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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-4552
CNB FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
NEW YORK 22-3203747
(STATE INCORPORATION) (IRS EMPLOYER
IDENTIFICATION NUMBER)
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24 CHURCH STREET, CANAJOHARIE, NEW YORK 13317
(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
(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 [ ]
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, 2000, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $96,059,189
As of March 15, 2000, 7,534,054 shares of registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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<CAPTION>
DOCUMENTS PART OF 10-K INTO WHICH INCORPORATED
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Portions of the Consolidated Financial
Statements for the year ended December 31,
1999 I, II
Portions of Proxy Statement for Annual Meeting
of Shareholders to be held on May 4, 2000 III
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT 1999
CNB FINANCIAL CORP.
<TABLE>
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PAGE
PART I ----
<S> <C> <C>
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder
Matters..................................................... 9
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 11
Item 7A Quantitative and Qualitative Disclosures About Market 30
Risk........................................................
Item 8. Financial Statements and Supplementary Data................. 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure........................................ 30
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 30
Item 11. Executive Compensation...................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and 30
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 31
8-K.........................................................
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PART I
ITEM 1. BUSINESS
GENERAL
CNB Financial Corp. (the Company or Corporation) is a bank holding company,
registered under the Bank Holding Company Act of 1956, as amended. It is
organized under the laws of the State of New York. Its principal subsidiary is
Central National Bank, Canajoharie, (Bank). The Corporation maintains its
headquarters in Canajoharie, New York.
The principal business of the Company is to provide, through the Bank,
comprehensive banking services through its network of twenty eight branches and
two financial services centers located in Central New York in the counties of
Montgomery, Fulton, Chenango, Herkimer, Otsego, Oneida, Saratoga, Schoharie and
Schenectady.
In 1996 Central Asset Management, Inc. (CAM) was formed as a second
subsidiary of the Company. The main business activity of CAM is to offer
investment management services for a fee to a focused customer base of high net
worth individuals and businesses. On June 14, 1999, the Company established CNBF
Capital Trust I (the "Trust"), which is a statutory business trust. The Trust
exists for the exclusive purpose of issuing and selling 30 year guaranteed
preferred beneficial interests in the Company's junior subordinated debentures
("capital securities"). On August 4, 1999, the Trust issued $18.0 million in
capital securities with a floating interest rate equal to 3-month LIBOR plus 275
basis points.
At December 31, 1999, the Company had, on a consolidated basis, total
assets of $914.2 million, deposits of $796.2 million, net loans and leases of
$449.1 million and stockholders' equity of $54.6 million. A detailed discussion
concerning the Corporation's consolidated financial condition and results of
operations is 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 and leases. 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. 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, by providing personalized service, convenient locations, and the
flexibility to meet the needs of individuals and businesses in its market area.
GROWTH STRATEGY
While maintaining the "small town" personal appeal of a well established
community bank, we are positioning ourselves for growth by attracting and
retaining talented personnel, improving our technological capabilities and
introducing new products to better serve our customers. Our goal is to increase
our total assets to over $1 billion by the end of the year 2000. Toward this
end, we intend to continue expansion within our existing market, as well as
certain potential markets contiguous to our current service area.
To aid our growth plans, we have instituted a major, company-wide,
client-focused sales and service culture with each of our full and part-time
employees, regardless of position, now being thoroughly trained in "relationship
selling." This concept is an overall personal service mindset that strives to
improve performance even in functions where there is no direct customer contact.
All personnel are now motivated by sales rallies, sales and service awards and a
new pay-for-performance plan. Through greater pre-call planning and the
delegation of many administrative functions, our sales people can spend more
time in the market place.
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To compliment our new sales focus and fulfill our growth initiative, we
will continue to look for opportunities to develop new branches and new markets
as well as strategically acquire other financial institutions, financial related
service companies and/or individual branch offices. In this regard, In August
1999, we completed an acquisition of five retail banking offices located in
Otsego and Chenango counties of New York from Astoria Federal Savings and Loan
Association. As part of the acquisition, we acquired all of the customer-related
deposits maintained at the branches totaling approximately $156.5 million
(including accrued interest payable), and certain other liabilities relating to
the branches. The Company paid to Astoria a pre-tax premium of 12.1%, or
after-tax premium of 8.9% on the deposits transferred and received a net cash
payment of approximately $133.9 million. These five offices are in addition to
our recently opened downtown Saratoga loan office and the three full-service
branch locations in Oneida, Herkimer and Saratoga counties we opened in late
1999.
COMPETITION
The Company faces significant competition for both deposits and loans. The
deregulation of the financial services industry and the commoditization of
deposit and lending products has led to increased competition among banks and
other financial institutions for a significant portion of the deposit and
lending activity that had traditionally been the arena of banks and savings and
loan associations. The Company competes for deposits with other commercial
banks, savings banks, savings and loan associations, credit unions, money market
and other mutual funds, insurance companies, brokerage firms and other financial
institutions, many of which are substantially larger in size and have greater
financial resources than the Company.
The Company's competition for loans comes principally from commercial
banks, savings banks, savings and loan associations, mortgage banks, credit
unions, finance companies and other institutional lenders, many of whom maintain
offices in the Company's market area. The Company's principal methods of
competition include providing competitive loan and deposit pricing, personalized
customer service, and continuity of banking relationships. Although the Company
is subject to competition from other financial institutions, some of which have
much greater financial and marketing resources, the Company believes it benefits
by its position as a community oriented financial services provider with a long
history of serving its market area. Management believes that the variety, depth
and stability of the communities, which the Company services support the service
and lending activities conducted by the Company.
CONCENTRATION OF CONSUMER LENDING
The Bank's lending activities focus on consumer loans and leases with a
concentration in indirect financing provided through manufactured housing and
automobile dealers. At December 31, 1999, approximately 12% of the Bank's total
loan portfolio was concentrated in manufactured housing loans, 17% was
concentrated in lease financing on automobiles and approximately 10% 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 and leases.
EXECUTIVE OFFICERS OF THE COMPANY AND BANK
The following table sets forth, as of December 31, 1999, selected
information about the principal officers of the Company, each of whom is elected
by the Board of Directors and each of whom holds office at the discretion of the
Board of Directors:
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CORPORATE
HELD EMPLOYEE SHARES OF
NAME (AGE) OFFICE AND POSITION SINCE SINCE STOCK
- ---------- -------------------------- ----- --------- ---------
<S> <C> <C> <C> <C>
Donald L. Brass (51).......... President 1993 1993 42,221
Peter J. Corso (56)........... V.P. & Treasurer 1993 1993 16,810
Michael D. Hewitt (49)........ Sr. V.P. & Asst. Secretary 1999 1999 100
</TABLE>
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Mr. Hewitt, Senior Vice President and Senior Community Bank Sales Manager,
joined the Bank in 1998 from KeyBank.
EMPLOYEES
As of December 31, 1999, the Bank employs 323 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
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 offer, 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.
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 would directly or indirectly control more than
5% of the voting shares of any bank or bank holding company or otherwise control
a bank or merge or consolidate with any other bank holding company. The
Riegle-Neal Interstate Banking and Branching 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 or bank holding company and from engaging in any activities other than
banking or managing or controlling banks. The recently enacted
Gramm-Leach-Bliley Act ("GLB Act") permits a qualifying bank holding company to
become a financial holding company and thereby to affiliate with a broader range
of financial companies than has previously been permitted for a bank holding
company. Permitted affiliates include securities brokers, underwriters and
dealers, investment managers, insurance companies and companies engaged in other
activities that are declared by the Federal Reserve Board, in cooperation with
the Treasury Department, to be "financial in nature or incidental thereto" or
declared by the Federal Reserve Board unilaterally to be "complementary" to
financial activities. A bank holding company may elect to become a financial
holding company if each of its subsidiary banks is "well capitalized", is "well
managed", and has at least a "satisfactory" CRA rating. Qualifying bank holding
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companies are required to file a declaration with the Federal Reserve Board to
become financial holding companies.
