 basis point decrease in interest
rates resulted in 2.2% decrease in net interest income. These amounts were well
within the Company's ALCO policy limits.
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 cashflows,
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 sensitivty 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.
OTHER INCOME
Other income increased $756 from $3,774 in 1997 to $4,530 in 1998. The primary
reasons for the increase were an increase in other income of $437, an increase
in service charges on deposit accounts of $231, and an increase in the net gain
on securities transactions of $88. The increase in other income of $437 in 1998
was due mainly to Management's evaluation of a dealer's reserve amount carried
on a dealer that declared bankruptcy in 1994. The reserve was reduced by $223 in
1998. This income is considered non-recurring. In addition, fees on trust and
investment advisory services increased $134 and loan and other bank fee income
increased $80. The increase in service charges on deposit accounts of $231
resulted mainly from ATM convenience fees and service charges on deposit
accounts that resulted from increased transaction volume.
Other income increased $596 from $3,178 in 1996 to $3,774 in 1997. The main
reason for the increase was an increase in service charges on deposit accounts
and an increase in fees from fiduciary activities.
OTHER EXPENSES
Other expenses increased $1,343 (7%) from $18,511in 1997 to $19,854 in 1998.
Other expense increased $419 from $2,587 in 1997 to $3,006 in 1998. The increase
was due mainly to increases in the loss on the sale of expired lease vehicles of
$135, telephone and tele-communications expense of $124 due to upgrades in the
Company's tele-communication systems, and correspondent bank fees of $78. Data
processing expense increased $354 in 1998 due mainly to the conversion of the
Company's core processing system. Salaries and benefits increased $337 in 1998
primarily from an increase in staffing levels and normal merit increases year to
year. Professional fees increased $265 in 1998 due primarily to the consulting
costs incurred in assisting management in various strategic, organizational, and
operational issues. The management of the Company anticipates that professional
fees which totaled $1,325 in 1998 should decrease significantly in 1999 as no
consulting projects are planned. Promotional and marketing decreased $322 in
1998 as the Company phased out its promotional and direct mail program for
deposit accounts.
12
<PAGE>
Other expenses increased $732 (4%) from $17,779 in 1996 to $18,511 in 1997.
Occupancy and equipment expense increased $342 (22%) during 1997. The major
items contributing to this increase were increased depreciation expense on the
Operations Center opened in 1996 and furniture and equipment as well as
increased maintenance expense on machinery. Data processing costs increased $376
(30%) to $1,643. The increase in this category was primarily the result of an
additional $218 in depreciation expense on data processing equipment and an
additional $96 paid to our third party processor. Professional fees increased
$413 due primarily to consulting costs incurred in assisting management in
addressing various strategic and organizational issues, as well as operational
issues of the Company.
INCOME TAXES
Income tax expense is based on pre-tax income for financial reporting purposes
and includes an appropriate provision for the effect of any temporary
differences between assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. The effective tax rates
for 1998, 1997 and 1996 were 25.33%, 29.68% and 27.67% respectively. The
decrease in the effective tax rate from 1997 to 1998 was due primarily to an
increase in tax exempt income, as well as various tax planning strategies
implemented by the Company.
SECURITIES
The Company's securities are classified in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". SFAS No. 115 requires that
securities be classified into one of three categories: held to maturity;
available for sale; or trading. Debt securities for which the Company has the
positive intent and ability to hold to maturity are classified as held to
maturity and carried at amortized cost. Available for sale securities and
trading securities are carried at estimated fair value. Unrealized gains and
losses on available for sale securities are reported as a separate component in
accumulated other comprehensive income (a component of stockholders' equity),
net of tax, while unrealized gains and losses on trading securities are
reflected in earnings. All securities can be used as part of the asset/liability
management strategy and securities available for sale and trading securities, if
any, may be sold in response to, or in anticipation of factors such as changes
in market interest rates, changes in security prepayment rates, liquidity
considerations and regulatory capital requirements. Management anticipates
fluctuations in stockholders' equity due to changes in the estimated fair value
of available for sale securities.
At December 31, 1998, the net unrealized loss on the available for sale
portfolio totaled $1,853 compared to a net unrealized gain of $720 at year-end
1997. The $2,573 shift reflects the unrealized loss ($1,314) on a corporate bond
which management has evaluated and does not believe that this is other than a
temporary impairment. Management believes its investment will be fully collected
at maturity. The remaining variance reflects the interest rate volatility that
existed during the last two years. Management monitors the fair value of assets
and liabilities on a total balance sheet basis. These movements were generally
offset by unrecognized changes in value of other portions of the balance sheet.
The amortized cost and weighted average yield of the Company's security
portfolios at December 31, 1998, by contractual maturity (collateralized
mortgage obligations and mortgage backed securities are included by final
contractual maturity), are as follows:
AMORTIZED (Dollars in thousands) AVERAGE
COST YIELD(2)
AVAILABLE-FOR-SALE
Due in one year or less $ 2,061 6.02%
Due after one to FIVE years 17,194 6.22%
Due after FIVE to ten years 32,904 6.51%
Due after ten years 131,461 7.10%
-------- ----
Total(1) $183,620 6.90%
======== ====
HELD-TO-MATURITY
Due in one year or less $ 5,797 7.72%
Due after one to FIVE years 25,017 7.83%
Due after FIVE to ten years 36,543 8.79%
Due after ten years 46,099 7.90%
-------- ----
Total $113,456 8.16%
======== ====
(1) Excludes Federal Home Loan Bank, Federal Reserve Bank and preferred stock.
(2) Average yield on tax exempt securities is calculated on a tax equivalent
basis.
13
<PAGE>
Actual maturities may differ from those shown in the table above because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
LOANS
The Company provides a full range of loan products through the branch offices
and main office functions. The main office is responsible for the larger
commercial, agricultural and various indirect consumer loans. The direct lending
activities of the branches are focused on individual and small to medium size
businesses within their market areas. Consistent with the focus on providing
community-banking services, the Company generally does not attempt to diversify
geographically by making a significant amount of loans to borrowers outside of
the primary service area.
Net loans receivable were $372,569 at December 31, 1998, an increase of $34,237
from the $338,332 at December 31, 1997. Net loans receivable at December 31,
1997 were up $25,456 from the $312,876 at December 31, 1996.
SUMMARY OF LOAN PORTFOLIO
(In thousands)
AT DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Secured by real estate $164,870 $146,376 $141,953 $137,373 $122,004
Installment and other consumer 164,034 147,681 124,868 123,729 119,471
Commercial and agricultural 51,637 48,888 48,552 48,875 42,203
Tax-exempt 2,989 3,861 4,932 5,277 6,123
Net deferred loan fees/costs
and unearned discount (2,577) (96) 938 1,363 2,025
-------- -------- -------- -------- --------
Total Loans 380,953 346,710 321,243 316,617 291,826
Allowance for loan losses (8,384) (8,378) (8,367) (8,463) (8,292)
-------- -------- -------- -------- --------
Net loans receivable $372,569 $338,332 $312,876 $ 308,154 $283,534
======== ======== ======== ========= ========
</TABLE>
Loans secured by real estate increased $18,494 from $146,376 at December 31,
1997 to $164,870 at December 31, 1998. The most significant increase in loans
secured by real estate was in the area of commercial real estate. Commercial
real estate increased $9,099 from $47,367 at December 31, 1997 to $56,466 at
December 31, 1998. One-to-four family, agriculture, and construction real estate
loans experienced moderate growth in 1998. The balance of home equity loans
remained relatively unchanged from 1997 to 1998. Installment and other consumer
loans increased $16,353 from $147,681 at December 31, 1997 to $164,034 at
December 31, 1998. The most significant increase in installment and other
consumer loans was in lease receivables. Lease receivables increased $19,962
from $23,524 at December 31, 1997 to $43,486 at December 31, 1998. Management
anticipates continued growth in lease receivables for 1999. All other types of
installment and other consumer loans experienced declines in 1998 as
manufactured housing decreased from $61,519 at December 31, 1997 to $60,975 at
December 31, 1998 and consumer loans decreased from $62,638 at December 31, 1997
to $59,573 at December 31, 1998. Commercial and agriculture loans increased
$2,685 from $48,888 at December 31, 1997 to $51,637 at December 31, 1998.
Loan concentrations greater than 10% of the total loan portfolio for 1998 are as
follow: one-to-four family residential real estate loans of $62,675 or 16.5%,
manufactured housing of $60,975 or 16.0%, commercial real estate of $56,466 or
14.8%, and lease receivables of $43,486 or 11.4%.
Commercial and agricultural loans maturing within one year are $33,609, after
one but within five years $9,637 and after five years $8,391. Fixed rate
commercial and agricultural loans repricing after one but within five years are
$9,637 and those repricing after five years are $8,391. All variable rate loans
will reprice within one year. Maturities are based on contract terms.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents Management's estimate of an amount
adequate to provide for losses inherent in the loan portfolio. In its continuing
evaluation of the allowance and its adequacy, Management considers the Company's
loan loss experience, the amount of past-due and non-performing loans, current
and anticipated economic conditions, underlying collateral values securing loans
and other factors which affect the allowance for loan losses. Management
monitors the adequacy of the allowance for loan losses through the use of an
estimation process designed to comply with the requirements of the OCC as
published periodically in its Banking Circular, the Instructions for Preparation
of Reports of Condition and Income, and the AICPA's Audit and Accounting Guide.
14
<PAGE>
While it is the Company's policy to charge-off loans in the period in which a
loss is considered probable, there are additional factors impacting potential
future losses which cannot be quantified precisely or attributed to particular
loans or classes of loans. The determination of the adequacy of the allowance
for losses is necessarily an estimate, based upon future loan performance
outside the control of the Company. Adverse local, regional or national economic
conditions, change in interest rates, population, products and other factors can
all adversely affect future loan delinquency rates. Unforeseen conditions could
require adjustments to the allowance through additional loan loss provisions.
Net earnings could be significantly affected if circumstances differ
substantially from the assumptions used in determining the level of the
allowance. In addition, regulatory agencies, as an integral part of the
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to increase the allowance based
upon their judgment of the information available to them at the time of their
examination.
Loans considered doubtful of collection by Management are placed on non-accrual
status for the recording of interest. Generally, commercial-type loans are
placed on non-accrual status when principal and/or interest is 90 days or more
past due and loans secured by residential real estate are placed on non-accrual
status when principal and/or interest is 120 days or more past due, except for
those loans which, in Management's judgment, are well secured and in the process
of collection. Consumer loans are generally not placed on non-accrual status and
are generally charged-off when 180 days past due. Previously accrued income that
has not been collected is generally reversed from current income. Interest
received on non-accrual loans is applied to reduce the carrying amount of the
loan or, if principal is considered fully collectible, recognized as interest
income. Loans are removed from non-accrual status when they become current as to
principal and interest or when, in the opinion of Management, the loans are
considered to be fully collectible as to principal and interest. Total
non-performing loans at December 31, 1998 were $5,275, representing 1.4% of the
total loan portfolio, as compared to $4,493 or 1.3% of the loan portfolio at
December 31, 1997.
The Company's historic levels of non-performing loans and charge-offs have been
above industry averages, due in part to the Company's manufactured housing and
commercial lending portfolios; however, management believes that the allowance
for loan losses is sufficient to provide for losses inherent in the loan
portfolio.
