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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly period ending March 31, 1999
Commission File Number 33-45522
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CNB FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
New York 22-3203747
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 Church Street, Canajoharie N.Y. 13317
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(Address of principal executive offices - Zip code)
Registrant's telephone number, include area code (518) 673-3243
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Indicated by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the bank
was required to file such reports), and (2) has been subjected to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding
Class on April 30, 1999
----- -----------------
Common Stock, $1.25 par value 7,561,548
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<PAGE>
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page
Item 1. Consolidated Interim Financial Statements (unaudited)
1. Consolidated Balance Sheets 3.
2. Consolidated Statements of Income 4.
3. Consolidated Statements of Cash Flows 5.
4. Notes to Consolidated Interim Financial Statements 6.-7.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8. - 18.
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19.
Item 2. Changes in Securities and Use of Proceeds 19.
Item 3. Defaults Upon Senior Securities 19.
Item 4. Submission of Matters to a Vote of Security Holders 19.
Item 5. Other Information 19.
Item 6. Exhibits and Reports on Form 8-K 19.
SIGNATURES 20.
</TABLE>
-2-
<PAGE>
Part 1. Financial Information
Item 1. Consolidated Financial Statements
CNB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
Assets
<S> <C> <C>
Cash and due from banks $ 18,273 $ 16,128
Securities available for sale, at fair value 187,085 186,651
Investment securities held to maturity, at amortized cost 114,062 113,456
Net loans receivable 377,317 372,569
Accrued interest receivable 5,814 5,843
Premises and equipment, net 9,801 10,075
Other real estate owned and repossessed assets 1,307 1,099
Other assets 3,903 5,267
--------- ---------
Total assets $ 717,562 $ 711,088
========= =========
Liabilities and Stockholders' Equity
Noninterest-bearing deposits 59,008 66,339
Interest-bearing deposits 567,614 561,803
--------- ---------
Total deposits 626,622 628,142
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Short-term borrowings:
Securities sold under agreements to repurchase 6,319 12,347
Borrowings from the Federal Home Loan Bank of New York 11,500 -
Borrowings from the U.S. Treasury 505 304
--------- ---------
Total short-term borrowings 18,324 12,651
--------- ---------
Long-term borrowings 6,441 6,530
Other liabilities 8,740 8,199
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Total liabilities 660,127 655,522
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Stockholders' equity:
Common stock, $1.25 par value, 20,000,000 shares authorized
(7,803,926 issued at March 31, 1999 and 7,796,396 shares
issued at December 31, 1998) 9,763 9,746
Additional paid-in capital 6,249 6,144
Retained earnings 45,973 44,729
Accumulated other comprehensive (loss) (566) (1,376)
Treasury stock, at cost (242,378 shares at March 31, 1999 and 224,578 shares
at December 31, 1998) (3,984) (3,677)
--------- ---------
Total stockholders' equity 57,435 55,566
--------- ---------
Total liabilities and stockholders' equity $ 717,562 $ 711,088
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
3
<PAGE>
CNB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Interest and dividend income:
Loans, including fees $ 8,389 $ 7,871
Securities:
Taxable 3,672 3,802
Nontaxable 933 842
Federal funds sold and other 33 30
------- -------
13,027 12,545
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Interest expense:
Deposits 6,065 5,746
Short-term borrowings 165 247
Long-term borrowings 85 98
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6,315 6,091
------- -------
Net interest income 6,712 6,454
Provision for loan losses 270 150
------- -------
Net interest income after provision for loan losses 6,442 6,304
------- -------
Other income:
Service charges on deposit accounts 499 453
Net gain on securities transactions 71 94
Other 520 452
------- -------
1,090 999
------- -------
Other expenses:
Salaries and employee benefits 2,404 2,180
Occupancy and equipment 572 525
Data processing 571 518
Professional fees 245 280
FDIC deposit insurance and related costs 18 17
Advertising and marketing 61 74
Postage and courier 128 129
Office supplies and stationery 172 135
Other real estate owned and repossessed assets 151 275
Other 697 777
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5,019 4,910
------- -------
Income before income tax expense 2,513 2,393
Income tax expense 662 623
------- -------
Net income $ 1,851 $ 1,770
======= =======
Earnings per share:
Basic $ 0.24 $ 0.23
======= =======
Diluted $ 0.24 $ 0.23
======= =======
</TABLE>
Per share data has been adjusted for the June 1998 two-for-one stock split.
See accompanying notes to unaudited consolidated interim financial statements.