OCC SUPERVISION
The Bank is supervised and regularly examined by the 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.
The GLB Act authorized qualifying national banks to file a certification
with the OCC to engage in expanded activities through the formation of a
"financial subsidiary". A national bank may have a "financial subsidiary"
engaged in any activity that is financial in nature or incidental to a financial
activity, except for insurance underwriting, insurance investments, real estate
investment or development, or merchant banking. In order to qualify to establish
or acquire a financial subsidiary, a national bank and each of its depository
institution affiliates must be "well capitalized", and "well managed", and may
not have less than a "satisfactory" CRA rating. The GLB Act also contains
provisions requiring financial institutions to protect the privacy of customer
information and allowing customers, subject to certain exceptions, to opt out of
institutions providing customer information to unaffiliated third parties for
marketing purposes.
FDIC INSURANCE ASSESSMENTS AND RELATED COSTS
The Bank is subject to FDIC deposit insurance assessments. Pursuant to
Section 7 of the Federal Deposit Insurance Act (12 U.S.C. 1817), 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% per $100 of assessable deposits
depending on its capital position and supervisory factors. Institutions are also
required to pay an assessment related to the cost of Financing Corporation
("FICO") bonds, which assessment is currently 2.12 basis points per $100 of
assessable deposits on an annualized basis. The FICO assessment is not tied to
the FDIC risk-based insurance premium rates.
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 retained net income, as defined by applicable regulations, for that year,
combined with its retained net income for the preceding two years. Furthermore,
the Bank may not pay a dividend in an amount greater than its undivided profits
then on hand. At December 31, 1999, the Bank could pay dividends to the Company
of $12.5 million without the prior approval of the OCC.
In addition, the Federal Reserve Board and the OCC may determine under
certain circumstances that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment of such dividends. The Federal Reserve
Board has indicated that it generally would be an unsafe and unsound practice to
pay dividends except out of current operating earnings.
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TRANSACTIONS WITH AFFILIATES
The Bank is subject to restrictions under federal law which limit the
extensions of credit to, and certain other transactions with or on behalf of
affiliates, including the Corporation. Such transactions are limited in amount
to 10 percent of the Bank's capital and surplus for any single affiliate, and to
an aggregate of 20% for all of the Bank's affiliates. Furthermore, such loans
and extensions of credit, as well as certain other transactions, are required to
be secured in accordance with specific statutory requirements. Federal law also
requires that transactions between the Bank and the Company or any non-banking
subsidiaries of the Company, 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.
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 and OCC have established capital guidelines,
which are applicable to bank holding companies and national banks. The
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 and lease
losses. The sum of Tier 1 capital and Tier 2 capital is "total risk-based
capital." The Company's Tier 1 risk-based capital and total risk-based capital
ratios as of December 31, 1999 were 9.4% and 10.7%, respectively. The Bank's
Tier 1 risk-based and total risk-based capital ratios as of December 31, 1999
were 8.9% and 10.2%, respectively.
In addition, bank holding companies and banks that meet certain specified
criteria, including that they have the highest regulatory rating, must have a
minimum leverage ratio of Tier 1 capital ("Leverage Ratio") of 3.0%. All other
bank holding companies and banks are required to maintain a Leverage Ratio of
4.0%. The Company's and Bank's Leverage Ratio as of December 31, 1999 was 6.6%
and 6.3%, respectively. 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.
In 1991, the Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") which 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 OCC 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
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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".
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 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.
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.
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 OCC is required to 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.
ITEM 2. PROPERTIES
The executive offices of the Company 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.
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The location of the Bank's offices, as well as certain information related
to these offices are set forth below:
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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............................. *
62 Pioneer Street, Cooperstown, NY.......................... Owned
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
63 Putnam Street, Saratoga, NY.............................. Leased
15 Park Avenue, Clifton Park, NY............................ Leased
131 Oriskany Boulevard, Whitesboro, NY...................... Leased
18 South Broad Street, Norwich, NY.......................... Owned
1 Wall Street, Oneonta, NY.................................. Owned
107 Oneida Street, Oneonta, NY.............................. Owned
Route 23 Southside Mall, Oneonta, NY........................ Leased
103 North Caroline Street, Herkimer, NY..................... Leased
</TABLE>
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* The Bank owns the building in which its Cooperstown office is located, but
leases the land pursuant to a long-term lease
Premises and Equipment owned and used by the Company and its subsidiaries
at December 31, 1999, had a net book value of $13.0 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 Re-marketing Agent.
For the year ended December 31, 1999, rental fees of $448,000 were paid on
leased facilities. See also note 5, "Premises and Equipment" to the consolidated
financial statements.
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ITEM 3. LEGAL PROCEEDINGS
The Company is party and/or its property is the subject of 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company.
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 bid
prices of the common stock of the Corporation and the dividends paid thereon
during the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
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<S> <C> <C> <C>
1999:
First Quarter............................................. 20 15 $.080
Second Quarter............................................ 18 13/64 15 .080
Third Quarter............................................. 15 3/4 13 13/16 .085
Fourth Quarter............................................ 15 3/4 13 .125
1998:
First Quarter............................................. 18 15/16 14 1/2 $.070
Second Quarter............................................ 21 18 1/2 .070
Third Quarter............................................. 28 19 .075
Fourth Quarter............................................ 20 3/4 15 .115
</TABLE>
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.