NON-PERFORMING LOANS
(In thousands)
<TABLE>
AT DECEMBER 31,
<CAPTION>
1998 1997 1996 1995 1994
Non-accrual loans:
<S> <C> <C> <C> <C> <C>
Secured by real estate $1,652 $1,943 $ 2,367 $2,637 $1,995
Otherloans 2,344 164 886 441 1,231
------ ------ ------- ------ ------
Total non-accrual loans 3,996 2,107 3,253 3,078 3,226
------ ------ ------- ------ ------
Accruing loans contractually past due
90 days or more 1,279 2,386 1,226 885 544
------ ------ ------- ------ ------
Total nonperforming loans $5,275 $4,493 $4,479 $3,963 $3,770
====== ====== ====== ====== ======
</TABLE>
Information regarding foregone interest on the above non-accrual loans
follows:
<TABLE>
(In thousands)
YEAR ENDED DECEMBER 31,
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Interest recognized $ 71 $21 $28 $5 $ --
Foregone Interest 318 190 125 147 252
----- ----- ----- ----- -----
Interest income that
would have been
recognized at original terms $ 389 $ 211 $ 153 $ 152 $ 252
===== ===== ===== ===== =====
</TABLE>
15
<PAGE>
The following table summarizes the changes in the allowance for loan losses:
ALLOWANCE FOR LOAN LOSSES
(In thousands)
<TABLE>
YEAR ENDED DECEMBER 31,
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance at the beginning of the year $ 8,378 $ 8,367 $ 8,463 $ 8,292 $ 7,772
Provision charged to operations 773 275 635 965 1,600
Charge-Offs:
Agricultural loans 41 77 184 35 48
Commercial loans 220 326 361 18 263
Credit cards 160 274 92 81 99
Constuner loans(l) 904 854 660 1,181 1,200
----- ----- ----- ----- ------
Total charge-offs 1,325 1,531 1,297 1,315 1,610
----- ----- ----- ----- ------
Recoveries:
Agricultural loans 31 16 21 43 59
Commercial loans 144 928 203 118 117
Credit cards 46 43 35 39 34
Constuner loans(l) 337 280 307 321 320
----- ----- ----- ----- ------
Total recoveries 558 1,267 566 521 530
----- ----- ----- ----- ------
Net charge-offs 767 264 731 794 1,080
----- ----- ----- ----- ------
Balance at end of year $ 8,384 $ 8,378 $ 8,367 $ 8,463 $ 8,292
====== ===== ===== ===== ======
Ratio of net charge-offs to
average loans outstanding 0.21% 0.08% 0.23% 0.26% 0.39%
Allowance for loan loss as a
percentage of total loans at year end 2.20% 2.42% 2.60% 2.67% 2.84%
</TABLE>
(1) Includes residential real estate
The following table sets forth the allocation of the allowance for loan losses
by category, as well as the percentage of loans in each category to total loans,
as prepared by the Company. This allocation is based on management's assessment
as of a given point in time of the risk characteristics of each of the component
parts of the total loan portfolio and is subject to changes as and when the risk
factors of each such component part change. The allocation is not indicative of
either the specific amounts or the loan categories in which future charge-offs
may be taken, nor should it be taken as an indicator of future loss trends. The
allocation of the allowance to each category does not restrict the use of the
allowance to absorb losses in any category.
<TABLE>
(In thousands)
AT DECEMBER 31,
<CAPTION>
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Secured by real estate $2,581 43% $1,956 42% $1,666 44% $1,186 43% $1,429 42%
Installment and other
consumer loans 1,960 43% 1,114 44% 1,350 41% 1,688 42% 2,890 44%
Commercial and
agricultural loans 1,491 14% 2,300 14% 1,399 15% 1,461 15% 763 14%
Other qualitative
factors 2,352 -- 3,008 -- 3,952 -- 4,128 -- 3,210 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$8,384 100% $8,378 100% $8,367 100% $8,463 100% $8,292 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
16
<PAGE>
DEPOSITS
The Company's primary sources of funds are deposits. The Company offers deposit
accounts having a range of interest rates and terms. The Company offers
transaction accounts, savings accounts, money market accounts, N.O.W. accounts,
and certificates of deposit accounts ranging in various terms. The Company only
solicits deposits from its primary market area and includes individuals, local
governments and businesses.
The flow of deposits is influenced significantly by general economic conditions,
changes in prevailing interest rates, and competition. The variety of deposit
accounts offered by the Company has allowed it to be competitive in obtaining
funds and to respond with flexibility to changes in consumer demand. The Company
manages the pricing of its deposits in keeping with its asset/liability
management, liquidity and profitability objectives. Based on experience, The
Company believes that its transaction accounts, savings accounts and money
market accounts are relatively stable source of deposits. However, the ability
of the Company to attract and maintain certificates of deposits and the rates
paid on those deposits has been and will continue to be significantly affected
by market conditions.
The following table is a summary of average deposits and average rates paid:
AVERAGE DEPOSITS AND AVERAGE RATES PAID
<TABLE>
(In thousands)
YEAR ENDED DECEMBER 31,
<CAPTION>
1998 1997 1996
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 56,952 -- $ 50,287 -- $ 45,910 --
NOW and money market accounts 122,898 2.87% 109,269 2.87% 106,028 2.96%
Savings accounts 100,852 2.82% 98,664 2.85% 98,335 2.91%
Time deposits 323,081 5.74% 271,578 5.73% 253,141 5.79%
-------- ---- -------- ---- -------- ----
$603,783 4.13% $529,798 4.06% $503,414 4.10%
======== ==== ======== ==== ======== ====
</TABLE>
The following table is a sunnnary of deposits:
<TABLE>
DEPOSITS
(In thousands)
DECEMBER 31,
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Non-interest
bearing deposits $66,339 $49,358 $ 50,313 $ 47,234 $ 48,706
-------- -------- -------- -------- --------
Interest-bearing deposits:
NOW accounts 76,896 65,519 60,106 47,191 49,976
Savings accounts 102,446 97,604 98,440 95,193 108,139
Money market accounts 52,618 40,043 38,557 38,964 22,442
Time deposits
of $100,000 or more 120,917 114,371 110,145 115,161 62,659
Other time deposits 208,926 171,577 151,656 152,568 125,042
-------- -------- -------- -------- --------
Total interest-bearing deposits 561,803 489,114 458,904 449,077 368,258
-------- -------- -------- -------- --------
Total Deposits $628,142 $538,472 $509,217 $496,311 $416,964
======== ======== ======== ======== ========
</TABLE>
17
<PAGE>
The contractual maturity for time deposits of $100,000 or more is as follows at
December 31, 1998:
1998
Less than or equal to three months $ 67,987
Three months through six months 34,568
Six months through twelve months 11,242
Over twelve months 7,120
--------
$120,917
========
BORROWINGS
Although deposits are the Company's primary source of funds, the Company
utilizes security repurchase agreements and borrowings as a funding source. The
Company regularly has security repurchase agreements with several Bank customers
in the ordinary course of business. Further information concerning repurchase
agreements is located in note 6 to the consolidated financial statements. For
liquidity management, lines of credit have also been established with
correspondent banks to meet short-term funding needs. See "Liquidity".
The Company has $1,900 in long-term borrowings with the Federal Home Loan Bank
of New York. This FHLB borrowing bears interest at 5.45%, amortizes monthly and
matures in 2003. In 1995 and 1996, the Company issued Industrial Revenue Bonds
to fund the construction of its new administrative and operations complex. As of
December 31, 1998, the remaining balance on the bonds was $4,630 and bears
interest at a variable interest rate, which adjusts weekly, based on a
commercial paper rate index. The bonds have annual principal payments due
through 2025. See also notes 7 and 12 to the consolidated financial statements.
CAPITAL RESOURCES
Total stockholders' equity increased 2% from December 31, 1997 to December 31,
1998, compared to 13% growth during 1997 and 2% growth during 1996. In 1997, the
Company added $7,681 to equity through net income and returned $2,516 to its
stockholders in the form of dividends. The Company's goal is to maintain a
strong capital position to support its growth and expansion activities, improve
operating efficiency and customer satisfaction.
Important indicators of capital adequacy for the Bank are Tier I Risk-Based
Capital, Total Risk Based Capital and the Leverage ratio. Tier I Capital
consists of common stock and qualifying stockholders' equity. Total Risk-Based
Capital consists of Tier I Capital and a portion of the allowance for loan
losses. The Leverage ratio is calculated by dividing Tier I Risk-Based Capital
into quarterly average assets (as defined). In accordance with regulatory
guidelines, regulatory capital does not include the net unrealized gain or loss
on securities available for sale included in equity. All of the Bank's
regulatory capital ratios exceed the required minimums.
On March 1, 1999, the Company announced its intention to extend the repurchase
program announced in 1997 and to purchase up to 574,472 shares of its stock in
the open market during the period from March 16, 1999 to March 15, 2000. During
1998, 134,985 shares were repurchased at a cost of $3,455. The repurchased
shares will be held in treasury stock but may be reissued in the future in
connection with the Company's Dividend Reinvestment Plan, to satisfy the issuing
of stock options, or for other corporate purposes, such as acquisitions.
In May 1998, the Board of Directors approved a two-for-one stock split, and an
amendment to the Certificate of Incorporation to change the par value of the
Company's stock at the Annual Meeting. The two-for-one stock split was paid on
June 30, 1998.
IMPACT OF THE YEAR 2000
Background:
The Year 2000 Problem or the Millennium Bug as it has come to be known stems
from legacy systems created in the 60's, 70's and 80's. During this period
computer hardware was relatively expensive with much less computing power than
can be found in most desktop PC's today. Computer storage space was considered a
premium and programmers saved space by entering only the last two digits of a
year, assuming the century two digits to be 19. Thus the basic problem,
computers may assume "00" to be "1900" rather than "2000". This problem may have
a material adverse effect on the Company's financial condition, results of
operations, business or business prospects because the Company, like most
financial institutions, relies extensively on computer technology to manage its
financial information and serve its customers. The Company and its subsidiaries
are regulated by federal banking agencies, which are requiring substantial
efforts by banks and their affiliated companies to prevent or mitigate
disruptions related to the Year 2000.
The problem can have severe effects on more than computer systems. It could
affect security and VCR systems, Heating and Ventilation systems, Telephones and
Elevators containing embedded microchips or any device having a clock.
18
<PAGE>
The Company's Approach:
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 will be significantly complete according to FFIEC guidelines
by March 31, 1999. 5) Implementation - During this phase of the project plan the
Company will continue to monitor its systems.
The total budget for Year 2000 renovation and testing was set at $205,000. For
the year ended December 31, 1998, the Company has expended $40,000 on Year 2000
renovation and 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, management anticipates
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
anticipated losses in ensuing periods. In addition, although the Company is
adopting special measures to maintaining 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
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.
19
<PAGE>
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 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, 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.
LIQUIDITY
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
loan, mortgage backed security and collateralized mortgage obligation principal
repayments, maturities and calls of securities and sales from the available for
sale and trading portfolios.
Investing activities used $84,120 in 1998 as the Company continued to leverage
its balance sheet by increasing earning assets, principally $47,886 in
securities, and $36,274 in loans. Financing activities provided $68,735, as the
company experienced increases in deposits somewhat offset by decreases in
borrowings, the purchase of treasury stock and the payment of dividends. For
more information concerning the Company's cash flow, see "The Consolidated
Statements of Cash Flows."