4
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CNB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net Income $ 1,851 $ 1,770
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 351 329
Provision for loan losses 270 150
Net gain on securities transactions (71) (94)
Net loss on sales and writedowns of other real estate
owned and repossessed assets 39 94
Purchases of trading securities (15,153) (816)
Proceeds from sales of trading securities 15,164 1,963
Increase (decrease) in accrued interest receivable 29 (723)
Net change in other assets and other liabilities 1,572 1,660
-------- -------
Net cash provided by operating activities 4,052 4,333
-------- -------
Cash flows from investing activities:
Purchases of securities:
Available for sale (37,497) (50,324)
Held to maturity (5,110) (9,104)
Proceeds from sales of securities:
Available for sale 26,619 14,315
Proceeds from maturities and calls of securities:
Available for sale 11,647 12,256
Held to maturity 4,504 7,497
Net loans made to customers (5,500) (10,944)
Proceeds from sales of other real estate owned and
repossessed assets 235 217
Capital expenditures (77) (906)
-------- -------
Net cash (used) in investing activities (5,179) (36,993)
-------- -------
Cash flows from financing activities:
Net (decrease) increase in deposits (1,520) 49,090
Net (decrease) increase in short term borrowings 5,673 (11,549)
Payments on long-term borrowings (89) (84)
Dividends paid (607) (534)
Proceeds from issuance of shares for options and Dividend Reinvestment Plan 239 149
Purchase of treasury stock (424) (553)
-------- -------
Net cash provided by financing activities 3,272 36,519
-------- -------
Net (decrease) increase in cash and cash equivalents 2,145 3,859
Cash and cash equivalents at beginning of period 16,128 19,498
-------- -------
Cash and cash equivalents at end of period $ 18,273 $23,357
======== =======
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
5
<PAGE>
CNB Financial Corp.
Notes to Unaudited Consolidated Interim Financial Statements
1. The accompanying unaudited consolidated interim financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered necessary for a fair
presentation have been included. The accompanying unaudited consolidated
interim financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K as of and for the year ended December
31, 1998. Operating results for the three-month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
full year.
2. 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.
The following table provides the calculation of basic and diluted EPS for
the three months ended March 31:
<TABLE>
<CAPTION>
Three Months Ended 3/31/99 Three Months Ended 3/31/98
--------------------------- --------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
(in thousands, except per share data) Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
common stockholders $1,851 7,567 $0.24 $1,770 7,695 $0.23
Effect of dilutive securities:
Stock options 40 44
--------------------------------------------------------------
Diluted EPS $1,851 7,607 $0.24 $1,770 7,739 $0.23
==============================================================
</TABLE>
6
<PAGE>
3. Comprehensive Income - The Company has adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income represents the sum of net income and items of "other
comprehensive income," which are reported directly in stockholders' equity,
net of tax, such as the change in the net unrealized gain or loss on
securities available for sale and the decrease in the net unrealized loss
on securities available for sale transferred to investment securities held
to maturity. 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.
Total comprehensive income for the three months ended March 31, 1999 and
1998 was $2,661 and $1,866, respectively.
4. Recent Accounting Pronouncements:
FASB Statement 133
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure
those instruments at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. 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 the Company's
consolidated financial statements.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
CNB Financial Corp. (the Company) is a one-bank holding company, registered
under the Bank Holding Company Act of 1956, as amended. It was organized under
the laws of the State of New York and became a bank holding company on January
5, 1993 through the consummation of a reorganization plan with Central National
Bank, Canajoharie, (Bank) which became the wholly owned subsidiary of the
Company. The Company maintains its headquarters in Canajoharie, New York. The
principal business of the Company is to provide, through the Bank, comprehensive
banking services. Its network of twenty branches and two financial service
centers are located in the Central New York counties of Montgomery, Fulton,
Herkimer, Otsego, Schoharie, Saratoga and Schenectady. In 1996 Central Asset
Management, Inc. (CAM) was formed as a second subsidiary of the Company. The
main business activity of CAM is to offer investment
7
<PAGE>
management services, for a fee, to a focused customer base of high net worth
individuals and businesses.
The Company's principal business is attracting deposits from customers within
its market area and investing those funds primarily in mortgage loans, consumer
loans, commercial and agricultural loans, as well as government and corporate
debt securities. The financial condition and operating results of the Company
are dependent on its net interest income which is the difference between the
interest and dividend income earned on its assets, primarily loans and
investments, and the interest expense paid on its liabilities, primarily
deposits and borrowings. Net income is also affected by other operating income,
such as fees on deposit related services, loan servicing income, and fiduciary
activities; other operating expenses, such as salaries and benefits, occupancy
expenses, data processing expense, provision for loan losses, and federal and
state income taxes.
The Company's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government polices, changes in accounting standards and actions of
regulatory agencies. Future changes in applicable laws, regulations or
government policies may have a material impact on the Company. The demand for
and supply of real estate, competition among lenders, the level of interest
rates and the availability of funds substantially influence lending activities.
The ability to gather deposits and the cost of funds are influenced by
prevailing market interest rates, fees and terms on deposit products, as well as
the availability of alternative investments, including mutual funds and stocks.
Forward Looking Statements
When used in this filing or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project",
"believe", or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. In addition, certain disclosures and information customarily provided
by financial institutions, such as an analysis of the adequacy of the allowance
for loan losses or an analysis of the interest rate sensitivity of the Company's
assets and liabilities, are inherently based upon predictions of future events
and circumstances. Furthermore, from time to time, the Company may publish other
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, and similar matters.