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ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL REVIEW
<TABLE>
<CAPTION>
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.................................... $914,172 $711,088 $634,389 $586,075 $564,792
Net loans & leases receivable................... 449,064 372,569 338,332 312,876 308,154
Securities...................................... 387,765 300,107 255,520 235,743 215,450
Deposits........................................ 796,244 628,142 538,472 509,217 496,311
Borrowings...................................... 35,687 19,181 35,164 21,824 14,583
Guaranteed preferred beneficial interests in
Company's junior subordinated debentures...... 18,000 -- -- -- --
Stockholders' equity............................ 54,623 55,566 54,606 48,391 47,433
SELECTED OPERATIONS DATA:
Total interest and dividend income.............. $ 56,179 $ 52,542 $ 48,635 $ 46,885 $ 43,615
Total interest expense.......................... 27,417 26,158 22,722 21,754 20,088
-------- -------- -------- -------- --------
Net interest income............................. 28,762 26,384 25,913 25,131 23,527
Provision for loan and lease losses............. 1,456 773 275 635 965
-------- -------- -------- -------- --------
Net interest income after provision for loan and
lease losses.................................. 27,306 25,611 25,638 24,496 22,562
Other income.................................... 3,517 4,530 3,774 3,178 2,745
Other expenses.................................. 22,337 19,854 18,511 17,779 16,254
-------- -------- -------- -------- --------
Income before income tax expense................ 8,486 10,287 10,901 9,895 9,053
Income tax expense.............................. 2,151 2,606 3,235 2,738 2,481
-------- -------- -------- -------- --------
Net income...................................... $ 6,335 $ 7,681 $ 7,666 $ 7,157 $ 6,572
======== ======== ======== ======== ========
PER SHARE DATA, ADJUSTED FOR STOCK SPLITS:
Basic earnings per share........................ $ 0.84 $ 1.01 $ 0.99 $ 0.90 $ 0.82
Diluted earnings per share...................... 0.83 1.00 0.99 0.90 0.81
Cash dividends per share........................ 0.37 0.33 0.30 0.27 0.24
Book value per share............................ 7.25 7.34 7.12 6.25 5.92
PERFORMANCE RATIOS:
Return on average equity........................ 10.67% 13.83% 14.99% 14.97% 15.19%
Return on average assets........................ 0.80% 1.11% 1.25% 1.22% 1.25%
Interest rate spread(1)......................... 3.43% 3.59% 3.93% 4.07% 4.13%
Interest rate margin(1)......................... 3.99% 4.20% 4.58% 4.68% 4.82%
Average earning assets to average
interest-bearing liabilities.................. 115.38% 114.89% 116.80% 115.70% 117.46%
Other expenses to average assets................ 2.83% 2.86% 3.01% 3.03% 3.08%
Efficiency ratio(1)(2).......................... 63.95% 63.08% 61.38% 61.93% 61.02%
ASSET QUALITY RATIOS:
Nonperforming loans to total loans.............. 1.30% 1.38% 1.30% 1.39% 1.25%
Allowance for loan losses to total loans........ 1.86% 2.20% 2.42% 2.60% 2.67%
Allowance for loan losses to nonperforming
loans......................................... 143.73% 158.94% 186.47% 186.81% 213.55%
CAPITAL RATIOS:
Stockholders' equity to total assets............ 5.98% 7.81% 8.61% 8.26% 8.40%
Tier 1 risk-based capital ratio................. 9.41% 11.30% 13.00% 12.20% 12.18%
Total risk-based capital ratio.................. 10.66% 12.50% 13.30% 13.50% 13.44%
Leverage ratio.................................. 6.58% 7.90% 8.40% 8.30% 9.02%
</TABLE>
- ---------------
(1) Ratios are calculated using fully tax equivalent (FTE) interest income.
(2) Equals other expenses less goodwill amortization expense divided by net
interest income (FTE) plus other income (excluding net gains or losses on
securities transactions).
10
<PAGE> 12
Selected unaudited quarterly financial data is set forth in the table
below.
<TABLE>
<CAPTION>
1999
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest and dividend income............................ $13,027 13,176 14,296 15,680
Interest expense........................................ 6,315 6,374 6,838 7,890
------ ------ ------ ------
Net interest income..................................... 6,712 6,802 7,458 7,790
Provision for loan and lease losses..................... 270 450 340 396
------ ------ ------ ------
Net interest income after provision for loan and lease
losses................................................ 6,442 6,352 7,118 7,394
Other income............................................ 1,090 176 1,030 1,221
Other expenses.......................................... 5,019 4,776 5,853 6,689
------ ------ ------ ------
Income before income tax expense........................ 2,513 1,752 2,295 1,926
Income tax expense...................................... 662 457 637 395
------ ------ ------ ------
Net income.............................................. $1,851 1,295 1,658 1,531
====== ====== ====== ======
Earnings per share:
Basic................................................. $ 0.24 0.17 0.22 0.20
====== ====== ====== ======
Diluted............................................... $ 0.24 0.17 0.22 0.20
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
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 and lease losses..................... 150 140 320 163
------ ------ ------ ------
Net interest income after provision for loan and lease
losses................................................ 6,304 6,562 6,211 6,534
Other income............................................ 999 981 1,020 1,530
Other expenses.......................................... 4,909 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
====== ====== ====== ======
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
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. Its principal subsidiary is Central National
Bank, Canajoharie (Bank). The Company maintains its headquarters in Canajoharie,
New York. The principal business of the Company is to provide, through the Bank,
11
<PAGE> 13
comprehensive banking services through its network of twenty-eight branches and
two financial services centers located in Central New York in the counties of
Montgomery, Fulton, Chenango, Herkimer, Oneida, Otsego, Schoharie, Saratoga and
Schenectady. In 1996, Central Asset Management, Inc. (CAM) was formed as a
second subsidiary of the Company. The main business activity of CAM is to offer
investment management services for a fee to a focused customer base of high net
worth individuals and businesses.
The Company's principal business is attracting deposits from customers
within its market area and investing those funds primarily in mortgage loans,
consumer loans and leases, commercial and agricultural loans, and government and
corporate debt securities. The financial condition and operating results of the
Company are dependent on its net interest income which is the difference between
the interest and dividend income earned on its assets, primarily loans and
investments, and the interest expense paid on its liabilities, primarily
deposits and borrowings. Net income is also affected by other operating income,
such as fees on deposit related services, loan servicing income, and fiduciary
activities; other operating expenses, such as salaries and benefits, occupancy
expenses, and data processing expense; provision for loan and lease 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 policies, changes in accounting standards and actions of
regulatory agencies. 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 and lease 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 and lease
losses, include but are not limited to the following:
- 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;
- Changes in market interest rates or changes in the speed at which market
interest rates change;
- Changes in laws and regulations affecting the financial service industry;
- Changes in competition and continued pricing pressures on loan and
deposit products;
- Changes in consumer preferences and customer borrowing, repayment,
investment and deposit practices;
12
<PAGE> 14
- 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;
- Risks related to the Company's reliance on technology; and
- 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.
OVERVIEW
The following summarizes the significant activity and transactions for the
Company in 1999:
- On August 27, 1999, the Company completed the acquisition of five
branches located in the Upstate New York counties of Otsego (three
branches located in Oneonta, NY and one branch located in Cooperstown,
NY) and Chenango (one branch located in Norwich, NY) from Astoria Federal
Savings and Loan Association ("Astoria"), representing $156.5 million in
deposits at the acquisition date.
- On June 14, 1999, the Company established CNBF Capital Trust I (the
"Trust"), which is a statutory business trust. The Trust exists for the
exclusive purpose of issuing and selling 30 year guaranteed preferred
beneficial interests in the Company's junior subordinated debentures
("capital securities"). On August 4, 1999, the Trust issued $18.0 million
in capital securities with a floating interest rate of 3-month LIBOR plus
275 basis points.
- During 1999, the Company opened three additional branches located in
Clifton Park, Herkimer, and Whitesboro, New York.
Net income for the year ended December 31, 1999 was $6.3 million, a $1.3
million decrease when compared to net income of $7.7 million for the year ended
December 31, 1998. Basic earnings per share ("EPS") amounted to $0.84, and
diluted EPS was $0.83 for the year ended December 31, 1999 compared to $1.01
basic EPS and $1.00 diluted EPS for the year ended December 31, 1998. Operating
results in 1999 were effected by a write-down of $1.4 million (pre-tax) on a
corporate bond held in the Company's available for sale portfolio in 1999. The
write-down was caused by an other-than-temporary impairment of the bond and was
recognized in net (loss) gain on securities transactions and resulted in an
after-tax non-cash charge of $1.0 million. Operating results without the
write-down were $7.4 million, or $0.97 diluted EPS. The decrease in net income
can also be attributed to an increase in provision for loan and lease losses of
$683,000 from $773,000 for the year ended December 31, 1998 to $1.5 million for
the year ended December 31, 1999. The increase in the provision for loan and
lease losses was due primarily to strong loan and lease growth in 1999 and an
increase in charge-offs, primarily in manufactured housing and credit card
loans. The Company has implemented initiatives to reduce charge-offs related to
manufactured housing and credit card loans in the future, evidenced by the sale
of the credit card loan portfolio in 1999 and de-emphasizing lending on
manufactured homes.