For liquidity management, unused lines of credit totaling $67,600 were
maintained at year-end 1998.
INFLATION
The consolidated financial statements and related consolidated financial
information presented in this annual report have been prepared in conformity
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB STATEMENT 132
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Post-Retirement Benefits," ("SFAS No. 132") which amends
disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions,"
SFAS No. 88, "Employers' Accounting for Settlement and Curtailments of Defined
Benefit Plans and for Termination benefits," and SFAS No. 106, "Employers'
Accounting for Post-retirement Benefits Other Than Pensions." SFAS No. 132
standardizes disclosure requirements of SFAS No. 87 and SFAS No. 106 to the
extent practicable and recommends parallel format for presenting information
about pensions and other post-retirement benefits. This statement is applicable
to all entities and addresses disclosure only. The statement does change any of
the measurement or recognition provisions provided for in Statements No. 87, No.
88, or No. 106. See Footnote 11 in the "Notes to Consolidated Financial
Statements" in the Company's annual report for the adoption of the required
disclosures for SFAS No. 132.
20
<PAGE>
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. The statement is
effective for fiscal years beginning after June 15, 1999. Management will be
reviewing the statement to determine what impact, if any, this statement will
have on its accounting or disclosures.
21
<PAGE>
REPORT OF MANAGEMENT
Management is responsible for the integrity and objectivity of the consolidated
financial statements and other information in this report. The consolidated
financial statements were prepared in accordance with generally accepted
accounting principles and in the judgment of management present fairly the
Corporation's consolidated financial position and results of operations. The
financial information contained elsewhere in this report is consistent with that
in the consolidated financial statements. The consolidated financial statements
and other financial information in this report include amounts that are based on
management's best estimates and judgments and give due consideration to
materiality.
Management is responsible for maintaining a system of internal control and has
established a system of internal accounting control designed to provide
reasonable assurance that transactions are recorded properly to permit
preparation of consolidated financial statements, that transactions are executed
in accordance with management's authorizations and that assets are safeguarded
from significant loss or unauthorized use.
The Internal Audit Department of the Corporation reviews, evaluates, monitors
and makes recommendations on both administrative and accounting control, which
acts as an integral, but independent, part of the system of internal controls.
The independent auditors conduct an annual audit of the Corporation's
consolidated financial statements to enable them to express an opinion as to the
fair presentation of the statements. In connection with the audit, the
independent auditors consider internal control to the extent they consider
necessary to determine the nature, timing and extent of their auditing
procedures. The independent auditors also prepare recommendations regarding
internal control and other accounting and financial related matters. The
implementation of these recommendations by management is monitored directly by
the Audit Committee of the Board of Directors.
The Board of Directors discharges its responsibility for the Corporation's
consolidated financial statements through its Audit Committee. The Audit
Committee meets periodically with the independent auditors, the Internal Auditor
and management. Both the independent auditors and the Internal Auditor have
direct access to the Audit Committee.
Donald L. Brass Peter J. Corso
President Executive Vice President and
Treasurer
22
<PAGE>
CNB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 1998 and 1997, and
for the three year ended December 31, 1998
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CNB Financial Corp.:
We have audited the consolidated balance sheets of CNB Financial corp. and
subsidiaries (the Company) as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
consolidated statements of income, changes in stockholders' equity, and cash
flows of the Company for the year ended December 31, 1996, were audited by other
auditors whose report thereon dated January 30, 1997, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 1997 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of CNB
Financial corp. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
- ------------
Albany, New York
February 19, 1999
23
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- --------
(In thousands, except share data)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 16,128 19,498
Trading securities -- 1,119
Securities available for sale, at fair value 186,651 144,077
Investment securities held to maturity, at amortized cost
(estimated fair value of $119,046 in 1998 and $115,719 in 1997) 113,456 110,324
Net loans receivable 372,569 338,332
Accrued interest receivable 5,843 5,557
Premises and equipment, net 10,075 10,005
Other real estate owned and repossessed assets 1,099 1,372
Other assets 5,267 4,105
--------- ---------
Total assets $ 711,088 634,389
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits 66,339 49,358
Interest-bearing deposits 561,803 489,114
--------- ---------
Total deposits 628,142 538,472
--------- ---------
Short-term borrowings:
Securities sold under agreements to repurchase 12,347 17,330
Borrowings from the Federal Home Loan Bank of New York -- 10,400
Borrowings from the U.S. Treasury 304 503
--------- ---------
Total short-term borrowings 12,651 28,233
--------- ---------
Long-term borrowings 6,530 6,931
Other liabilities 8,199 6,147
--------- ---------
Total liabilities 655,522 579,783
--------- ---------
Commitments and contingent liabilities (note 12)
Stockholders' equity:
Common stock, $1.25 par value, 20,000,000 shares authorized at December 31,
1998 and 10,000,000 shares authorized at December 31, 1997 (7,796,396
shares issued at December 31, 1998 and 7,752,340 shares
issued at December 31, 1997) 9,746 9,690
Additional paid-in capital 6,144 5,891
Retained earnings 44,729 39,564
Accumulated other comprehensive (loss) income (1,376) 393
Treasury stock, at cost (224,578 shares at December 31, 1998
and 76,144 shares at December 31, 1997) (3,677) (932)
--------- ---------
Total stockholders' equity 55,566 54,606
--------- ---------
Total liabilities and stockholders' equity $ 711,088 634,389
========= =========
</TABLE>
Share data has been adjusted for the June 1998 two-for-one stock split.
See accompanying notes to consolidated financial statements.
24
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------- ------- -------
(In thousands, except per share data)
Interest and dividend income:
Loans, including fees $33,008 30,813 30,242
Securities:
Taxable 15,710 14,230 13,167
Nontaxable 3,559 3,173 2,869
Federal funds sold and other 265 419 607
------- ------- -------
52,542 48,635 46,885
------- ------- -------
Interest expense:
Deposits 24,910 21,511 20,650
Short-term borrowings 868 810 843
Long-term borrowings 380 401 261
------- ------- -------
26,158 22,722 21,754
------- ------- -------
Net interest income 26,384 25,913 25,131
Provision for loan losses 773 275 635
------- ------- -------
Net interest income after
provision for loan losses 25,611 25,638 24,496
------- ------- -------
Other income:
Service charges on deposit accounts 1,953 1,722 1,387
Net gain on securities transactions 616 528 602
Other 1,961 1,524 1,189
------- ------- -------
4,530 3,774 3,178
------- ------- -------
Other expenses:
Salaries and employee benefits 9,034 8,697 8,723
Occupancy and equipment 1,998 1,881 1,539
Data processing 1,997 1,643 1,267
Professional fees 1,325 1,060 647
FDIC deposit insurance and related costs 68 64 2
Advertising and marketing 345 667 687
Postage and courier 599 561 488
Office supplies and stationery 600 493 641
Other real estate owned and
repossessed assets 882 858 848
Other 3,006 2,587 2,937
------- ------- -------
19,854 18,511 17,779
------- ------- -------
Income before income tax expense 10,287 10,901 9,895
Income tax expense 2,606 3,235 2,738
------- ------- -------
Net income $ 7,681 7,666 7,157
======= ======= =======
Earnings per share:
Basic $ 1.01 0.99 0.90
======= ======= =======
Diluted $ 1.00 0.99 0.90
======= ======= =======
Per share data has been adjusted for the June 1998 two-for-one stock split.
See accompanying notes to consolidated financial statements.
25
<PAGE>
<TABLE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK TOTAL INCOME
------ ---------- --------- -------------- --------- ----- ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 6,680 10,346 30,243 339 (175) 47,433
Comprehensive income:
Net income -- -- 7,157 -- -- 7,157 $ 7,157
Other comprehensive loss, net of tax:
Unrealized net holding losses arising during
the year and decrease in net unrealized
loss on securities available for sale
transferred to investment securities held
to maturity (pre-tax $1,434) (1,004)
Reclassification adjustment for net gains
realized in net income during the year
(pre-tax $870) (609)
---------
Other comprehensive loss -- -- -- (1,613) -- (1,613) (1,613)
--------
Comprehensive income $ 5,544
=======
Cash dividends, $.265 per share -- -- (2,080) -- -- (2,080)
Purchase of treasury stock -- -- -- -- (3,099) (3,099)
Isssuance of shares for options and Dividend
Reinvestment Plan 21 120 -- -- 452 593
Stock retirement (250) (1,399) (1,150) -- 2,799 --
Three-for-two stock split 3,225 (3,225) -- -- -- --
------- ------- ------- ------- ------ -------
Balance at December 31, 1996 9,676 5,842 34,170 (1,274) (23) 48,391
Comprehensive income:
Net income -- -- 7,666 -- -- 7,666 7,666
Other comprehensive income, net of tax:
Unrealized net holding gains arising during the
year and decrease in net unrealized loss on
securities available for sale transferred
to investment securities held to maturity
(pre-tax $2,893) 2,025
Reclassification adjustment for net gains realized
in net income during the year (pre-tax $512) (358)
-------
Other comprehensive income -- -- -- 1,667 -- 1,667 1,667
-------
Comprehensive income $ 9,333
=======
Cash dividends, $.295 per share -- -- (2,272) -- -- (2,272)
Purchase of treasury stock -- -- -- -- (1,432) (1,432)
Issuance of shares for options and Dividend
Reinvestment Plan 14 49 -- -- 523 586
------ ------- ------- ------ ------- -------
Balance at December 31, 1997 9,690 5,891 39,564 393 (932) 54,606
Comprehensive income:
Net income -- -- 7,681 -- -- 7,681 7,681
Other comprehensive loss, net of tax:
Unrealized net holding losses arising during the
year and decrease in net unrealized loss on
securities available for sale transferred to
investment securities held to maturity
(pre-tax $2,136) (1,495)
Reclassification adjustment for net gains realized
in net income during the year (pre-tax $391) (274)
-------
Other comprehensive loss -- -- -- (1,769) -- (1,769) (1,769)
-------
Comprehensive income $ 5,912
=======
Cash dividends, $.33 per share -- -- (2,516) -- -- (2,516)
Purchase of treasury stock -- -- -- -- (3,455) (3,455)
Issuance of shares for options and Dividend
Reinvestment Plan 56 253 -- -- 710 1,019
------- ------- ------- ------- ------- -------
Balance at December 31, 1998 $ 9,746 6,144 44,729 (1,376) (3,677) 55,566
======= ======= ======= ======= ======= =======
</TABLE>
Per share data has been adjusted for the June 1998 two-for-one stock split
See accompanying notes to consolidated financial statements.