A variety of factors could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements. Some of the risks and uncertainties
that may affect the operations, performance, development and results of the
Company's business, the interest rate sensitivity of its assets and liabilities,
and the adequacy of its allowance for loan losses, include but are not limited
to the following:
8
<PAGE>
a. Deterioration in local, regional, national or global economic conditions
which could result, among other things, in an increase in loan
delinquencies, a decrease in property values, or a change in the housing
turnover rate;
b. Changes in market interest rates or changes in the speed at which market
interest rates change;
c. Changes in laws and regulations affecting the financial service industry;
d. Changes in competition and continued pricing pressures on loan and deposit
products;
e. Changes in consumer preferences and customer borrowing, repayment,
investment and deposit practices;
f. The effect of certain customers and vendors of critical systems or services
failing to adequately address issues relating to becoming Year 2000
compliant;
g. The introduction, withdrawal, success and timing of business initiatives
and strategies, several of which are in early stages and therefore
susceptible to greater uncertainty than more mature businesses;
h. Risks related to the pending acquisition of 5 branches from Astoria Federal
Savings and Loan Association, including the ability to retain deposits,
generate revenues from the new locations, manage costs, implement
integration plans; and
i. The ability of the Bank to implement successfully its strategy to increase
the level of loans on its balance sheet at acceptable levels of risk.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including those described above, could affect the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected. The Company does not undertake, and specifically disclaims any
obligations, to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Pending Acquisition of Five Astoria Federal Branches and New Branches
On April 9, 1999, the Company announced the signing of a definitive agreement to
purchase 5 branches located in the Upstate New York counties of Otsego (3
branches located in Oneonta, NY and 1 branch located in Cooperstown, NY) and
Chenango (1 branch located in Norwich, NY) from Astoria Federal Savings and Loan
Association ("Astoria"), a subsidiary of Astoria Financial Corporation. Under
the agreement, Central National Bank, Canajoharie will acquire all of the
deposits related to the branches. At March 31, 1999, the total amount of
deposits amounted to approximately $164.0 million. The transaction, which is
subject to regulatory approval, is currently expected to close in the third
quarter of 1999.
9
<PAGE>
In addition to acquiring the Astoria branches, the Bank, in executing its
expansion initiative, opened a loan production office in Saratoga Springs in
February 1999 and has applied for or received approval to open branches in
Clifton Park, Halfmoon and Utica. The Clifton Park and Utica branches are
expected to open by the end of 1999.
Results of Operations
(All dollar amounts in thousands other than per share data, except
when otherwise noted)
The Company recognized net income of $1,851 or $0.24 diluted earnings per share
for the quarter ended March 31, 1999, compared to $1,770 or $0.23 diluted
earnings per share for the quarter ended March 31, 1998. The Company's return on
average assets was 1.03% for the quarter ended March 31, 1999, down 7 basis
points from the 1.10% for the quarter ended March 31, 1998. The Company's return
on average equity was 13.04% for the quarter ended March 31, 1999, up 8 basis
points from 12.96% for the quarter ended March 31, 1998.
Net interest income for the first quarter of 1999 increased $258 (4%) over the
first quarter of 1998, from $6,454 to $6,712. The increase in net interest
income was due primarily to an increase the average balance of earning assets in
the first quarter 1999 when compared to the first quarter of 1998. (See
additional discussion under the caption "Net Interest Income"). The deposits to
be acquired in the Astoria transaction carry a lower average rate than the
Company's current deposit liabilities. The Company currently intends to invest
these additional funds in securities until it finds appropriate lending
opportunities. The Company anticipates that the Astoria transaction will result
in increased net interest income and an improvement in net interest margin over
time.
The provision for loan losses for the first quarter of 1999 was $270, which is
an $120 (80%) increase over the provision for loan losses for the first quarter
of 1998. The increase in the provision in the first quarter of 1999 when
compared to the first quarter of 1998 resulted primarily from increased
delinquencies and charge-offs in the Company's manufactured housing and credit
card loan portfolios. The Company is exploring ways to reduce the losses from
these portfolios and has reduced the level of originations of such loans. In
light of the Company's growth plans and other factors, the Company expects
continued provisions for loan losses during 1999 at levels higher than those
experienced during 1998.
Total other income was $1,090 for the first quarter of 1999, up $91 (9%) from
the $999 recognized in the first quarter of 1998. The increase in other income
was due primarily to increases in service charges on deposit accounts ($46),
higher revenues for trust services ($20), and an increase in loan servicing
income ($20). The increase in service charges on deposit accounts resulted
mainly from ATM convenience fees and increases in transaction volume on demand
deposit accounts.
Total other expenses were $5,019 for the first quarter of 1999, up $109 (2%)
from the $4,910 recognized in the first quarter of 1998, due to planned
investments in facilities, technology and personnel, consistent with the
Company's strategy to diversify products and expand capacity. More specifically,
the increase in other expenses was due primarily to increases in salaries and
employee benefits, occupancy and equipment, and data
10
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processing offset by decreases in costs associated with other real estate owned
and repossessed assets, and professional fees. Salaries and employee benefits
increased $224, from $2,180 for the first quarter of 1998 to $2,404 for the
first quarter of 1999, due primarily to an increase in the number of full time
equivalent employees and an increase in salaries due to merit increases. Costs
associated with other real estate owned and repossessed assets decreased $124,
from $275 in the first quarter of 1998 to $151 for the first quarter of 1999,
due primarily to a $100 write-down of an OREO property in the first quarter of
1998. The Astoria acquisition and other new branches will result in an increase
in other expense resulting from operating costs and amortization of the deposit
premium to be paid in the Astoria acquisition.