In addition, the 1999 operating results were impacted by the expense
incurred from the Astoria branch acquisition and three branch openings that were
completed in 1999. A substantial portion of the funds obtained from the
acquisition were invested in federal funds sold and debt securities which bear a
much lower rate of interest than loans. As the Company deploys these funds in
higher yielding loans, an improvement in operating results is anticipated. This
expansion in 1999 led to an increase in operating expenses, including goodwill
amortization, that the Company did not expect to immediately recover from the
income provided by
13
<PAGE> 15
the new branches. The Company has several initiatives underway, which should
result in increased profitability from the new branches. These initiatives
include reducing the Company's cost of funds by focusing on core deposit growth,
increasing loan volume, and increasing income from insurance, annuity and
fiduciary activities. With the expansion experienced in 1999, the Company has
access to new markets, which coupled with the technological upgrades made to the
Company's core processing system and network in 1998, have the Company
well-positioned for the year 2000 and beyond.
Due primarily to the expansion in 1999, the Corporation's total assets
increased $203.1 million (28.6%) from $711.1 million at December 31, 1998 to
$914.2 million at December 31, 1999. The Company's total cash and cash
equivalents totaled $31.2 million at December 31, 1999 compared to $16.1 million
at December 31, 1998. The increase in cash and cash equivalents of $15.1 million
was due primarily to the "Year 2000" issue where the Company increased liquidity
to meet potential funding demands in periods surrounding the transition from
1999 to 2000. Cash and cash equivalents returned to more normal levels in early
2000. Total securities increased $87.7 million at December 31, 1999 when
compared to December 31, 1998, which was due primarily to the deployment of the
funds received from the Astoria branch acquisition. Net loans and leases
receivable increased $76.5 million (20.5%) from $372.6 million at December 31,
1998 to $449.1 million at December 31, 1999. Loan and lease growth during 1999
was driven primarily by increases in lease financing on automobiles, commercial
loans (including real estate) and residential real estate. Goodwill was $19.4 at
December 31, 1999 due to the Astoria branch acquisition.
Total deposits increased $168.1 million (26.8%) from $628.1 million at
December 31, 1998 to $796.2 million at December 31, 1999, which was due
primarily to the deposit liabilities assumed from the Astoria branch
acquisition. The Company, through the Trust, issued $18.0 million in capital
securities in 1999 to provide the necessary regulatory capital for the Bank to
complete the Astoria branch acquisition. Stockholders' equity of $54.6 million
decreased by $943,000 (1.7%) during 1999. The decrease in stockholders' equity
in 1999 was primarily due to the Company's earnings of $6.3 million offset by
dividend payments of $2.8 million, a decrease in accumulated other comprehensive
income/loss of $3.7 million (mainly from a decrease in the fair market value of
available-for-sale securities), and a net treasury stock increase of $848,000.
BRANCH ACQUISITION AND EXPANSION
On August 27, 1999, the Company completed the acquisition of 5 branches
located in the Upstate New York Counties of Otsego (3 branches located in
Oneonta, NY and 1 branch located in Cooperstown, NY) and Chenango (1 branch
located in Norwich, NY) from Astoria Federal Savings and Loan Association, a
subsidiary of Astoria Financial Corporation. The Company purchased from Astoria
approximately $3.7 million in branch related assets, primarily the real and
personal property associated with branches. The Company assumed from Astoria,
all customer-related deposits maintained at the branches totaling approximately
$156.5 million (including accrued interest payable), and certain other
liabilities relating to the branches. The Company paid to Astoria a pre-tax
premium of 12.1%, or after-tax premium of 8.9% on the deposits transferred and
received a net cash payment of approximately $133.9 million. The goodwill
recognized on the transaction will be amortized over a fifteen-year period on a
straight-line basis. In addition, the Company opened three branches (Clifton
Park, Herkimer and Whitesboro, New York) in 1999.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED
DEBENTURES
In the second quarter of 1999, the Company established CNBF Capital Trust I
(the "Trust"), which is a statutory business trust. The Trust exists for the
exclusive purpose of issuing and selling 30 year guaranteed preferred beneficial
interests in the Company's junior subordinated debentures ("capital
securities"). On August 4, 1999, the Trust issued $18.0 million in capital
securities at an interest rate of 3-month LIBOR (the rate on the capital
securities resets quarterly) plus 275 basis points, which equaled 8.12% at
issuance and 8.26% at December 31, 1999. The Company used the net proceeds from
the sale of the capital securities for general corporate purposes and to provide
equity to the Bank. The capital securities, with associated expense that is tax
deductible, qualify as Tier I capital under regulatory definitions, subject to
certain restrictions. The Company's primary source of funds to pay interest on
the debentures owed to the Trust are current dividends from the Bank.
Accordingly, the Company's ability to service the debentures is dependent upon
the continued
14
<PAGE> 16
ability of the Bank to pay dividends. The capital securities are not classified
as debt for financial statement purposes and the expense associated with the
capital securities is recorded as non-interest expense in the consolidated
statements of income.
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, and other
earning assets 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 fully tax equivalent (FTE) basis was $29.9 million
for the year ended December 31, 1999, a $2.4 million increase (8.5%) over the
$27.6 million reported for 1998. The Company's net interest margin was 3.99% for
the year ended December 31, 1999 compared to a net interest margin of 4.20% for
the year ended December 31, 1998. The decrease in net interest margin can be
attributed to the decrease in the yield on earning assets exceeding the decrease
in the rate paid on interest-bearing liabilities. The yield on earning assets
decreased from 8.19% for the year ended December 31, 1998 to 7.65% for the year
ended December 31, 1999, a decrease of 54 basis points (bp). Meanwhile, the rate
paid on interest-bearing liabilities decreased 38 basis points from 4.60% for
the year ended December 31, 1998 to 4.22% for the year ended December 31, 1999.
To compensate for the decrease in net interest margin, the Company has focused
on growing earning assets, which has contributed to the increase in net interest
income in 1999.
The yield on earning assets decreased from 8.19% for the year ended
December 31, 1998 to 7.65% for the year ended December 31, 1999. Despite this
decrease in yield, interest income from earning assets on a FTE basis increased
$3.6 million (6.7%) from $53.7 million for the year ended December 31, 1998 to
$57.3 million for the year ended December 31, 1999. This increase in interest
income was driven primarily by growth in earning assets from $655.6 million for
the year ended December 31, 1998 to $749.8 million for the year ended December
31, 1999 (14.4% increase). The average balance of total loans and leases
increased from $362.4 million for the year ended December 31, 1998 to $406.9
million for the year ended December 31, 1999 ($44.5 million increase or 12.3%).
The increase in the average balance of loans and leases was due primarily to
growth in the average balance of lease financing of automobiles which increased
$23.8 million from an average balance of $27.7 million for the year ended
December 31, 1998 to $51.5 million for the year ended December 31, 1999. The
average balance of commercial and agricultural loans (including real estate) and
residential real estate increased approximately $16.0 million during 1999, while
manufactured housing loans decreased approximately $4.7 million during 1999.
The decrease in yield on total loans and leases of 69 bp from 9.12% for the
year ended December 31, 1998 to 8.43% for the year ended December 31, 1999 can
be attributed to several factors. A significant amount of loans that yielded
higher rates in the beginning of 1999 paid-off due to the favorable interest
rate environment (30 year residential mortgage rate in January 1999 was 6.75%)
that was in place from November 1998 through April 1999. These loans were
re-financed or replaced with lower yielding loans. In addition, the average
yield on lease financing of automobiles was 7.17%. Lease financing experienced
the greatest amount of growth during 1999, and has a lower yield when compared
to manufactured housing, a product that yielded approximately 9.03% during 1999.