26
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ----- ------
(In thousands)
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 7,681 7,666 7,157
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,312 1,100 767
Provision for loan losses 773 275 635
Deferred tax expense 1,585 401 377
Net gain on securities transactions (616) (528) (602)
Net loss on sales and writedowns of other
real estate owned and repossessed assets 173 310 321
Purchases of trading securities (61,846) (6,312) (11,013)
Proceeds from sales of trading securities 63,190 5,209 10,745
Increase in accrued interest receivable (286) (411) (305)
Net change in other assets and other liabilities 49 (701) (1,158)
--------- --------- ---------
Net cash provided by operating activities 12,015 7,009 6,924
--------- --------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale (169,062) (113,123) (97,086)
Held to maturity (27,121) (21,750) (20,224)
Proceeds from sales of securities available for sale 62,534 86,367 71,799
Proceeds from maturities and calls of securities:
Available for sale 61,774 16,602 13,552
Held to maturity 23,989 16,196 10,046
Net loans made to customers (36,274) (26,788) (5,125)
Proceeds from sales of other real estate owned
and repossessed assets 1,364 704 1,763
Purchases of premises and equipment (1,324) (1,432) (4,517)
--------- --------- ---------
Net cash used in investing activities (84,120) (43,224) (29,792)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 89,670 29,255 12,906
Net (decrease) increase in short-term borrowings (15,582) 13,723 5,891
Proceeds from long-term borrowings -- -- 1,000
Payments on long-term borrowings (401) (383) (307)
Dividends paid (2,516) (2,272) (2,080)
Proceeds from issuance of shares for options
and Dividend Reinvestment Plan 1,019 586 593
Purchase of treasury stock (3,455) (1,432) (3,099)
--------- --------- ---------
Net cash provided by financing activities 68,735 39,477 14,904
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (3,370) 3,262 (7,964)
Cash and cash equivalents at beginning of year 19,498 16,236 24,200
--------- --------- ---------
Cash and cash equivalents at end of year $ 16,128 19,498 16,236
========= ========= =========
(Continued)
</TABLE>
27
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- ------
(In thousands)
<S> <C> <C> <C>
Additional disclosures relative to cash flows:
Interest paid $ 26,105 22,538 21,905
======== ======== ========
Taxes paid $ 1,627 2,185 2,080
======== ======== ========
Supplemental schedule of non-cash investing and
financing activities:
Transfer of loans to other real estate owned
and repossessed assets $ 1,264 1,057 2,119
======== ======== ========
Adjustment of securities available for sale
to fair value, net of tax $ (1,801) 1,634 (1,642)
======== ======== ========
Decrease in net unrealized loss on securities
available for sale transferred to investment
securities held to maturity, net of tax $ 32 33 29
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CNB
Financial Corp. (the Parent Company or the Company) and its
wholly-owned subsidiaries, Central National Bank, Canajoharie (the
Bank) and Central Asset Management (CAM). All significant
intercompany balances and transactions are eliminated in
consolidation. The accounting and reporting policies of the
Company conform in all material respects to generally accepted
accounting principles and to general practice within the banking
industry. The Company utilizes the accrual method of accounting
for financial reporting purposes.
(b) USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of
the allowance for loan losses and the valuation of other real
estate owned and repossessed assets acquired in connection with
foreclosures or insubstance foreclosures. In connection with the
determination of the allowance for loan losses and the valuation
of other real estate owned and repossessed assets, management
generally obtains independent appraisals for significant
properties.
Management believes that the allowance for loan losses is adequate
and that other real estate owned and repossessed assets are
recorded at their fair value less an estimate of the costs to sell
the assets. While management uses available information to
recognize losses on loans, other real estate owned and repossessed
assets, future additions to the allowance or writedowns of other
real estate owned and repossessed assets may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies periodically review the Bank's allowance for loan losses
and other real estate owned and repossessed assets. Such agencies
may require the Bank to recognize additions to the allowance or
writedowns of other real estate owned and repossessed assets based
on their judgments about information available to them at the time
of their examination which may not be currently available to
management.
The Bank operates twenty full-service branches and one loan
production office throughout six counties in Central New York
State. A substantial portion of the Company's assets are loans
secured by real estate located in these six counties. Accordingly,
the ultimate collectibility of a substantial portion of the
Company's loan portfolio is dependent upon economic conditions in
these market areas. In addition, other real estate owned and
repossessed assets are also generally located in these six
counties.
(Continued)
29
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(c) CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. At
December 31, 1998 and 1997, cash and cash equivalents consist
solely of cash and due from banks.
(d) TRADING SECURITIES, SECURITIES AVAILABLE FOR SALE, AND INVESTMENT
SECURITIES HELD TO MATURITY
Management determines the appropriate classification of securities
at the time of purchase. If management has the positive intent and
ability to hold debt securities to maturity, they are classified
as investment securities held to maturity and are stated at
amortized cost. However, if a security can be prepaid or settled
in such a manner that the holder of the security would not recover
substantially all of its recorded investment, such security cannot
be classified as held to maturity. If securities are purchased for
the purpose of selling them in the near term, they are classified
as trading securities and are reported at fair value with
unrealized holding gains and losses reflected in current earnings.
All other debt and equity securities are classified as securities
available for sale and are reported at fair value, with net
unrealized gains or losses reported in accumulated other
comprehensive income, net of tax.
Realized gains and losses on the sale of securities are based on
the net proceeds and the amortized cost of the securities sold,
using the specific identification method. The cost of securities
is adjusted for amortization of premium and accretion of discount,
which is calculated on an effective interest method.
Unrealized losses on securities are charged to earnings when the
decline in fair value of a security is determined to be other than
temporary.
Non-marketable equity securities, such as Federal Home Loan Bank
(FHLB) of New York stock and Federal Reserve Bank stock, are
stated at cost since there is no readily available market value.
These investments are required for membership. The investment in
the Federal Home Loan Bank of New York stock is pledged to secure
Federal Home Loan Bank of New York borrowings.
Transfers from securities available for sale to investment
securities held to maturity are recorded at the securities' fair
values on the date of the transfer. Any net unrealized gains or
losses continue to be reported in accumulated other comprehensive
income, net of tax, as long as the securities are carried in the
investment securities held to maturity portfolio, and are
amortized over the remaining life of the transferred securities as
an adjustment to yield in a manner consistent with the
amortization of any premium or discount.
(Continued)
30
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(e) NET LOANS RECEIVABLE
Loans receivable are stated at the unpaid principal amount, net of
unearned income, net deferred loan fees and costs, and the
allowance for loan losses. Loans considered doubtful of collection
by management are placed on non-accrual status for the recording
of interest. Generally, commercial-type loans are placed on
non-accrual status when principal and/or interest is 90 days or
more past due and loans secured by residential real estate are
placed on non-accrual status when principal and/or interest is 120
days or more past due, except for those loans which, in
management's judgment, are well secured and in the process of
collection. Consumer loans are generally not placed on non-accrual
status and are generally charged off when 180 days past due.
Previously accrued income that has not been collected is generally
reversed from current income. Interest received on non-accrual
loans is applied to reduce the carrying amount of the loan or, if
principal is considered fully collectible, recognized as interest
income. Loans are removed from non-accrual status when they become
current as to principal and interest or when, in the opinion of
management, the loans are considered to be fully collectible as to
principal and interest. Loan fees received at the inception of a
loan and certain direct costs of origination are deferred and
amortized into interest income over the life of the loan.
(f) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased through a provision for
loan losses charged to operations. Loans are charged against the
allowance for loan losses when management believes that
collectibility of the principal is unlikely. 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 current and prospective economic
conditions that may affect borrowers' ability to pay.
(g) LOAN IMPAIRMENT
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118, a loan (generally
commercial-type loans) is considered impaired when it is probable
that the Company will be unable to collect all amounts of
principal and interest under the original contractual terms of the
agreement or when a loan (of any loan type) is restructured in a
troubled debt restructuring subsequent to the Company's adoption
of these Statements. The allowance for loan losses related to
impaired loans is based on the discounted cash flows using the
loan's initial effective rate or the fair value of the collateral
for certain loans where repayment of the loan is expected to be
provided solely by the underlying collateral (collateral dependent
loans). The Company's impaired loans are generally collateral
dependent. The Company considers estimated costs to sell, on a
discounted basis, when determining the fair value of collateral in
the measurement of impairment if those costs are expected to
reduce the cash flows available to repay or otherwise satisfy the
loans.
(Continued)
31
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Other real estate owned includes both formally foreclosed and
insubstance foreclosed real properties. In accordance with SFAS
No. 114, a loan is classified as an insubstance foreclosure when
the Company has taken possession of the collateral regardless of
whether formal foreclosure proceedings have taken place.
(h) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method
based on the estimated useful lives of the assets. Buildings and
improvements are generally depreciated over 15 to 39 years, with
furniture, fixtures and equipment depreciated from 3 to 5 years.
Gains or losses realized on asset dispositions are reflected in
the consolidated statements of income. Maintenance and repairs are
charged to operating expense and improvements are capitalized.
(i) STOCK BASED COMPENSATION
The Company accounts for its stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly,
compensation expense is recognized only if the exercise price of
the option is less than the fair value of the underlying stock at
the grant date. SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages entities to recognize the fair value of
all stock-based awards on the date of grant as compensation
expense over the vesting period. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma disclosures of net income and
earnings per share as if the fair-value-based method defined in
SFAS No. 123 had been applied to stock option grants made in 1995
and later years. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosures required by SFAS No. 123.
(j) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets are recognized subject to management's
judgment that those assets will more likely than not be realized.
A valuation allowance is recognized if, based on an analysis of
available evidence, management believes that all or a portion of
the deferred tax assets will not be realized. Adjustments to
increase or decrease the valuation allowance are charged or
credited, respectively, to income tax expense. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(Continued)
32
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(k) EARNINGS PER SHARE
On December 31, 1997, the Company adopted the provisions of SFAS
No. 128, "Earnings per Share." SFAS No. 128 establishes standards
for computing and presenting earnings per share (EPS). This
Statement supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share" and related interpretations. SFAS No. 128
requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital
structures and specifies additional disclosure requirements.
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). All prior-period EPS data has been restated to conform
to the provisions of this Statement.
(l) FINANCIAL INSTRUMENTS
In the normal course of business, the Company is a party to
certain financial instruments with off-balance-sheet risk, such as
commitments to extend credit, unused lines of credit, letters of
credit, and standby letters of credit. The Company's policy is to
record such instruments when funded.
(m) 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 and the decrease in the net unrealized loss on securities
available for sale transferred to investment securities held to
maturity. While SFAS No. 130 does not require a specific reporting
format, it does require that an enterprise display an amount
representing total comprehensive income for each period for which
an income statement is presented. In accordance with SFAS No. 130,
the Company has reported comprehensive income and its components
for 1998, 1997 and 1996 in the consolidated statements of changes
in stockholders' equity. 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
and the net unrealized loss on securities available for sale
transferred to investment securities held to maturity.
(Continued)
33
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(n) SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for the way that the public business
enterprises report information about operating segments. For the
Company, the statement was effective for annual financial
statements issued for the year ending December 31, 1998.
The Company's operations are solely in the financial services
industry and include the traditional operations of a commercial
banking enterprise. Management makes operating decisions and
assesses performance based on an ongoing review of the Company's
commercial banking operations, which constitute the Company's only
operating segment for financial reporting purposes. The Company
operates primarily in central New York State in Montgomery,
Fulton, Herkimer, Otsego, Schoharie and Schenectady counties and
surrounding areas.
(o) RECLASSIFICATIONS
Amounts in the prior periods' consolidated financial statements
are reclassified whenever necessary to conform to the current
period's presentation.