Income tax expense was $662 for the first quarter of 1999 up $39 from the $623
recognized in the first quarter of 1998. The effective tax rate for the first
quarter of 1999 and 1998 was 26.3% and 26.0%, respectively.
Net Interest Income
(The accompanying schedule entitled "Average Balances/Net Interest Margin -
Fully Taxable Equivalent Basis (FTE)" is the basis of and should be read in
conjunction with this discussion).
FTE net interest income for the quarter ended March 31, 1999 amounted to $7.2
million, up 4.6% over the same 1998 period due primarily to growth in earning
assets. The net interest margin and interest rate spread were 4.21% and 3.60%,
respectively, for the quarter ended March 31, 1999, which is a decrease when
compared to the same period in 1998 when the amounts were 4.47% and 3.83%,
respectively. The continued decrease in the Company's net interest margin and
interest rate spread can be attributed to certain securities that have been
called or have paid down and have been replaced at lower rates. Additionally,
loans at higher rates have paid down and new loans have been recorded at lower
rates or certain loans have been refinanced at lower rates. The yield on earning
assets has decreased more rapidly than the rate paid on interest bearing
liabilities. The FTE yield on earning assets has decreased from 8.41% for the
quarter ended March 31, 1998 to 7.88% for the quarter ended March 31, 1999 (53
basis point decrease). The rate on interest-bearing liabilities was 4.58% for
the quarter ended March 31, 1998 compared to 4.28% for the quarter ended March
31, 1999 (30 basis point decrease). To mitigate the impact of the decrease in
the Company's net interest margin and interest rate spread, the Company has
focused its efforts on growing earning assets. As discussed above, the Astoria
acquisition also is expected to improve the net interest margin over time by
lowering the Company's cost of deposits.
The average yield on taxable securities decreased 94 basis points from 7.22% for
the quarter ended March 31, 1998 to 6.28% for the quarter ended March 31, 1999.
The FTE yield on tax-exempt securities decreased 36 basis points from 8.90% for
the quarter ended March 31, 1998 to 8.54% for the quarter ended March 31, 1999.
The average balance of total securities increased from $268.6 million for the
quarter ended March 31, 1998 to $301.0 million for the quarter ended March 31,
1999, a $32.4 million (12.1%) increase. As noted above, the decrease in the FTE
yield on investment securities can be attributed to certain securities that have
been called or have paid down and have been replaced at lower rates.
11
<PAGE>
The average balance of total loans increased from $347.6 million for the quarter
ended March 31, 1998 to $383.9 million for the quarter ended March 31, 1999, a
$36.3 million (10.5%) increase. The most significant increase in the average
balance of loans was in the lease receivable portfolio, where the average
balance increased from $21.7 million for the quarter ended March 31, 1998 to
$40.3 million for the quarter ended March 31, 1999, an $18.6 million increase,
reflecting continued penetration of this recently introduced product. The
average balance of loans secured by real estate increased $11.5 million and the
average balance of commercial and agricultural loans increased $8.7 million for
the quarter ended March 31, 1999 when compared to quarter ended March 31, 1998.
The yield on total loans decreased 31 basis points from 9.07% for the quarter
ended March 31, 1998 to 8.76% for the quarter ended March 31, 1999. This
decrease in the FTE yield on loans can be attributed to certain loans at higher
rates being paid down and new loans recorded at lower rates or certain loans
being refinanced at lower rates.
The Company's average rate on interest-bearing deposits decreased 29 basis
points from 4.54% for the quarter ended March 31, 1998 to 4.25% for the quarter
ended March 31, 1999. The average balance of interest-bearing deposits increased
$64.4 million from $506.2 million for the quarter ended March 31, 1998 to $570.6
million for the quarter ended March 31, 1999. The decrease in the average rate
of interest-bearing deposits can be attributed primarily to the decrease in the
average rate of time deposits. The average rates paid on time deposits decreased
from 5.78% for the quarter ended March 31, 1998 to 5.37% for the quarter ended
March 31, 1999, a 41 basis point decrease. Additionally, the average rate of
money market accounts has decreased as the rate paid was 4.27% for the quarter
ended March 31, 1998 compared to 3.52% for the quarter ended March 31, 1999. The
decrease in the rate on money market accounts can be attributed to the decrease
in the federal funds rate for the comparable periods (money market accounts are
tied to the federal funds rate) and an increase in lower tier money market
accounts generated from commercial and municipal customers which bear lower
rates. These decreased rates reflect the Company's effort to improve its net
interest margin by reducing its level of high-cost deposits.
The average balance of the Company's short-term borrowings decreased from $19.2
million for the quarter ended March 31, 1998 to $13.5 million for the quarter
ended March 31, 1999 as the Company's was able to generate sufficient deposits
to fund its asset growth. The average rate paid on short-term borrowing
decreased from 5.15% for the quarter ended March 31, 1998 to 4.89% for the
quarter ended March 31, 1999. The decrease in the rate of the Company's
long-term borrowings can be attributed to a long-term borrowing that has a
floating rate tied to commercial paper that has decreased for the quarter ended
March 31, 1999 when compared to the quarter ended March 31, 1998. These
long-term borrowings consist of a Federal Home Loan Bank borrowing and an
industrial development bond issued to finance the construction of the new
operations center.