The Company's decision to focus growth on lease financing and to de-emphasize
lending in manufactured housing was due primarily to the Company's attempt to
lower credit risk, which resulted in a lower yield generated by total loans and
leases in 1999.
The average balance of total securities increased $38.4 million, from
$288.3 million for the year ended December 31, 1998 to $326.8 million for the
year ended December 31, 1999. The increase in the average balance of total
securities was due primarily to the initial investment of funds received in the
Astoria branch transaction. The yield on total securities decreased from 7.07%
for the year ended December 31, 1998 to 6.81% for the year ended December 31,
1999. The decrease in yield on total securities can be attributed to
15
<PAGE> 17
accelerated pay-downs on mortgage-backed securities and collateralized mortgage
obligations (CMOs) that resulted from a substantial decrease in long-term
mortgage rates which led to a higher than normal re-finance period that occurred
at the end of 1998 and into the beginning of 1999. As these mortgage-backed
securities and CMOs paid down, the amortization of associated premiums was
accelerated, and the securities were replaced with securities with lower yields.
The Company anticipates the yield on these securities should increase as
long-term mortgage rates continue to increase. This is likely to result in
reductions in re-financing which will reduce pre-payments and amortization of
premiums on mortgage-backed securities/CMOs, and the opportunity to replace
securities at similar or higher rates. The average balance of mortgage-backed
securities and CMOs for year ended December 31, 1999 amounted to $150.0 million,
which represents 45.9% of the average balance of total securities.
The rate paid on interest-bearing liabilities decreased 38 basis points,
from 4.60% for the year ended December 31, 1998 to 4.22% for the year ended
December 31, 1999. Despite the decrease in the rate paid on interest-bearing
liabilities, interest expense increased $1.3 million (4.8%), due to a 14.4%
($81.7 million) increase in the average balance of interest-bearing liabilities.
Several factors contributed to the increase in interest expense. The rate paid
on time deposits greater than $100,000, the most costly source of funds for the
Company, decreased 42 basis points from 5.90% for the year ended December 31,
1998 to 5.48% for the same period in 1999. The average balance of time deposits
greater than $100,000 decreased 24.0% during 1999, as the Company placed less
reliance on obtaining these funds which was a result of the Astoria branch
acquisition. The decrease in the rate paid on other time deposits can be
attributed to run-off of a high yielding 18 month promotional certificate of
deposit product which yielded 5.92% and the acquisition of time deposits from
the Astoria branch acquisition with lower rates, consistent with market rates at
the date of acquisition. The breakdown of deposits liabilities acquired on
August 27, 1999 from Astoria were $2.5 million in non-interest bearing deposits,
$24.5 million in NOW and money market accounts, $25.2 million in savings
accounts, and $103.5 million in time deposits.
The average balance for N.O.W accounts increased $14.4 million (20.9%) for
the year ended December 31, 1999 when compared to the same period in 1998. The
average balance for savings accounts increased $16.2 million (16.0%) for the
year ended December 31, 1999 when compared to the same period in 1998.
Meanwhile, the rates paid on these deposit type accounts remained stable. The
average balance of money market accounts increased $7.9 million for the same
period while the rate paid on money market accounts decreased 50 basis points.
The decrease in rate on money market accounts can be attributed to a substantial
number of money market accounts that are tied to the federal funds rate, which
was lower for the year ended December 31, 1999 when compared to the same period
in 1998. The average balance of total borrowings as a percentage of average
interest-bearing liabilities remained relatively unchanged for the year ended
December 31, 1999 when compared to the year ended December 31, 1998, as did the
average rate paid on borrowings.
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.
16
<PAGE> 18
AVERAGE BALANCES AND INTEREST RATES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------- ---------------------------- ----------------------------
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
BALANCE EXPENSE RATES BALANCE EXPENSE RATES BALANCE EXPENSE RATES
-------- ------- ------- -------- ------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans:
Taxable.......................... $402,949 $34,062 8.45% $358,823 $32,830 9.15% $325,886 $30,584 9.38%
Tax-exempt....................... 3,945 227 5.75% 3,581 234 6.53% 4,591 303 6.60%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total loans...................... 406,894 34,289 8.43% 362,404 33,064 9.12% 330,477 30,887 9.35%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Securities:
Taxable.......................... 264,630 17,721 6.70% 226,128 15,710 6.95% 195,084 14,230 7.29%
Tax-exempt....................... 62,129 4,518 7.27% 62,197 4,680 7.52% 54,147 4,097 7.57%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total securities................. 326,759 22,239 6.81% 288,325 20,390 7.07% 249,231 18,327 7.35%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Federal funds sold and other....... 16,151 806 4.99% 4,904 265 5.40% 7,578 419 5.53%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total earning assets............... 749,804 57,334 7.65% 655,633 53,719 8.19% 587,286 49,633 8.45%
------- ---- ------- ---- ------- ----
Other assets....................... 40,755 38,170 28,105
-------- -------- --------
Total assets............... $790,559 $693,803 $615,391
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing deposits:
NOW accounts..................... $ 83,005 1,527 1.84% $ 68,633 1,217 1.77% $ 61,768 1,112 1.80%
Money market..................... 62,202 2,346 3.77% 54,265 2,315 4.27% 47,501 2,023 4.26%
Savings.......................... 117,016 3,249 2.78% 100,852 2,843 2.82% 98,664 2,808 2.85%
Time $ $100,000.................. 110,332 6,044 5.48% 145,082 8,567 5.90% 123,698 7,260 5.87%
Other time....................... 247,775 12,745 5.14% 175,499 9,968 5.68% 147,880 8,308 5.62%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
deposits..................... 620,330 25,911 4.18% 544,331 24,910 4.58% 479,511 21,511 4.49%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Short-term borrowings.............. 23,218 1,162 5.00% 17,120 868 5.07% 16,189 810 5.00%
Long-term borrowings............... 6,308 344 5.45% 6,722 380 5.65% 7,104 401 5.64%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total borrowings................. 29,526 1,506 5.10% 23,842 1,248 5.23% 23,293 1,211 5.20%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities...................... 649,856 27,417 4.22% 568,173 26,158 4.60% 502,804 22,722 4.52%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Non-interest bearing deposits...... 62,971 56,952 50,287
Other liabilities.................. 18,356 13,151 11,166
Stockholders' equity............... 59,376 55,527 51,134
-------- -------- --------
Total liabilities and
stockholders' equity..... $790,559 $693,803 $615,391
======== ======== ========
Net interest income (FTE).......... $29,917 $27,561 $26,911
======= ======= =======
Interest rate spread............... 3.43% 3.59% 3.93%
==== ==== ====
Net interest margin................ 3.99% 4.20% 4.58%
==== ==== ====
</TABLE>
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.