(2) SECURITIES
The amortized cost and approximate fair value of securities available for
sale at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $ 111,725 244 1,557 110,412
Mortgage backed securities 8,156 96 33 8,219
U.S. Treasury securities 6,022 69 2 6,089
U.S. Government agency securities 11,849 29 49 11,829
Corporate debt securities 45,868 1,499 2,127 45,240
------------- ----------- --------- -------------
Total debt securities 183,620 1,937 3,768 181,789
Federal Home Loan Bank stock 2,092 - - 2,092
Federal Reserve Bank stock 356 - - 356
Mutual funds 1,811 - - 1,811
Preferred stock 625 - 22 603
------------- ----------- --------- -------------
$ 188,504 1,937 3,790 186,651
============= =========== ========= =============
</TABLE>
(Continued)
34
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $ 55,206 488 550 55,144
Mortgage backed securities 8,876 59 26 8,909
U.S. Treasury securities 8,030 33 40 8,023
U.S. Government agency securities 26,618 121 15 26,724
Corporate debt securities 41,054 926 304 41,676
------------- ----------- --------- -------------
Total debt securities 139,784 1,627 935 140,476
Federal Home Loan Bank stock 2,092 - - 2,092
Federal Reserve Bank stock 356 - - 356
Preferred stock 1,125 28 - 1,153
------------- ----------- --------- -------------
$ 143,357 1,655 935 144,077
============= =========== ========= =============
</TABLE>
The amortized cost and approximate fair value of debt securities
available for sale at December 31, 1998, by contractual maturity, are
shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
APPROXIMATE
AMORTIZED FAIR
COST VALUE
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 2,019 2,018
Due after one year through five years 13,427 12,115
Due after five years through ten years 17,946 18,009
Due after ten years 30,347 31,016
------------- ------------
63,739 63,158
Mortgage backed securities and collateralized mortgage
obligations 119,881 118,631
------------- ------------
$ 183,620 181,789
============= ============
</TABLE>
Gross gains of $668,000 and gross losses of $52,000 were realized on
sales of trading securities and securities available for sale in 1998.
Gross gains of $762,000 and gross losses of $234,000 were realized on
sales of trading securities and securities available for sale in 1997;
gross gains of $1,438,000 and gross losses of $836,000 were realized on
sales of trading securities and securities available for sale in 1996.
(Continued)
35
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The amortized cost and approximate fair value of investment securities
held to maturity at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
State and municipal obligations $ 65,466 4,487 52 69,901
Mortgage backed securities 19,594 330 39 19,885
Collateralized mortgage obligations 5,800 13 10 5,803
U.S. Government agency securities 5,151 105 - 5,256
Corporate and taxable municipal debt
securities 17,445 888 132 18,201
------------- ----------- --------- ------------
$ 113,456 5,823 233 119,046
============= =========== ========= =============
<CAPTION>
1997
-------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
State and municipal obligations $ 56,844 3,485 79 60,250
Mortgage backed securities 22,188 427 87 22,528
Collateralized mortgage obligations 2,802 66 - 2,868
U.S. Government agency securities 12,112 207 96 12,223
Corporate and taxable municipal debt
securities 16,378 1,493 21 17,850
------------- ----------- --------- ------------
$ 110,324 5,678 283 115,719
============= =========== ========= =============
</TABLE>
(Continued)
36
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The amortized cost and approximate fair value of debt securities held to
maturity at December 31, 1998, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties
.
<TABLE>
<CAPTION>
APPROXIMATE
AMORTIZED FAIR
COST VALUE
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 5,597 5,545
Due after one year through five years 23,871 25,278
Due after five years through ten years 30,559 33,503
Due after ten years 28,035 29,032
------------- ------------
88,062 93,358
Mortgage backed securities and collateralized
mortgage obligations 25,394 25,688
------------- ------------
$ 113,456 119,046
============= ============
</TABLE>
There were no sales of investment securities held to maturity during
1998, 1997 or 1996.
Securities with a carrying value of approximately $163.9 million and
$140.3 million at December 31, 1998 and 1997, respectively, were pledged
to secure public deposits, repurchase agreements and borrowings from the
U.S. Treasury.
(Continued)
37
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(3) NET LOANS RECEIVABLE
The composition of the loan portfolio is as follows at December 31
<TABLE>
<CAPTION>
1998 1997
-------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
One-to-four family mortgages $ 62,675 58,800
Commercial 56,466 47,367
Agricultural 17,193 14,772
Construction 3,643 1,378
Home equity 24,893 24,059
-------------- ------------
164,870 146,376
-------------- ------------
Other loans:
Commercial 33,238 30,553
Agricultural 18,399 18,335
Manufactured housing 60,975 61,519
Lease receivables 43,486 23,524
Tax-exempt 2,989 3,861
Consumer 59,573 62,638
-------------- ------------
218,660 200,430
-------------- ------------
Less: Net deferred loan fees/costs and unearned discount (2,577) (96)
Allowance for loan losses (8,384) (8,378)
-------------- ------------
Net loans receivable $ 372,569 338,332
============== ============
<CAPTION>
A summary of the activity in the allowance for loan losses for the years ended December 31 is as
follows:
1998 1997 1996
------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 8,378 8,367 8,463
Provision for loan losses 773 275 635
Charge-offs (1,325) (1,531) (1,297)
Recoveries 558 1,267 566
------------ ------------- -------------
Balance at end of year $ 8,384 8,378 8,367
============ ============= =============
</TABLE>
38 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
The following table sets forth information with regard to non-performing
loans at December 31:
1998 1997 1996
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans in non-accrual status $ 3,996 2,107 3,253
Loans contractually past due 90 days or
more and still accruing interest 1,279 2,386 1,226
------------ ------------- -----------
Total non-performing
loans $ 5,275 4,493 4,479
============ ============= ===========
</TABLE>
There are no material commitments to extend further credit to borrowers
with non-performing loans.
Accumulated interest on non-accrual loans, as shown above, of
approximately $318,000, $190,000 and $125,000, was not recognized in
interest income during the years ended December 31, 1998, 1997 and 1996,
respectively. Approximately $71,000, $21,000 and $28,000 of interest on
non-accrual loans, as shown above, was collected and recognized as
interest income during the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company had impaired loans of $3,298,000 and $1,600,000 at December
31, 1998 and 1997, respectively. Included in this amount are impaired
loans of $886,000 and $1,203,000, respectively, which had an allowance
for loan losses of $345,000 and $170,000, respectively. Average impaired
loans were $2,720,000 for 1998, $1,966,000 for 1997, and $3,440,000 for
1996. Interest income recognized on impaired loans was not significant
for 1998, 1997 and 1996.
Certain directors and executive officers of the Company were customers of
and had other transactions with the Company in the ordinary course of
business. Loans to these parties were made in the ordinary course of
business at the Company's normal credit terms, including interest rate
and collateralization. The aggregate of such loans totaled less than 5%
of total stockholders' equity at December 31, 1998 and 1997. (See also
note 6)
(4) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Land $ 549 549
Buildings and improvements 9,782 9,711
Furniture, fixtures and equipment 8,089 6,830
Construction-in-progress 38 44
------------- -------------
18,458 17,134
Less accumulated depreciation (8,383) (7,129)
------------- -------------
Total premises and equipment, net $ 10,075 10,005
============= =============
Land, buildings and improvements with a carrying value of approximately
$4.4 million are pledged to secured long-term borrowings. (See also note
7)
</TABLE>
39 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(5) DEPOSITS
<TABLE>
<CAPTION>
The components of interest-bearing deposits are as follows at December 31:
1998 1997
-------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
NOW accounts $ 76,896 65,519
Savings accounts 102,446 97,604
Money market accounts 52,618 40,043
Time deposits of $100,000 or more 120,917 114,371
Other time deposits 208,926 171,577
-------------- ----------------
Total $ 561,803 489,114
============== ================
<CAPTION>
The approximate amount of contractual maturities of time deposit accounts
for the years subsequent to December 31, 1998 are as follows:
YEARS ENDED DECEMBER 31, (IN THOUSANDS)
------------------------
<S> <C> <C>
1999 $ 230,345
2000 78,753
2001 6,454
2002 7,051
2003 4,039
Thereafter 3,201
------------
$ 329,843
</TABLE>
(6) SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase generally mature within
one to three days from the transaction date, however, certain agreements
are entered into for longer terms. Control of the securities is
maintained by the Company during the term of the agreement. Information
concerning securities sold under agreements to repurchase for each of the
last three years ended December 31 is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at year-end $ 12,347 17,330 13,854
Average daily balance during the year 13,882 14,345 16,232
Maximum month-end balance during the year 18,068 17,330 18,008
Weighted-average interest rate at year-end 4.37% 5.04% 4.75%
Weighted-average interest rate during the year 4.86% 4.84% 4.74%
</TABLE>
40 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Company has entered into repurchase agreements with entities which
have certain executive officers who are significant stockholders and
directors of the Company. These repurchase agreements are entered into in
the ordinary course of business at market terms. These repurchase
agreements resulted in approximately $10,925,000 and $14,037,000 being
due to these entities at December 31, 1998 and 1997, respectively.
The Company has two lines of credit, expiring in December 1999, which are
available with the FHLB of New York. The first is an overnight line of
credit for approximately $33.8 million with interest based on existing
market conditions. The second is a one-month overnight repricing line of
credit for approximately $33.8 million with interest based on existing
market conditions. There were no amounts outstanding on these lines at
December 31, 1998. There was approximately $10.4 million outstanding
under the overnight line of credit at December 31, 1997. Borrowings on
these lines are secured by FHLB stock, certain securities, and
one-to-four family first lien mortgage loans.
(7) LONG-TERM BORROWINGS
Long-term borrowings consist of a Federal Home Loan Bank borrowing of
approximately $1,900,000 and $2,241,000 at December 31, 1998 and 1997,
respectively, which bears interest at 5.45% with monthly principal and
interest payments due through 2003, and an Industrial Development Agency
(IDA) note of approximately $4,630,000 and $4,690,000 at December 31,
1998 and 1997, respectively, which bears interest at a variable
commercial paper rate, with payments due through 2025. The
weighted-average interest rate on the IDA note was 5.70% during 1998 and
5.72% during 1997. (See also note 12)
The amount of principal payments coming due over the next five years
starting in 1999 and ending in 2003 for long-term borrowings is $425,000,
$445,000, $477,000, $504,000 and $419,000, with $4,260,000 in principal
payments due thereafter.
(8) STOCKHOLDERS' EQUITY
At the Annual Meeting in May 1998, the stockholders approved an amendment
to the Certificate of Incorporation to increase the number of authorized
shares from 10 million to 20 million. In addition, a two-for-one stock
split and a change in the par value of the common stock from $2.50 to
$1.25 per share were approved. All share and per share data has been
restated to reflect the split, which was distributed in June 1998.