Average Balances/Net Interest Margin - Fully Taxable Equivalent (FTE) Basis
The following table sets forth average balance and interest rate information.
The average balances used for these tables and other statistical disclosures
were calculated using daily averages. Tax exempt income has been adjusted to a
tax equivalent basis by tax effecting
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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>
<CAPTION>
1999 1998
------------------------------------ ---------------------------------------
Three months ended March 31, Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $383,913 $ 8,406 8.76% $347,582 $ 7,883 9.07%
Taxable Securities 233,774 3,672 6.28% 210.711 3,802 7.22%
Tax-exempt Securities 67,211 1,435 8.54% 57,861 1,287 8.90%
Federal Funds Sold 2,591 33 5.02% 2,158 30 5.50%
-------- -------- ---- -------- -------- ----
Total interest-earning assets 687,488 13,546 7.88% 618,312 13,002 8.41%
======== ======== ==== ======== ======== ====
Interest-bearing liabilities:
Deposits
NOW 74,442 346 1.86% 64,605 287 1.77%
Savings 103,043 719 2.79% 98,662 685 2.78%
Money Market 60,504 532 3.52% 47,090 502 4.27%
-------- -------- ---- -------- -------- ----
Time Deposits 332,638 4,468 5.37% 295,845 4,272 5.78%
-------- -------- ---- -------- -------- ----
Total Interest Bearing Deposits 570,627 6,065 4.25% 506,202 5,746 4.54%
-------- -------- ---- -------- -------- ----
Short-term Borrowings 13,510 165 4.89% 19,183 247 5.15%
Long-term Borrowings 6,495 85 5.26% 6,879 98 5.72%
-------- -------- ---- -------- -------- ----
Total Interest-bearing
liabilities $590,632 6,315 4.28% $532,265 6,091 4.58%
======== -------- ---- ======== -------- ----
Interest Rate Spread $ 7,231 3.60% $ 6,911 3.83%
======== ========
Net Interest Margin 4.21% 4.47%
</TABLE>
13
<PAGE>
Financial Condition and Liquidity
The Company's total assets at March 31, 1999 were $717.6 million, an increase of
$6.5 million from December 31, 1998. The increase includes an increase of $2.1
million in cash and cash equivalents and $4.7 million in net loans receivable.
The increase in total assets was funded primarily through an increase in
short-term borrowings.
Securities
The carrying value of securities available for sale at March 31, 1999 amounted
to $187.1 million, which remained relatively unchanged from the carrying amount
at December 31, 1998. The net unrealized loss on securities available for sale
decreased from $1.9 million at December 31, 1998 to $0.7 million at March 31,
1999. The decrease in net unrealized losses reflects the decline in interest
rates from December 31, 1998 to March 31, 1999. The carrying value of securities
held-to-maturity increased slightly, from $113.5 million at December 31, 1998 to
$114 million at March 31, 1999. On May 1, 1999, the Company transferred the
entire securities held-to-maturity portfolio to the securities available for
sale portfolio. The transfer is a result of the acquisition of 5 Astoria
branches, which will impact the Company's asset/liability and tax planning
strategies. Subsequent to this transfer, all securities acquired will be
recorded as securities available for sale. The unrealized pretax gain on the
securities held-to-maturity portfolio at March 31, 1999 amounted to
approximately $5.1 million. The transfer resulted in an increase in
stockholders' equity on May 1, 1999 of $3.5 million, which represents the net
unrealized gain on that date, net of tax.
Loans
Net loans receivable increased $4.7 million from $372.6 million at December 31,
1998 to $377.3 million at March 31, 1999. The following schedule details the
Company's loan portfolio:
March 31, December 31,
1999 1998
---- ----
Loans secured by real estate:
Residential $ 64,187 $ 62,675
Commercial 59,074 56,466
Agricultural 16,294 17,193
Construction 2,995 3,643
Home equity 23,531 24,893
--------- ---------
166,036 164,870
--------- ---------
Other loans:
Commercial 36,092 33,238
Agricultural 17,954 18,399
Manufactured Housing 59,316 60,975
Lease receivables 47,957 43,486
Tax exempt 2,087 2,989
Consumer 59,286 59,573
--------- ---------
222,692 218,660
--------- ---------
Net deferred loan fees/cost
and unearned discount (3,021) (2,577)
Allowance for loan losses (8,390) (8,384)
--------- ---------
Net loans receivable $ 377,317 $ 372,569
========= =========
14
<PAGE>
The most significant area of growth in the Company's loan portfolio continues to
be in lease receivables. Lease receivables increased $4.5 million, from $43.5
million at December 31, 1998 to $48.0 million at March 31, 1999. Loans secured
by real estate increased $1.1 million, from $164.9 million at December 31, 1998
to $166.0 million at March 31, 1999. Commercial and residential real estate
increased $2.6 million and $1.5 million, respectively, during the quarter ended
March 31, 1999. Meanwhile home equity loans and agricultural real estate
experienced declines in the first quarter of 1999. Commercial loans increased
$2.9 million during the quarter and manufactured housing decreased $1.7 million
during the quarter. The Company will continue to focus its efforts in growth
related to the lease receivable, residential real estate, and commercial real
estate/commercial loan portfolios.