17
<PAGE> 19
VOLUME RATE ANALYSIS
<TABLE>
<CAPTION>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------- ---------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total loans...................... $ 4,057 $(2,832) $ 1,225 $2,984 $ (807) $2,177
Total securities................. 2,717 (868) 1,849 2,875 (812) 2,063
Federal funds sold and other..... 607 (66) 541 (148) (6) (154)
------- ------- ------- ------ ------- ------
Total interest and dividend
income......................... 7,381 (3,766) 3,615 5,711 (1,625) 4,086
------- ------- ------- ------ ------- ------
NOW accounts..................... 254 56 310 124 (19) 105
Money market..................... 339 (308) 31 288 4 292
Savings.......................... 456 (50) 406 62 (27) 35
Time M $100,000.................. (2,050) (473) (2,523) 1,255 52 1,307
Other time....................... 4,105 (1,328) 2,777 1,552 108 1,660
Short-term borrowings............ 309 (15) 294 47 11 58
Long-term borrowings............. (23) (13) (36) (22) 1 (21)
------- ------- ------- ------ ------- ------
Total interest expense........... 3,390 (2,131) 1,259 3,306 130 3,436
------- ------- ------- ------ ------- ------
Net change in net interest
income......................... $ 3,991 $(1,635) $ 2,356 $2,405 $(1,755) $ 650
======= ======= ======= ====== ======= ======
</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 re-price 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 interest
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
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
balance sheet in response to the rate
18
<PAGE> 20
change. As of December 31, 1999, under this analysis, a 200 basis point increase
in interest rates resulted in a 4.5% decrease in net interest income and a 200
basis point decrease in interest rates resulted in 1.1% increase in net interest
income. These amounts were within the Company's ALCO policy.
Interest rate risk analyses performed by the Company indicate that the
Company is liability sensitive, or its interest-bearing liabilities re-price
more quickly than its earning assets. As a result, rising interest rates could
result in a decrease in net interest 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. Additionally, the Company will focus on growing its core deposit base
which should be less volatile when rates change when compared to time deposits
greater than $100,000 (which represented 24% of interest-bearing liabilities at
December 31, 1999), which are more volatile when rates change due to their
short-terms which typically range from 30 days to six months. Under a declining
rate scenario, the analysis indicates that the Company's benefit from its miss-
match in interest-bearing liabilities re-pricing more quickly than earning
assets is mitigated due to the optionality of earning assets. Management makes
certain assumptions in relation to prepayment speeds for loans, CMOs and
mortgaged-backed securities, which would prepay much faster in a falling rate
scenario. These assumptions are based on historical analysis and industry
standards for prepayments. Management continuously evaluates various
alternatives to address interest rate risk.
The preceding sensitivity analysis does not represent a Company forecast
and should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cash flows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make assurances as to the predictive
nature of these assumptions including how customer preferences or competitor
influences might change. Also, as market conditions vary from those assumed in
the sensitivity analysis, actual results will differ due to:
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate changes on caps and floors on adjustable rate assets,
the potential effect of changing debt service levels on customers with
adjustable rate loans, depositor early withdrawals and product preference
changes, and other internal/external variables. Furthermore, the sensitivity
analysis does not reflect actions that ALCO might take in responding to or
anticipating changes in interest rates.
OTHER INCOME
Other income decreased from $4.5 million for the year ended December 31,
1998 to $3.5 million for the year ended December 31, 1999. The primary reason
for the decrease in other income can be attributed to a write-down of $1.4
million (pre-tax) on a corporate bond held in the Company's available for sale
portfolio in 1999. The write-down was caused by an other-than-temporary
impairment of the bond and was recognized in net (loss) gain on securities
transactions and resulted in an after-tax non-cash charge of $1.0 million.
Excluding the write-down, other income increased 8.4% from $4.5 million for the
year ended December 31, 1998 to $4.9 million for the year ended December 31,
1999. Service charges on deposit accounts increased $204,000 (10.4%) in 1999
when compared to 1998. The increase in service charges on deposit accounts
resulted mainly from ATM convenience fees and service charges on deposit
accounts that resulted from increased transaction volume (from deposits acquired
from the Astoria branch acquisition). Income from other items increased $202,000
(10.3%) in 1999 when compared to 1998. The increase in other items was due
primarily to the sale of the Company's $3.9 million credit card portfolio in
December 1999, which resulted in a $282,000 gain. Additionally, income from the
Company's subsidiary, Central Asset Management, Inc. (CAM) and the Company's
Trust Department increased $77,000 (13.4%) from $576,000 for the year ended
December 31, 1998 to $653,000 for the year ended December 31, 1999.
Other income increased $756,000 from $3.8 million in 1997 to $4.5 million
in 1998. The primary reasons for the increase were an increase in other income
of $437,000, an increase in service charges on deposit accounts of $231,000, and
an increase in the net gain on securities transactions of $88,000. The increase
in
19
<PAGE> 21
other income of $437,000 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 $223,000 in 1998. This income is considered
non-recurring. In addition, fees on trust and investment advisory services
increased $134,000 and loan servicing and other bank fee income increased
$80,000. The increase in service charges on deposit accounts of $231,000
resulted mainly from ATM convenience fees and service charges on deposit
accounts that resulted from increased transaction volume.
OTHER EXPENSES
Other expenses increased $2.5 million (12.5%) from $19.9 million for the
year ended December 31, 1998 to $22.3 million for the year ended December 31,
1999. The increase in other expenses can be attributed to several factors:
Salaries and employee benefits increased $742,000 (8.2%) in 1999 when compared
to 1998 due to an increase in full-time equivalent employees. Full-time
equivalent employees increased from 272 at December 31, 1998 to 323 at December
31, 1999. The increase in full-time equivalent employees can be attributed to
the Astoria branch acquisition (5 branches) and the three additional branch
openings in 1999. Interest on capital securities was $615,000 in 1999, as the
Company issued the securities in August of 1999. Data processing expense
increased $511,000 (25.6%) due mainly to the conversion of the Company's core
processing system and the implementation of a check-imaging system completed at
the end of 1998. Goodwill amortization amounted to $441,000 in 1999, which was
the result of the Astoria branch acquisition completed on August 27, 1999. Other
expense items increased $355,000 due mainly to an increase in telephone and fax
expenses, which increased $150,000 in 1999. Offsetting these increases was a
decrease in professional fees of $507,000 in 1999 due mainly to the consulting
costs incurred in assisting management in various strategic, organizational, and
operational issues in 1998.
Other expenses increased $1.3 million (7%) from $18.5 million in 1997 to
$19.9 million in 1998. The other expense line item increased $419,000 from $2.6
million in 1997 to $3.0 million in 1998. The increase was due mainly to
increases in the loss on the sale of expired lease vehicles of $135,000,
telephone and tele-communications expense of $124,000 due to upgrades in the
Company's tele-communication systems, and correspondent bank fees of $73,000.
Data processing expense increased $354,000 in 1998 due mainly to the conversion
of the Company's core processing system. Salaries and benefits increased
$337,000 in 1998 primarily from an increase in staffing levels and normal merit
increases year to year. Professional fees increased $265,000 in 1998 due
primarily to the consulting costs incurred in assisting management in various
strategic, organizational, and operational issues.
INCOME TAXES
Income tax expense is based on pre-tax income for financial reporting
purposes. The effective tax rates for 1999, 1998 and 1997 were 25.3%, 25.3% and
29.7% respectively. The decrease in the effective tax rates from 1997 is 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/loss (a component of stockholders'
equity), net of tax, while unrealized gains and losses on trading securities are
reflected in earnings. All securities are 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 antici-
20
<PAGE> 22
pates fluctuations in stockholders' equity due to changes in the estimated fair
value of available for sale securities.
At December 31, 1999, the net unrealized loss on the available for sale
portfolio totaled $7.3 million compared to a net unrealized loss of $1.9 million
at year-end 1998. The $5.4 million increase reflects the increase in market
interest rates during the second half of 1999. Additionally, on May 1, 1999, the
Company transferred the held-to-maturity portfolio which had a an amortized cost
of $112.9 million to the available for sale portfolio for $117.7 million, which
represented the approximate fair value of the held-to-maturity portfolio, on May
1, 1999. This transfer resulted in a substantial increase in the amount of
securities subject to valuation for unrealized gains and losses that have to be
recognized on the Company's balance sheet. The transfer was in anticipation of
the Astoria acquisition, which impacted the Company's asset/liability and tax
planning strategies. As a result of the transfer, the Company will not have a
held to maturity portfolio for the foreseeable future.