41 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(9) INCOME TAXES
<TABLE>
<CAPTION>
The following is a summary of the components of income tax expense for
the years ended December 31:
1998 1997 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense:
Federal $ 864 2,085 1,740
State 157 749 621
------------ ------------ -------------
1,021 2,834 2,361
Deferred tax expense 1,585 401 377
------------ ------------ -------------
$ 2,606 3,235 2,738
============ ============ =============
<CAPTION>
Income tax expense differs from the amount of tax determined by applying
the federal statutory income tax rate of 34% as a result of the following
items:
1998 1997 1996
------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Pre-tax income at statutory rate $ 3,498 3,706 3,364
Tax exempt income (1,268) (1,080) (990)
State income tax, net of federal tax benefit 386 554 410
Other, net (10) 55 (46)
------------ ------------- -------------
$ 2,606 3,235 2,738
============ ============= =============
Effective tax rate 25.3% 29.7% 27.7%
===== ====== =======
<CAPTION>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31 are as
follows:
1998 1997
----------------- -------------
(IN THOUSANDS)
Deferred tax assets:
Allowance for loan losses $ 3,605 3,251
Deferred compensation 1,576 1,113
Other real estate owned and repossessed assets 106 187
Deferred loan fees 55 102
Pension and postretirement benefits 353 326
Accrued liabilities 191 242
Alternative minimum tax credit carryforward 314 -
Other 223 174
----------------- --------------
Gross deferred tax assets 6,423 5,395
----------------- --------------
Deferred tax liabilities:
Leases (5,113) (2,446)
Depreciation on premises and equipment (200) (245)
Other (211) (220)
------------------ --------------
Gross deferred tax liabilities (5,524) (2,911)
------------------ --------------
Net deferred tax asset $ 899 2,484
================= ==============
</TABLE>
42 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
In addition to the deferred tax assets and liabilities described above,
the Company had a deferred tax asset of $596,000 at December 31, 1998 and
a deferred tax liability of $159,000 at December 31, 1997, related to the
net unrealized gain or loss on securities available for sale and the net
unrealized loss on securities transferred from securities available for
sale to investment securities held to maturity in 1994.
As of December 31, 1998, the Company had alternative minimum tax ("AMT")
credit carryforwards of $314,000. AMT credits may be used indefinitely to
reduce regular federal income taxes to the extent regular federal income
taxes exceed the related alternative minimum tax otherwise due.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will be realized. Based upon management's
consideration of the historical level of taxable income in the prior
years, as well as the time period that the items giving rise to the
deferred tax assets will turn around, no deferred tax asset valuation
allowance is considered necessary as of December 31, 1998 and 1997.
(10) STOCK OPTION PLAN
During 1994, the Company established a Stock Option Plan (the Plan) which
permits the issuance of options to selected employees. The Company has
reserved 300,000 shares (adjusted for stock splits) of common stock for
issuance under the Plan. As of December 31, 1998, 233,000 options have
been granted. Stock options are nontransferable other than on death and
have vesting periods ranging from six months to five years. The term of
the options is ten years. A summary of the stock option activity follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NO. OF EXERCISE
SHARES PRICE
----------- ---------
<S> <C> <C>
Outstanding at December 31, 1995 93,000 $ 5.43
Granted 57,000 9.30
Exercised (25,500) 5.43
----------- ---------
Outstanding at December 31, 1996 124,500 7.21
Granted - --
Exercised (10,500) 5.43
----------- ---------
Outstanding at December 31, 1997 114,000 7.37
Granted 62,000 16.42
Exercised (44,069) 6.94
Forfeited (5,000) 16.2
----------- ---------
Outstanding at December 31, 1998 126,931 $ 11.58
=========== =========
</TABLE>
43 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The following table summarizes information about the Company's stock
options at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE REMAINING
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
---------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
$ 5.43 30,000 5.2 years 30,000
8.81 6,675 8.0 6,675
9.38 33,256 7.2 21,756
16.25 54,000 9.8 -
19.75 3,000 9.9 -
-------------- --------------- ------------
126,931 8.0 58,431
============== =============== ============
</TABLE>
As of December 31, 1997 and 1996, respectively, 102,500 and 101,500
options were exercisable.
All options have been granted at exercise prices equal to the fair value
of the common stock at the grant date. Therefore, in accordance with the
provisions of APB Opinion No. 25 related to fixed stock options, no
compensation cost has been recognized in the consolidated financial
statements with respect to options granted or exercised. Under the
alternative fair-value-based method defined in SFAS No. 123, the fair
value of all fixed stock options on the grant date would be recognized as
compensation expense over the vesting period. The estimated weighted
average fair value of options granted in 1998 and 1996 was $4.22 and
$1.71, respectively. The fair value of each option grant is estimated on
the grant date using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1998 and 1996,
respectively: dividend yield of 1.5% and 3.3%; expected volatility of
19.1% and 17.9%; risk free interest rate of 4.5% and 5.5%; expected
option life of 7.0 and 4.9 years; and estimated forfeiture rate of 10%
and 0%. Pro forma disclosures for the Company, assuming application of
the fair value based method defined in SFAS No. 123 for options awarded
in 1995 and later, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------ ------
<S> <C> <C> <C>
Net income (in thousands):
As reported $ 7,681 7,666 7,157
Pro forma 7,656 7,636 7,112
Basic earnings per share:
As reported 1.01 0.99 0.90
Pro forma 1.00 0.99 0.90
Diluted earnings per share:
As reported 1.00 0.99 0.90
Pro forma 1.00 0.98 0.89
</TABLE>
44 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(11) EMPLOYEE BENEFIT PLANS
Employee Pension Benefits
-------------------------
The Company has a noncontributory pension plan which covers substantially
all full-time employees meeting certain eligibility requirements. The
benefit formula is based upon a percentage of final average pay
immediately prior to retirement. Plan benefits are funded through Company
contributions at least equal to the amounts required by law. Plan assets
are invested primarily in pooled investment funds.
The following tables provide a reconciliation of the changes in the
plan's projected benefit obligation and fair value of the plan's assets
for the years ended December 31, and a statement of the plan's funded
status at December 31:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Reconciliation of projected benefit obligation:
Projected benefit obligation at January 1 $ 7,510 6,867
Service cost 504 380
Interest cost 538 477
Benefits paid (540) (447)
Actuarial loss 97 233
--------------- --------------
Projected benefit obligation at December 31 8,109 7,510
--------------- --------------
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 8,906 7,916
Actual return on plan assets 563 1,477
Benefits paid (540) (447)
Actuarial loss due to measurement
date prior to December 31 (103) (40)
--------------- --------------
Fair value of plan assets at December 31 8,826 8,906
--------------- --------------
Funded status:
Funded status at December 31 717 1,396
Unrecognized portion of net asset at
transition (758) (845)
Unrecognized prior service cost 104 114
Unrecognized net gain (825) (1,237)
--------------- --------------
Pension liability recognized in other
liabilities $ (762) (572)
=============== ==============
</TABLE>
45 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The following table provides the components of net periodic pension cost
for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 504 380 460
Interest cost on projected benefit obligation 538 477 470
Expected return on plan assets (775) (695) (630)
Amortization of unrecognized net asset at transition (87) (87) (87)
Amortization of unrecognized prior service cost 10 11 11
Amortization of unrecognized actuarial gain -- (12) --
----------- ---------- ---------
Net periodic pension cost $ 190 74 224
=========== ========== =========
</TABLE>
The unrecognized net asset at transition is being amortized over 21 years
on a straight-line basis. Prior service costs are amortized on a
straight-line basis over the average future service period of active plan
participants. Gains or losses in excess of 10% of the greater of the
projected benefit obligation or the fair value of the plan assets are
amortized over the average remaining service period of active plan
participants.
The assumptions used in the measurement of the Company's projected
benefit obligation and net periodic pension cost are shown in the table
below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted-average assumptions at December 31:
Discount rate 6.50% 7.00% 7.50%
Expected return on plan assets 9.00 9.00 9.00
Rate of increase in future compensation levels 5.00 5.00 5.00
</TABLE>
401(k) Plan, Incentive Plan and Profit Sharing Plan
---------------------------------------------------
The Company maintains a 401(k) plan which covers all employees who have
met minimum eligibility requirements. As defined under the terms of the
plan, participants may elect to defer a portion of their compensation
through contributions to the plan. The Company makes matching
contributions equal to 30% of the first 8% of the participant's
contribution.
46 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
In 1998, the Company maintained an annual incentive plan for all
employees with awards based on certain pre-determined criteria set by the
Board of Directors. In 1998, employees could elect to contribute any
portion of the incentive award to the 401(k) plan. In 1997 and 1996, the
Company maintained a profit sharing plan for all employees and an
incentive plan for certain key officers. Awards under the profit sharing
plan were based on certain pre-determined criteria set by the Board of
Directors. Awards under the incentive plan were based on the Bank
achieving certain pre-determined performance targets set by the Board of
Directors. In 1997 and 1996, the Company contributed 50% of each
employee's profit sharing award to the 401(k) plan. Each employee could
also elect to contribute any portion of the remaining 50% of the profit
sharing award to the 401(k) plan. The expense related to these plans
amounted to $948,000 in 1998, $940,000 in 1997, and $1,028,000 in 1996.
Salary Continuation Agreements
------------------------------
The Company also has salary continuation agreements with certain key
officers and former officers. The Company had accrued $1,929,000 and
$1,422,000 at December 31, 1998 and 1997, respectively, to reflect its
liability under these agreements. The expense related to these agreements
amounted to $292,000 in 1998, $100,000 in 1997, and $83,000 in 1996.
In connection with these agreements, the Company has purchased whole-life
insurance contracts on the related officers with the Company as
beneficiary. The Company paid whole-life premiums of approximately
$178,000 in 1998, $180,000 in 1997, and $188,000 in 1996. At December 31,
1998 and 1997, the cash surrender value of these policies was $1,459,000
and $893,000, respectively.
Employee Postretirement Benefits
--------------------------------
Effective June 1994, the Company ceased offering any postretirement
benefits for those employees who had not yet retired and for those
retirees who had not yet reached age 65. The remaining obligation of the
Company to its retirees is not considered material to the consolidated
financial statements.
(12) COMMITMENTS AND CONTINGENT LIABILITIES
Off-Balance Sheet Financing
---------------------------
The Company is a party to certain financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments consist of commitments to
extend credit, unused lines of credit, letters of credit, and standby
letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amounts recognized on the
consolidated balance sheets. The contract amounts of these instruments
reflect the extent of involvement by the Company.
47 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Company's exposure to credit loss in the event of nonperformance by
the other party to the commitment to extend credit is represented by the
contractual notional amount of those instruments. The Company uses the
same credit policies in making commitments as it does for
on-balance-sheet instruments.
Unless otherwise noted, the Company does not require collateral or other
security to support off-balance-sheet financial instruments with credit
risk.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being fully drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral, if any, required by the Company upon the
extension of credit is based on management's credit evaluation of the
customer. Mortgage and construction loan commitments are secured by a
first or second lien on real estate. Collateral on extensions of credit
for commercial loans varies but may include accounts receivable,
inventory, property, plant and equipment, and income producing commercial
property.
Letters of credit and standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to support
borrowing arrangements. The credit risk involved in issuing letters of
credit and standby letters of credit is essentially the same as that
involved in extending loan facilities to customers.
Contract amounts of financial instruments that represent credit risk as
of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit and
unused lines of credit $ 42,122 26,972
Letters of credit and standby letters
of credit 1,313 1,475
-------------- -------------
$ 43,435 28,447
============== =============
</TABLE>
The Company does not engage in investments in futures contracts, forwards
(excluding forward sale commitments on residential mortgage loans),
swaps, option contracts or other derivative investments with similar
characteristics.