Deposits
Total deposits decreased $1.5 million from $628.1 million at December 31, 1998
to $626.6 million at March 31, 1999. Noninterest-bearing deposits decreased $7.3
million from December 31, 1998 to March 31, 1999. Money market deposits
increased from $52.6 million at December 31, 1998 to $56.4 million at March 31,
1999. NOW accounts decreased from $76.9 million at December 31, 1998 to $73.7
million at March 31, 1999. Savings deposits increased from $102.4 million at
December 31, 1998 to $103.8 million at March 31, 1999. Time deposits under
$100,000 increased $5.1 million from $208.9 million at December 31, 1998 to
$214.0 million at March 31, 1999 and time deposits over $100,000 decreased from
$120.9 million at December 31, 1998 to $119.7 million at March 31, 1999. The
change in composition during the quarter was due to normal seasonal activity of
municipal deposits and to management efforts to improve the net interest margin
by reducing the level of high cost deposits.
Borrowings
The Company utilizes a FHLB over night line of credit as a funding source.
Borrowings on the FHLB line at March 31, 1999 amounted to $11.5 million. Other
short-term borrowings include repurchase agreements, which amounted to $6.3
million at March 31, 1999.
Nonperforming Assets
Nonperforming assets are summarized in the following table:
March 31, December 31,
1999 1998
---- ----
Nonaccrual loans $3,716 $3,996
Accruing loans past due 90 days 1,244 1,279
------ ------
Total nonperforming loans 4,960 5,275
Other real estate owned and
Repossessed assets 1,307 1,099
------ ------
Total nonperforming assets $6,267 $6,374
====== ======
Nonperforming loans as a % of total loans 1.29% 1.38%
Nonperforming assets as a %
of total assets 0.87% 0.90%
Allowance for loan losses to
Nonperforming loans 169.92% 158.93%
15
<PAGE>
Nonaccrual loans at March 31, 1999 were comprised of $1.2 million in residential
real estate, $1.7 million in commercial and agricultural real estate, $733 in
commercial and agricultural loans, and $148 in manufactured housing loans. Loans
past due 90 days or more and still accruing were comprised mainly of residential
real estate and manufactured housing loans at March 31, 1999.
Gross charge-offs for the quarter ended March 31, 1999 amounted to $344.
Charge-offs were mainly comprised of manufactured housing loans and credit card
loans for the quarter ended March 31, 1999. Recoveries for the quarter ended
March 31, 1999 amounted to $80. Provisions for loan losses amounted to $270 for
the quarter ended March 31, 1999. The allowance for loan losses remained
relatively unchanged from December 31, 1998 to March 31, 1999 with a balance of
$8.4 million. 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.
Liquidity and Capital Resources
Liquidity is the ability of the Company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining the ability to meet the
day-to-day cash flow requirements of our customers, whether they be depositors
wishing to withdraw funds or borrowers requiring funds to meet their credit
needs.
Asset and liability management functions not only to assure adequate liquidity
in order to meet the needs of our customers, but also to maintain an appropriate
balance between interest-sensitive assets and interest-sensitive liabilities in
order to generate an appropriate return to stockholders. In the banking
environment, both assets and liabilities are considered sources of liquidity
funding and both are monitored on a daily basis. The asset portion of the
balance sheet provides liquidity primarily through loans, mortgage backed
securities and collateralized mortgage obligation principal repayments,
maturities and calls of securities and sales from the available for sale and
trading portfolios.
Management closely monitors the timing of cash inflows and outflows although
changes in interest rates, economic conditions and competitive forces strongly
impact the predictability of these cash flows. The Company attempts to provide
stable and flexible sources of funding through its branch network as well as
with limited use of borrowings. Management believes that the level of the
Company's liquid assets combined with daily monitoring of cash inflows and
outflows provide adequate liquidity to fund outstanding loan commitments, meet
daily withdrawal requirements of depositors, and meet all other daily
obligations of the Company.
Total stockholders' equity amounted to $57.4 million at March 31, 1999, which is
a $1.9 million increase over the $55.6 million balance at December 31, 1998. The
increase resulted primarily from earnings retention of $1.2 million and a
decrease in accumulated
16
<PAGE>
other comprehensive income of $810 related to net unrealized losses on
securities available for sale off set by treasury stock purchases of $424. The
Company paid a dividend of $0.08 per share on March 10, 1999. The Company is
exploring the possibility of issuing additional securities to raise capital to
support the acquisition of the Astoria branches.
Year 2000 Readiness
Progress made on this effort is closely monitored by the Company's regulatory
agency to ensure compliance with its Year 2000 plan. The Company's project plan
is structured after the guidelines set by the Federal Financial Institutions
Examination Council (FFIEC) regarding the installation and testing of mission
critical systems. The five phases outlined in this guidance are: 1) Awareness -
In May of 1997, the Company formed a Year 2000 Committee consisting of Senior
Officers and Managers representing all segments of its operations. The Board of
Directors is updated on a monthly basis regarding the progress of the program.