The Company's investment policy focuses investment decisions on maintaining
a balance of high quality, diversified investments. In making its investment
decisions, the Company also considers, liquidity, collateral to be used for
pledging purposes, tax position, and maximum overall returns. Under the
Company's investment policy, securities eligible for the Company to purchase
include: U.S. Government securities, U.S. Agency securities, mortgaged-backed
securities, collateralized mortgage obligations (CMO), municipal securities,
corporate debt obligations, bankers acceptances, certificates of deposit,
commercial paper, and asset-backed securities.
The following table represents the composition of the Company's securities
portfolio in dollar amounts and percentages at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
-------------------- --------------------
CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CMO & asset-backed securities.............. $145,940 37.6% $116,212 38.7%
Mortgage backed securities................. 36,861 9.5% 27,813 9.3%
Corporate and taxable municipal debt
securities............................... 75,270 19.4% 62,685 20.9%
U.S. Government agency securities.......... 58,065 15.0% 16,980 5.7%
State and municipal obligations............ 57,746 14.9% 65,466 21.8%
U.S. Treasury securities................... 5,938 1.5% 6,089 2.0%
-------- ----- -------- -----
Total debt securities............ 379,820 97.9% 295,245 98.4%
Non-marketable equity securities........... 4,040 1.1% 2,448 0.8%
Mutual funds and preferred stock........... 3,905 1.0% 2,414 0.8%
-------- ----- -------- -----
Total securities portfolio....... $387,765 100.0% $300,107 100.0%
======== ===== ======== =====
</TABLE>
21
<PAGE> 23
The fair value and weighted average yield of the Company's debt securities
at December 31, 1999, by contractual maturity (collateralized mortgage
obligations, asset-backed securities, and mortgage backed securities are
included by final contractual maturity), are as follows:
<TABLE>
<CAPTION>
FAIR AVERAGE
VALUE YIELD(1)
--------- ---------
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C>
Due in one year or less..................................... $ 15,078 7.55%
Due after one to five years................................. 107,524 7.47%
Due after five to ten years................................. 112,032 7.73%
Due after ten years......................................... 145,186 8.06%
-------- ----
Total............................................. $379,820 7.77%
======== ====
</TABLE>
- ---------------
(1) Average yield on tax-exempt securities is calculated on a tax equivalent
basis.
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.
The increase in the Company's securities portfolio from $300.1 million at
December 31, 1998 to $378.8 at December 31, 1999 was due mainly to the
deployment of funds received from the Astoria branch acquisition. The Company
assumed from Astoria, all customer related deposits maintained at the branches
totaling approximately $156.5 million and received a net cash payment of $133.9
million in August 1999. CMOs and asset backed securities increased from $116.2
million at December 31, 1998 to $145.9 million at December 31, 1999, however, as
a percent of total securities, CMOs and asset-backed securities remained
relatively unchanged from 38.7% at December 31, 1998 to 37.6% at December 31,
1999. State and municipal obligations decreased from $65.5 million (21.8% of the
securities portfolio) at December 31, 1998 to $57.8 million (14.9% of the
securities portfolio) at December 31, 1999. Interest earned on state and
municipal obligations is exempt from federal, and in some cases, state income
taxes. The decrease in state and municipal obligations during 1999 can be
attributed to certain tax planning strategies implemented by the Company.
Corporate debt securities increased from $62.7 million (20.9% of the
securities portfolio) at December 31, 1998 to $75.3 million (19.4% of the
securities portfolio) at December 31, 1999. Included in corporate debt
securities is a corporate obligation that management believes is
other-than-temporarily impaired. During 1999, the Company wrote-down the
corporate obligation $1.4 million to net (loss) gain on securities transactions.
The remaining carrying value of the corporate obligation is $1.5 million, which
management will continue to monitor for additional other-than-temporary
impairment. Although management currently anticipates collecting the current
carrying value of this security, should conditions worsen relative to this
security, additional other-than-temporary write-downs may be necessary. All of
the other corporate debt securities were rated "BBB" or higher at December 31,
1999. U.S. Government agency securities increased from $17.0 million (5.7% of
the securities portfolio) to $58.1 million (15.0% of the securities portfolio)
at December 31, 1999. The increase in U.S. Government agency securities (all
rated "AAA") can be attributed to favorable risk-weighting treatment for
regulatory capital purposes. Non-marketable equity securities are comprised
mainly of stock issued by the FHLB of New York and the Federal Reserve Bank of
New York and are carried at cost as they may only be resold to the issuers of
the securities.
LOANS AND LEASES
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.
22
<PAGE> 24
At December 31, 1999, net loans and leases receivable amounted to $449.1
million, a $76.5 (20.5%) increase over the balance of $372.6 million at December
31, 1999. Loans secured by real estate increased from $164.9 million at December
31, 1998 to $207.8 million at December 31, 1999. Loans secured by real estate
represented 45.4% of total loans and leases at December 31, 1999 compared to
43.3% at December 31, 1998. Other loans increased from $218.7 million at
December 31, 1998 to $255.8 million at December 31, 1999. Other loans
represented 55.9% of total loans and leases at December 31, 1999 compared to
57.4% at December 31, 1998. Net deferred loan fees/costs and unearned discount
increased from ($2.6) million at December 31, 1998 to ($6.0) million at December
31, 1999, due mainly to the unearned discount associated with lease receivables,
which increased 74.8% during 1999.
Loans secured by real estate increased $42.9 million (26.0%) during 1999.
One-to-four family residential real estate increased $21.3 million from $62.7
million at December 31, 1998 to $83.9 million at December 31, 1999. The increase
in one-to-four family residential real estate can be attributed to the change in
the Company's delivery structure and the purchase of $8.0 million in
out-of-market one-to-four family residential real estate loans in December 1999.
In 1999, the Company employed three mortgage loan originators who are
responsible for developing the Company's mortgage business by meeting with
referrals, networking with representatives of the local real estate industry and
sponsoring home buying seminars. In addition, the Company's customer service
representatives are trained to refer potential mortgage customers to the
mortgage loan originators. Commercial and agricultural real estate increased
$22.7 million, from $73.7 million at December 31, 1998 to $96.3 million at
December 31, 1999. The increase in commercial and agricultural real estate can
be attributed to an increase in the Company's market area and an increase in the
number of commercial loan officers employed by the Company. The Company has two
loan production offices located in Schenectady (opened in 1998) and Saratoga
(opened in 1999) counties and acquired 5 branches from Astoria in 1999 located
in Otsego and Chenango counties.
Other loans increased $37.2 million, from $218.7 million at December 31,
1998 to $255.8 million at December 31, 1999. The increase in other loans in 1999
was due primarily to the increase in lease receivables (secured by automobiles),
which increased $32.5 million (74.8%), from $43.5 million at December 31, 1999
to $76.0 million at December 31, 1999. The Company has a lease program offered
to various automobile dealers across upstate New York State that has been
expanded in 1999 and led to the increase. Commercial and agricultural loans
increased from $51.6 million at December 31, 1998 to $60.0 million at December
31, 1999. The increase in commercial and agricultural loans can be attributed to
an increase in the Company's market area and an increase in the number of
commercial loan officers employed by the Company. Manufactured housing loans
decreased $5.2 million in 1999, which was consistent with the Company's plan to
de-emphasize lending in manufactured housing. Consumer loans decreased $1.6
million in 1999 as the Company sold its $3.9 million credit card portfolio in
December 1999.