48 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Company generally enters into rate lock agreements at the time that
residential mortgage loan applications are taken. These rate lock
agreements fix the interest rate at which the loan, if ultimately made,
will be originated. Such agreements may exist with borrowers with whom
commitments to extend loans have been made, as well as with individuals
who have not yet received a commitment. The Company generally makes its
determination of whether or not to identify a loan as held for sale at
the time rate lock agreements are entered into. Accordingly, the Company
is exposed to interest rate risk to the extent that a rate lock agreement
is associated with a loan application or a loan commitment which is
intended to be held for sale, as well as with respect to loans held for
sale. In order to reduce the interest rate risk associated with
residential mortgage loans held for sale, as well as outstanding loan
commitments and uncommitted loan applications with rate lock agreements
which are intended to be held for sale, the Company enters into
agreements to sell loans in the secondary market to unrelated investors
on a loan by loan basis.
Lease Commitments
-----------------
The Company leases certain branch facilities and office space under
noncancelable operating leases. A summary of the future minimum
commitments required under noncancelable operating leases as of December
31, 1998 are as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
------------------------ -------------
1999 $ 617
2000 618
2001 607
2002 497
2003 284
Thereafter 4,087
------------
$ 6,710
============
Serviced Loans
--------------
The total amount of loans serviced by the Company for unrelated third
parties was approximately $14.4 million and $13.0 million at December 31,
1998 and 1997, respectively.
Reserve Requirement
-------------------
The Bank is required to maintain certain reserves of vault cash and/or
deposits with the Federal Reserve Bank of New York. The amount of this
reserve requirement, included in cash and cash equivalents, was
approximately $8,146,000 at December 31, 1998.
Dividend Restrictions
---------------------
The approval of banking regulatory authorities is required before
dividends paid by the Bank to the Parent Company during the year can
exceed certain prescribed limits. Undivided profits at the Bank of
approximately $14,267,000 are free of limitations at December 31, 1998.
49 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Legal Proceedings
-----------------
The Company is, from time to time, a defendant in legal proceedings
relating to the conduct of its business. In the best judgment of
management, the consolidated financial position of the Company will not
be affected materially by the outcome of any pending legal proceedings.
The Company has an Industrial Development Agency (IDA) note of
approximately $4,630,000 and $4,690,000 at December 31, 1998 and 1997,
respectively, with payments due through 2025. This note relates to the
construction and financing of the Company's operations center in
Canajoharie, New York. In conjunction with this financing, the Company
has a 30 year payment-in-lieu-of-taxes (PILOT) agreement with the IDA
under which the Company pays reduced property taxes on the property. In
1999, the New York State Supreme Court in Montgomery County voided this
PILOT agreement, but no order was given related to the repayment of past
property taxes or the renegotiation of the PILOT. Although the Company
has appealed this ruling, if the appeal is unsuccessful, the Company may
have to pay property taxes to the applicable taxing authorities.
Management anticipates, based upon discussion with legal counsel, that
the amount of such payment, if any, will not be material to the Company's
consolidated financial statements.
(13) REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on an institution's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, banking institutions
must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. Capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by the regulations to ensure capital
adequacy require banking institutions to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital (as defined) to average assets (as defined). Management
believes that, as of December 31, 1998 and 1997, the Company and the Bank
met all capital adequacy requirements to which they were subject.
50 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
As of December 31, 1998, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, a banking institution must maintain
minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios
as set forth in the table below. There are no conditions or events since
that notification that management believes have changed the Bank's
category. Actual capital amounts and ratios as of December 31 are
presented in the table below.
<TABLE>
<CAPTION>
1998 1997 MINIMUM MINIMUM RATIOS
------------------- ------------------ RATIOS FOR TO BE WELL
ACTUAL ACTUAL CAPITAL CAPITALIZED UNDER
------------------- ------------------ ADEQUACY PROMPT CORRECTIVE
AMOUNT RATIO AMOUNT RATIO PURPOSES ACTION PROVISIONS
-------- ----- -------- ----- -------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital (to Total
Adjusted Average Assets):
Central National Bank,
Canajoharie $ 56,035 7.8% $ 52,212 8.2% 4.0% 5.0%
CNB Financial Corp.
(consolidated) 56,932 7.9 54,175 8.4 4.0
Tier 1 Capital (to Risk
Weighted Assets):
Central National Bank,
Canajoharie 56,035 11.2 52,212 11.7 4.0 6.0
CNB Financial Corp.
(consolidated) 56,932 11.3 54,175 12.0 4.0
Total Capital (to Risk
Weighted Assets):
Central National Bank,
Canajoharie 62,303 12.5 57,809 13.0 8.0 10.0
CNB Financial Corp.
(consolidated) 63,315 12.5 59,850 13.3 8.0
</TABLE>
51 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(14) EARNINGS PER SHARE
The following table provides the calculation of basic and diluted EPS for
the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -----------------------------------------
NET WEIGHTED PER SHARE NET WEIGHTED PER SHARE
INCOME AVG. SHARES AMOUNT INCOME AVG. SHARES AMOUNT
---------- ----------- --------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available
to common stockholders $ 7,681 7,625 $ 1.01 $ 7,666 7,712 $ 0.99
=========== ======== =========== =========
Effect of dilutive securities:
Stock options 48 44
---------- --------
Diluted EPS $ 7,681 7,673 $ 1.00 $ 7,666 7,756 $ 0.99
========== ========== ======== =========== ======== =========
<CAPTION>
1996
-------------------------------------------
NET WEIGHTED PER SHARE
INCOME AVG. SHARES AMOUNT
---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic EPS:
Net income available
to common stockholders $ 7,157 7,930 $ 0.90
========== ========
Effect of dilutive securities:
Stock options 34
----------
Diluted EPS $ 7,157 7,964 $ 0.90
========== ========== ========
</TABLE>
Options to purchase 49,500 shares of common stock at $9.38 per share were
outstanding during the second half of 1996, but were not included in the
computation of diluted EPS for the year ended December 31, 1996 because
the options' exercise price was greater than the average market price of
the common stock during the second half of 1996.
52 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and Cash Equivalents and Accrued Interest Receivable and Payable
---------------------------------------------------------------------
For these short-term instruments, the carrying value approximates fair
value.
Securities
----------
Fair values for securities (including trading securities, securities
available for sale and investment securities held to maturity) are based
on quoted market prices or dealer quotes, when available. When quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans
-----
The fair value of loans is determined by utilizing a discounted cash flow
model which considers scheduled maturities, repricing characteristics,
prepayment assumptions and interest cash flows.
Deposits
--------
The fair value of fixed maturity deposits is determined by utilizing a
discounted cash flow model which considers scheduled maturities,
repricing characteristics and interest cash flows. NOW accounts,
noninterest-bearing accounts, savings accounts and money market accounts
are payable on demand, thus the carrying value approximates fair value.
The fair value estimates for deposits do not include the benefit that
results from the low-cost funding provided by the deposit liabilities as
compared to the cost of borrowing funds in the market.
Borrowings
----------
The fair value of borrowings has been estimated using discounted cash
flow analyses that apply interest rates currently being offered for
borrowings with similar terms.
Commitments
-----------
Fees charged for commitments to extend credit are not significant and are
offset by associated credit risk with respect to certain amounts expected
to be funded. Accordingly, the fair value of these financial instruments
is immaterial.
53 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- -------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 16,128 16,128 19,498 19,498
Trading securities -- -- 1,119 1,119
Securities available for sale 186,651 186,651 144,077 144,077
Investment securities held to
maturity 113,456 119,046 110,324 115,719
Net loans receivable(1) 372,569 376,268 338,332 337,292
Accrued interest receivable 5,843 5,843 5,557 5,557
Financial liabilities:
Noninterest-bearing deposits 66,339 66,339 49,358 49,358
Interest-bearing deposits 561,803 563,943 489,114 491,013
Short-term borrowings 12,651 12,651 28,233 28,233
Long-term borrowings 6,530 6,199 6,931 6,589
Accrued interest payable 2,496 2,496 2,443 2,443
</TABLE>
(1) Lease receivables, although excluded from the scope of SFAS No. 107,
are included in the estimated fair value at their carrying amounts.
Note: Trading securities represent the only trading financial
instruments; all other financial instruments are considered to be
held for purposes other than trading.
The reported fair values of financial instruments are based on a variety
of factors. Accordingly, the fair values may not represent actual values
of the financial instruments that could have been realized as of year end
or that will be realized in the future. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in the estimate of fair value under SFAS No. 107.
54 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(16) PARENT COMPANY FINANCIAL STATEMENTS
The following presents the condensed balance sheets of the Parent Company
at December 31 and its condensed statements of income and cash flows for
the years ended December 31:
<TABLE>
<CAPTION>
Condensed Balance Sheets
1998 1997
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 135 765
Securities available for sale 603 1,153
Premises and equipment, net 4,795 4,899
Investment in subsidiaries 54,846 52,719
Other assets 58 18
--------------- -------------
$ 60,437 59,554
=============== =============
Liabilities and stockholders' equity:
Long-term borrowings 4,630 4,690
Other liabilities 241 258
Stockholders' equity 55,566 54,606
--------------- -------------
$ 60,437 59,554
=============== =============
<CAPTION>
Condensed Statements of Income
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from bank subsidiary $ 4,031 2,289 2,089
Interest income 74 120 253
Net gain (loss) on securities
transactions 20 182 (3)
Other income 685 597 364
------------ ----------- -----------
Total income 4,810 3,188 2,703
------------ ----------- -----------
Expenses:
Interest 266 269 113
Other 697 568 462
------------ ----------- -----------
Total expenses 963 837 575
------------ ----------- -----------
Income before equity in
undistributed earnings of
subsidiaries 3,847 2,351 2,128
Equity in undistributed earnings of
subsidiaries 3,834 5,315 5,029
------------ ----------- -----------
Net income $ 7,681 7,666 7,157
============ =========== ===========
</TABLE>
55 (Continued)
<PAGE>
CNB FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
1998 1997 1996
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 7,681 7,666 7,157
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in undistributed
earnings of subsidiaries (3,834) (5,315) (5,029)
Depreciation and amortization 266 251 131
Net (gain) loss on securities transactions (20) (182) 3
Net change in other assets
and other liabilities (69) (8) 73
---------- --------- ----------
Net cash provided by
operating activities 4,024 2,412 2,335
---------- --------- ----------
Cash flows from investing activities:
Purchases of securities
available for sale -- (625) (3,897)
Proceeds from sales of
securities available for sale 520 1,299 4,262
Maturities of securities
available for sale -- -- 2,538
Purchases of premises and equipment (162) (197) (3,195)
Investment in non-bank subsidiary -- (125) (100)
---------- --------- ----------
Net cash provided by (used
in) investing activities 358 352 (392)
---------- --------- ----------
Cash flows from financing activities: -- -- 1,000
Payments on long-term borrowings (60) (60) --
Dividends paid (2,516) (2,272) (2,080)
Proceeds from issuance of shares
for options and Dividend
Reinvestment Plan 1,019 586 593
Purchase of treasury stock (3,455) (1,432) (3,099)
---------- --------- ----------
Net cash used in financing
activities (5,012) (3,178) (3,586)
---------- --------- ----------
Net decrease in cash and cash equivalents (630) (414) (1,643)
Cash and cash equivalents at beginning of year 765 1,179 2,822
---------- --------- ----------
Cash and cash equivalents at end of year $ 135 765 1,179
========== ========= ==========
</TABLE>
These condensed financial statements should be read in conjunction with
the Company's consolidated financial statements and notes thereto.