2) Assessment - During this same time, the Company contacted every business we
depend on for software, hardware or as a service provider. We asked each of them
to complete a "Year 2000 Certification" and project plan to assess their state
of Year 2000 readiness. 3) Renovation - The Company primarily relies on third
party vendors for its primary systems. The renovation phase for our mission
critical systems was completed prior to year-end 1998. 4) Validation - Testing
of the Company's mission critical systems was also substantially completed by
year-end 1998 and was complete according to FFIEC guidelines by 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 testing was set at $40,000. For the quarter ended
March 31, 1999, the Company has expended $15,000 on Year 2000 testing. These
figures do not account for personnel time involved with the installation and
testing of these systems. The Company has funded, and plans to fund, its Year
2000 related expenditures out of general operating sources and expense them as
incurred.
The Company has completed an assessment of major borrowing accounts and has
evaluated and assigned risks to each based on information obtained from the
borrower. Year 2000 preparedness is now a part of on-going loan account review.
The Company has created Contingency and Business Resumption plans to enhance its
normal Disaster Recovery policies. However there are many circumstances which
are beyond the scope and control of this organization. Some of these are the
preparedness of utility companies such as electric, telephone and governmental
agencies. As part of the Contingency and Business Resumption plans, the Company
will continue to monitor disclosures related to Year 2000 issued by such
companies and agencies upon which the Company relies for certain services which
are beyond the scope and control of the Company.
Year 2000 Risks Facing the Company and the Company's Contingency Plan:
The failure of the Company to substantially complete its Plan could result in an
interruption in or failure of certain normal business activities or operations.
Such failures could adversely effect the Company's financial condition,
liquidity or results of
17
<PAGE>
operations. Currently, the Plan is on schedule and management believes that
successful completion of the Plan should significantly reduce the risks faced by
the Company with respect to the Year 2000 problem. The Company does not have any
significant concentration of borrowers from any particular industry (to the
extent some industries might be particularly susceptible toY2K concerns), and no
individual borrower accounts for a significant portion of the Company's assets.
However, the Company may experience some negative impact on the performance of
various loan accounts due to failure of the borrowers to prepare adequately for
the Year 2000 problem. In a worst-case scenario, these borrower-related
difficulties might require the Company to downgrade the affected credits in its
loan classification system or to make one or more special provisions to its loan
loss allowance for resulting losses in ensuing periods. In addition, although
the Company is adopting special measures to maintain necessary liquidity to meet
funding demands in periods surrounding the transition from 1999 to 2000, the
Company could also face increased funding costs or liquidity pressures if
depositors are motivated out of Y2K concerns to withdraw substantial amounts of
deposits. The Company does not currently expect any material impact from Y2K
related issues on its costs of funds or liquidity, but in a worst-case scenario,
if funding costs do rise, net interest margins may be negatively impacted over
the relevant time frame.
The Company could face some risk from the possible failure of one or more of its
third party vendors to continue to provide uninterrupted service through the
changeover to the Year 2000. Critical providers include the Company's core data
processing service provider, and the Company's provider of lease financing data
processing. While an evaluation of the Year 2000 preparedness of its third party
vendors has been part of the Company's Plan, the Company's ability to evaluate
these third party vendors is limited to some extent by the willingness of
vendors to supply information and the ability of vendors to verify the Y2K
preparedness of their own systems or their sub-providers. However, the Company
participates in user groups, receives assessments of Y2K preparedness of vendors
periodically from federal banking agencies, and the Company's Plan includes
third-party vendor system interface testing, accordingly the Company does not
currently anticipate that any of its significant third party vendors will fail
to provide continuing service due to the Year 2000 problem.
The Company, like similarly situated enterprises, is subject to certain risks as
a result of possible industry-wide or area-wide failures triggered by the Year
2000 problem. For example, the failure of certain utility providers (gas,
electric, tele-communications) or governmental agencies (the Federal Reserve
System, the Federal Home Loan Bank) to avoid disruption of service in connection
with the transition from 1999 to 2000 could materially adversely affect the
Company's financial condition, liquidity and results of operations. In
management's estimate, such a system-wide or area-wide failure represents
significant risk to the Company in connection with the Year 2000 problem because
the resulting disruption may be entirely beyond the ability of the Company to
cure. The significance of any such disruption would depend on its duration and
systematic and geographic magnitude. Any such disruption would likely impact
businesses other than the Company. In order to reduce the risks enumerated
above, the Company's Year 2000 Committee has begun to develop contingency and
business resumption plans in accordance with guidance issued by the federal bank
regulators. The Committee has evaluated options, selected a contingency
strategy, and assigned responsibilities for such
18
<PAGE>
contingency plans. Validating such contingency plans is anticipated to be
completed during the second quarter of 1999. Certain catastrophic events (such
as the loss of utilities or the failure of certain governmental bodies to
function) are outside the scope of the Company's contingency plans, although the
Company anticipates that it would respond to any such catastrophe in a manner
designed to minimize disruptions in customer service, and in full cooperation
with peer providers, community leaders and service organizations.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity risk, do not arise in the normal course of the Company's business
activities.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on the Company's net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or re-price more quickly than
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest income. Similarly, when earning
assets mature or re-price more quickly than interest-bearing liabilities,
falling interest rates could result in a decrease in net income.