56
<PAGE>
<TABLE>
<CAPTION>
CORPORATE DIRECTORY
<S> <C> <C>
CNB FINANCIAL CORP. CENTRAL NATIONAL BANK
- -----------------------------------------------------------------------------------------------------------
DIRECTORS SENIOR OFFICERS ASSISTANT VICE PRESIDENTS
- --------- --------------- -------------------------
J. CARL BARBIC DONALD L. BRASS SUSAN BARKER
RETIRED DAIRY FARMER, PRESIDENT AND BRANCH MANAGER
FORMER CLERK OF SCHOLARIC CHIEF EXECUTIVE OFFICER
COUNTY BOARD OF SUPERVISORS,
DIRECTOR SINCE 1989 PETER J. CORSO JOHN R. BRODHACKER.
EXECUTIVE VICE PRESIDENT COMPLIANCE OFFICER
AND CHIEF FINANCIAL OFFICER
DONALD L. BRASS
PRESIDENT AND CEO. MICHAEL D. HEWITT MICHAEL F. DIPIERRO,
CENTRAL NATIONAL BANK SENIOR VICE, PRESIDENT, WORKOUT AND
DIRECTOR SINCE 1990 SENIOR COMMUNITY REPOSSESSION OFFICER
AND RETAIL BANKING EXECUTIVE
DAVID J. NOLAN VINCENT J. FAZIO
RETIRED CHAIRMAN OF THE VICE PRESIDENTS ACCOUNTING MANAGER
BOARD, CEO AND PRESIDENT, ---------------
CENTRAL NATIONAL BANK HOLLY C. CRAVER
DIRECTOR SINCE 1981 ADMINISTRATOR OF ROBERT GRUGLE
CORPORATE RELATIONS BRANCH MANAGER
DIRECTOR SINCE 1981 PATRICK T. DAY
CREDIT ADMINISTRATION JOLENE HASKELL
VANNESS D. ROBINSON MANAGER BRANCH MANAGER
CHAIRMAN OF THE BOARD AND
EXECUTIVE VICE PRESIDENT, THOMAS GIGLIO BONNIE KELLER
NEW YORK CENTRAL MUTUAL RISK MANAGER ASSISTANT REGIONAL MANAGER
FIRE INSURANCE CO.
DIRECTOR SINCE 1997 HENRI D. LANGEVIN
EASTERN REGIONAL MANAGER WANDA KING
ALLEN H. SAMUELS ASSISTANT REGIONAL MANAGER
RETIRED ATTORNEY HENRY C. LOCKWOOD
DIRECTOR SINCE 1961 TRUST OFFICER RICHARD J. LACY
DIRECTOR OF ADMINISTRATION
JOSEPH A. SANTANGELO LISA P. MANNELLA
ADMINISTRATOR, MARKETING ADMINISTRATOR FRANK J. NANNA
ARKELL HALL FOUNDATION AUDIT MANGER
DIRECTOR SINCE 1991 PETER D. MARQUIS
COMMERCIAL LOAN STEVE T. NOBLE
JOHN P. WOODS, JR. PRODUCT MANAGER SMALL BUSINESS,
PRESIDENT, JOHN P. WOODS, INC. PRODUCT MANAGER
DIRECTOR SINCE 1991 GORDON W. MARSELIS
INDIRECT PRODUCT MANAGER DALE PINCKNEY
BRANCH MANAGER
GERARD C MURRAY
TRUST OFFICER
STEPHEN E. SOUKY.
FINANCIAL REPORTING MANAGER
ALBERT A. PETITTI
OPERATIONS OFFICER LORETTO THUM
BRANCH MANAGER
WILLIAM J. QUERBES
DIRECTOR OF HUMAN RESOURCES ANDREW T. TRAINOR
DIRECTOR OF SPECIAL ASSETS
DAVID SLENTZ
WESTERN REGIONAL MANAGER BONNIE A. TRIPP
CONSUMER FINANCE DIVISION
O. NEIL THOMAS
REGIONAL MANAGER/AGRICULTURAL THOMAS J. WEINGART
PRODUCT MANAGER ASSISTANT AGRICULTURAL
PRODUCT MANAGER
ROBERTA WINSMAN
DIRECTOR OF INFORMATION
AND TECHNOLOGY
CENTRAL ASSET MANAGEMENT
---------------------------------------------------------------
PETER J. CORSO
DONALD L. BRASS TREASURER
PRESIDENT
GERARD C. MURRAY
MANAGING DIRECTOR
</TABLE>
57
<PAGE>
- --------------------------------------------------------------------------------
[PHOTO]
BOARD OF DIRECTORS
Front from left:
John P. Woods, Jr.,
Donald L. Brass and
VanNess D. Robinson;
back:
David J. Nolan,
Allen H. Samuels,
Joseph A. Santangelo and
J. Carl Barbic.
----------------------------------------------
SHAREHOLDER INFORMATION
TRANSFER AGENT
Please direct questions about lost certificates, change of address, and
consolidation of accounts to CNB's transfer agent and registrar:
Central National Bank, Canajoharie
Attn. Holly Craver, Administrator, Corporate Relations
24 Church Street
Canajoharie, New York 13317
INDEPENDENT ACCOUNTANTS
KPMG LLP
515 Broadway
Albany, New York 12207
Tel: 518-427-4600
FORM 10-K AND OTHER INFORMATION
Furnished to shareholders upon request.
Please call or write:
CNB Financial Corporation
Attn. Holly Craver, Administrator, Corporate Relations
24 Church Street
Canajoharie, NY 13317
Tel: 518-673-3243
Fax: 518-673-3433
COMMON STOCK DATA
CNB Financial Corp. trades on the
NASDAQ National Market System
(Symbol CNBF).
----------------------------------------------
CNB
FINANCIAL
CORP.
OFFICERS
[PHOTO]
DONALD L. BRASS
President
[PHOTO]
PETER J. CORSO
Executive Vice President and
Treasurer
[PHOTO]
MICHAEL D. HEWITT
Senior Vice President and
Assistant Secretary
[PHOTO]
HOLLY C. CRAVER
Vice President and
Secretary
VISIT US ON
THE INTERNET AT:
http://www.canajocnb.com
- --------------------------------------------------------------------------------
58
<PAGE>
CENTRAL NATIONAL BANK
OFFICE LOCATIONS
AMSTERDAM GLOVERSVILLE
Amsterdam Super Kmart 198 2nd Avenue Extension
4930 State Highway 30 Gloversville, NY 12078
Amsterdam, NY 12010 (518) 725-9311
(518) 843-5253
JOHNSTOWN
106 Hannaford Plaza 210 N. Comrie Avenue
Amsterdam, NY 12010 Johnstown, NY 12095
(518) 842-2123 (518) 736-2200
CANAJOHARIE MIDDLEBURGH
24 Church Street 165 Main Street
Canajoharie, NY 13317 Middleburgh, NY 12122
(518) 673-3243 (518) 827-4111
CHERRY VALLEY MIDDLEVILLE
16 Main Street Newport Street
Cherry Valley, NY 13320 Middleville, NY 13406
(607) 264-8411 (315) 891-7502
COBLESKILL PALATINE BRIDGE
112-114 E. Main Street Dutchtown Plaza
Cobleskill, NY 12043 Palatine Bridge, NY 13317
(518) 234-4331 (518) 673-3201
COOPERSTOWN RICHFIELD SPRINGS
One Commons Drive 34-38 Main Street
Route 28 S Richfield Springs, NY 13439
Cooperstown, NY 13326 (315) 858-2800
(607) 547-8301
ROTTERDAM
DUANESBURG Rotterdam Wal-Mart
Route 20 Altamont Avenue & Crane Street
Duanesburg, NY 12056 Schenectady, NY 12303
(518) 895-2364 (518) 356-7140
EDMESTON ST. JOHNSVILLE
1 West Street 16 W. Main Street
Edmeston, NY 13335 St. Johnsville, NY 13452
(607) 965-8636 (518) 568-7612
FONDA SCHOHARIE
41 W. Main Street 339-341 Main Street
Fonda, NY 12068 Schoharie, NY 12157
(518) 853-4621 (518) 295-7788
FORT PLAIN SHARON SPRINGS
41 Canal Street Springs Corners
Fort Plain, NY 13339 Route 10 & 20
(518) 993-2393 Sharon Springs, NY 13459
(518) 284-2231
CNB FINANCIAL CORP.
24 CHURCH STREET
CANAJOHARIE, NEW YORK 13317
59
CNB FINANCIAL CORP. SUBSIDIARIES
1. Central National Bank, Canajoharle
Incorporated in New York
2. Central Asset Management Inc.
Incorporated in New York
Exhibit 23A
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
CNB Financial Corp.:
We consent to incorporation by reference in the following registration
statements:
File No. 33-63176 on Form S-3, and
File No. 333-66721 on Form S-8
of CNB Financial Corp. of our report dated February 19, 1999, relating to the
consolidated balance sheets of CNB Financial Corp. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the years then ended, which
report appears in the December 31, 1998 Annual Report on Form 10-K of CNB
Financial Corp.
/s/ KPMG LLP
Albany, New York
March 25, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement (No. 33-63176) Form S-3 of our report dated January 30, 1997, which
appears on page 23 of the 1996 Annual Report to Shareholders of CNB Financial
Corp., which is incorporated by reference in CNB Financial Corp.'s Annual Report
on Form 10-K for the year ended December 31, 1996.
PricewaterhouseCoopers LLP
Syracuse, New York
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 16,128 19,498
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 1,119
<INVESTMENTS-HELD-FOR-SALE> 186,651 144,077
<INVESTMENTS-CARRYING> 113,456 110,324
<INVESTMENTS-MARKET> 119,046 115,719
<LOANS> 380,953 346,710
<ALLOWANCE> 8,384 8,378
<TOTAL-ASSETS> 711,088 634,389
<DEPOSITS> 628,142 538,472
<SHORT-TERM> 12,651 28,233
<LIABILITIES-OTHER> 8,199 6,147
<LONG-TERM> 6,530 6,931
0 0
0 0
<COMMON> 9,746 9,690
<OTHER-SE> 45,820 44,916
<TOTAL-LIABILITIES-AND-EQUITY> 711,088 634,389
<INTEREST-LOAN> 33,008 30,813
<INTEREST-INVEST> 19,269 17,403
<INTEREST-OTHER> 265 419
<INTEREST-TOTAL> 52,542 48,635
<INTEREST-DEPOSIT> 24,910 21,511
<INTEREST-EXPENSE> 1,248 1,211
<INTEREST-INCOME-NET> 26,384 25,913
<LOAN-LOSSES> 773 275
<SECURITIES-GAINS> 616 528
<EXPENSE-OTHER> 19,854 18,511
<INCOME-PRETAX> 10,287 10,901
<INCOME-PRE-EXTRAORDINARY> 7,681 7,666
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,681 7,666
<EPS-PRIMARY> 1.01 0.99<F1>
<EPS-DILUTED> 1.00 0.99<F2>
<YIELD-ACTUAL> 4.32 4.71<F3>
<LOANS-NON> 3,996 2,107
<LOANS-PAST> 1,279 2,386
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 8,378 8,367
<CHARGE-OFFS> 1,325 1,531
<RECOVERIES> 558 1,267
<ALLOWANCE-CLOSE> 8,384 8,378
<ALLOWANCE-DOMESTIC> 6,032 5,370
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 2,352 3,008
<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>