An important element of both earnings performance and liquidity is management of
interest rate sensitivity. Interest rate sensitivity management involves
comparison between the maturity and re-pricing dates of earning assets and
interest-bearing liabilities, with the goal being to minimize the impact on net
interest income in periods of extreme fluctuations in interest rates. Quarterly,
the change in net interest income, as well as several other strategic
measurement ratios, are presented to the Company's Asset/Liability Committee
(ALCO) and Board of Directors and compared to Company-established guidelines.
The Company consistently maintains the ratios within the acceptable ranges of
the guidelines established. On a weekly basis, the ALCO, which is comprised of
Senior Management, meets to monitor the interest rate sensitivity and liquidity
position.
The ALCO utilizes the results of a detailed and dynamic simulation model to
quantify the estimated exposure of net interest income to sustained interest
rate changes. While ALCO routinely monitors simulated net interest income
sensitivity over a one-year period, it also utilizes additional tools to monitor
longer-term interest rate risk. The simulation model captures the impact of
changing interest rates on the interest income received and interest expense
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 March 31, 1999, under
this analysis, a 200 basis point increase in interest rates resulted in a 4.2%
decrease in annualized net interest income and a 200 basis point
19
<PAGE>
decrease in interest rates resulted in 1.4% increase in net interest income.
These amounts were well within the Company's ALCO policy limits.
Interest rate risk analyses performed by the Company indicate that the Company
is liability sensitive, or its interest-bearing liabilities mature or re-price
more quickly that its earning assets. As a result, rising interest rates could
result in a decrease in net income. The Company has taken steps to manage its
interest rate risk by attempting to match the re-pricing periods of earning
assets to its interest-bearing liabilities. The Company's current emphasis in
growing loans with terms less than five years and selling long-term fixed rate
loans are methods the Company has utilized to manage interest rate risk.
Management continuously evaluates various alternatives to address interest rate
risk.
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability 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 competitive
influences might change. Also, as market conditions vary from those assumed in
the sensitivity analysis, actual results will differ due to:
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate changes on caps and floors on adjustable rate assets,
the potential effect of changing debt service levels on customers with
adjustable rate loans, depositor early withdrawals and product preference
changes, and other internal/external variables. Furthermore, the sensitivity
analysis does not reflect actions that ALCO might take in responding to or
anticipating changes in interest rates.
20
<PAGE>
CNB Financial Corp.
Part II - Other Information
Item 1 - Legal Proceedings
No material changes since filing of the Registrant's Form 10-K for
the year end December 31, 1998
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and reports on Form 8-K
(A) Exhibits
Exhibit 27 - Financial Data Schedule (electronic filing only)
(B) Current Reports filed on Form 8-K
On March 2, 1999, the Company filed a Form 8-K dated March 1, 1999
related to the announcement of the quarterly dividend and
continuation of the Company's stock repurchase program.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB FINANCIAL CORP.
Registrant
Date: May 17, 1999 SIGNATURE:/s/Donald L. Brass
Donald L. Brass
President
Date: May 17, 1999 SIGNATURE:/s/Peter J. Corso
Peter J. Corso
Executive Vice President
22
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0883756
<NAME> TO COME
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<EXCHANGE-RATE> 1.000 1.000
<CASH> 18,273 20,382
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 2,975
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 187,085 168,021
<INVESTMENTS-CARRYING> 114,062 111,931
<INVESTMENTS-MARKET> 119,046 117,492
<LOANS> 385,707 357,254
<ALLOWANCE> 8,390 8,387
<TOTAL-ASSETS> 717,562 674,596
<DEPOSITS> 626,622 587,562
<SHORT-TERM> 18,324 16,684
<LIABILITIES-OTHER> 8,740 7,969
<LONG-TERM> 6,441 6,847
0 0
0 0
<COMMON> 9,763 9,719
<OTHER-SE> 47,672 45,815
<TOTAL-LIABILITIES-AND-EQUITY> 717,562 674,596
<INTEREST-LOAN> 8,389 7,871
<INTEREST-INVEST> 4,605 4,644
<INTEREST-OTHER> 33 30
<INTEREST-TOTAL> 13,027 12,546
<INTEREST-DEPOSIT> 6,065 5,746
<INTEREST-EXPENSE> 250 345
<INTEREST-INCOME-NET> 6,712 6,454
<LOAN-LOSSES> 270 150
<SECURITIES-GAINS> 71 94
<EXPENSE-OTHER> 5,019 4,909
<INCOME-PRETAX> 2,513 2,393
<INCOME-PRE-EXTRAORDINARY> 1,851 1,770
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,851 1,770
<EPS-PRIMARY> 0.24 0.23<F1>
<EPS-DILUTED> 0.24 0.23<F2>
<YIELD-ACTUAL> 4.21 4.47<F3>
<LOANS-NON> 3,716 2,823
<LOANS-PAST> 1,244 1,964
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 8,390 8,378
<CHARGE-OFFS> 344 263
<RECOVERIES> 80 122
<ALLOWANCE-CLOSE> 8,390 8,387
<ALLOWANCE-DOMESTIC> 8,390 8,387
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<ALLOWANCE-UNALLOCATED> 2,243 2,875
<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>