23
<PAGE> 25
SUMMARY OF LOAN AND LEASE PORTFOLIO
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Secured by real estate:
One-to-four family................ $ 83,949 $ 62,675 $ 58,800 $ 61,413 $ 63,545
Commercial and agricultural....... 96,309 73,659 62,139 57,444 53,698
Construction...................... 2,286 3,643 1,378 1,028 1,735
Home equity....................... 25,183 24,893 24,059 22,068 18,395
-------- -------- -------- -------- --------
207,727 164,870 146,376 141,953 137,373
-------- -------- -------- -------- --------
Other loans:
Commercial and agricultural....... 59,995 51,637 48,888 48,552 48,875
Manufactured housing.............. 55,774 60,975 61,519 61,621 59,890
Lease receivables................. 76,002 43,486 23,524 13,144 8,750
Tax-exempt........................ 6,116 2,989 3,861 4,932 5,277
Consumer.......................... 57,944 59,573 62,638 50,103 55,089
-------- -------- -------- -------- --------
255,831 218,660 200,430 178,352 177,881
-------- -------- -------- -------- --------
Net deferred loan fees/costs and
unearned discount................. (5,965) (2,577) (96) 938 1,363
-------- -------- -------- -------- --------
Total loans....................... 457,593 380,953 346,710 321,243 316,617
Allowance for loan and lease
losses............................ (8,529) (8,384) (8,378) (8,367) (8,463)
-------- -------- -------- -------- --------
Net loans and leases receivable... $449,064 $372,569 $338,332 $312,876 $308,154
======== ======== ======== ======== ========
</TABLE>
Loan concentrations greater than 10% of the total loan and lease portfolio
at December 31, 1999 are as follows: commercial and agricultural real estate of
$96.3 million or 21.0%, one-to-four family residential real estate loans of
$83.9 million or 18.3%, lease receivables of $76.0 million or 16.6%, commercial
and agricultural loans of $60.0 million or 13.1%, manufactured housing of $55.8
million or 12.2%, and consumer loans of $57.9 million or 12.7%.
The following table sets forth the earlier of maturity/re-pricing dates for
the Company's loan portfolio. The table does not take into account possible
pre-payments or scheduled principal amortization:
<TABLE>
<CAPTION>
RESIDENTIAL
REAL ALL OTHER
ESTATE LOANS
----------- ---------
<S> <C> <C>
Within one year............................................. $27,406 $127,581
More than one year to five years............................ 2,982 159,169
More than five years to fifteen years....................... 28,912 57,205
Greater than fifteen years.................................. 24,649 29,697
------- --------
Total....................................................... $83,949 $373,652
======= ========
</TABLE>
ASSET QUALITY AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses represents Management's estimate of
an amount adequate to provide for probable losses inherent in the loan
portfolio. In its continuing evaluation of the allowance and its adequacy,
Management considers the Company's loan and lease loss experience, the amount of
past-due and non-performing loans, current economic conditions, underlying
collateral values securing loans and other factors which affect the allowance
for loan and lease losses. Management monitors the adequacy of the allowance
through the use of a process designed to comply with the requirements of the OCC
as published
24
<PAGE> 26
periodically in its Banking Circular, the Instructions for Preparation of
Reports of Condition and Income, and the AICPA's Audit and Accounting Guide.
The determination of the adequacy of the allowance is necessarily an
estimate. 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, 1999 were $5.9 million,
representing 1.3% of the total loan portfolio, as compared to $5.3 million or
1.4% of the loan portfolio at December 31, 1998.
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
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Secured by real estate...................... $3,378 $1,652 $1,943 $2,367 $2,637
Other loans................................. 1,834 2,344 164 886 441
------ ------ ------ ------ ------
Total non-accrual loans.................. 5,212 3,996 2,107 3,253 3,078
------ ------ ------ ------ ------
Accruing loans contractually past due 90 days
or more..................................... 722 1,279 2,386 1,226 885
------ ------ ------ ------ ------
Total non-performing loans.......... $5,934 $5,275 $4,493 $4,479 $3,963
====== ====== ====== ====== ======
</TABLE>
Information regarding foregone interest on the above non-accrual loans
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest recognized................................... $244 $ 71 $ 21 $ 28 $ 5
Foregone interest..................................... 164 318 190 125 147
---- ---- ---- ---- ----
Interest income that would have been recognized
at original terms................................... $408 $389 $211 $153 $152
==== ==== ==== ==== ====
</TABLE>
25
<PAGE> 27
The following table summarizes the changes in the allowance for loan
losses:
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of the year.......... $8,384 $8,378 $8,367 $8,463 $8,292
Provision charged to operations............... 1,456 773 275 635 965
Charge-offs:
Agricultural loans.......................... 82 41 77 184 35
Commercial loans............................ 214 220 326 361 18
Credit cards................................ 191 160 274 92 81
Consumer loans(1)........................... 1,199 904 854 660 1,181
------ ------ ------ ------ ------
Total charge-offs........................... 1,686 1,325 1,531 1,297 1,315
------ ------ ------ ------ ------
Recoveries:
Agricultural loans.......................... -- 31 16 21 43
Commercial loans............................ 75 144 928 203 118
Credit cards................................ 49 46 43 35 39
Consumer loans(1)........................... 251 337 280 307 321
------ ------ ------ ------ ------
Total recoveries............................ 375 558 1,267 566 521
------ ------ ------ ------ ------
Net charge-offs............................... 1,311 767 264 731 794
------ ------ ------ ------ ------
Balance at end of year........................ $8,529 $8,384 $8,378 $8,367 $8,463
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding................................. 0.32% 0.21% 0.08% 0.23% 0.26%
Allowance for loan loss as a percentage of
total loans at year end..................... 1.86% 2.20% 2.42% 2.60% 2.67%
</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>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Secured by real
estate............. $2,996 45% $2,581 43% $2,797 42% $2,486 44% $2,375 43%
Installment and other
consumer loans..... 2,484 42% 1,960 43% 1,114 44% 758 41% 805 42%
Commercial and
agricultural
loans.............. 1,370 13% 1,491 14% 1,460 14% 1,170 15% 1,155 15%
Other qualitative
factors............ 1,679 -- 2,352 -- 3,007 -- 3,953 -- 4,128 --
------ --- ------ --- ------ --- ------ --- ------ ---
$8,529 100% $8,384 100% $8,378 100% $8,367 100% $8,463 100%
====== === ====== === ====== === ====== === ====== ===
</TABLE>
26
<PAGE> 28
DEPOSITS
The Company's primary source of funds is 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 certificate of deposit accounts with various terms. The Company only
solicits deposits from its primary market area and depositors 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, as well
as 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>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits........ $ 62,971 -- $ 56,952 -- $ 50,287 --
NOW and money market accounts........ 145,207 2.67% 122,898 2.87% 109,269 2.87%
Savings accounts..................... 117,016 2.78% 100,852 2.82% 98,664 2.85%
Time deposits........................ 358,107 5.24% 320,581 5.78% 271,578 5.73%
-------- ---- -------- ---- -------- ----
$683,301 3.79% $601,283 4.14% $529,798 4.06%
======== ==== ======== ==== ======== ====
</TABLE>
The following table is a summary of deposits:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-interest bearing deposits....... $ 58,064 $ 66,339 $ 49,358 $ 50,313 $ 47,234
-------- -------- -------- -------- --------
Interest-bearing deposits:
NOW accounts...................... 96,234 76,896 65,519 60,106 46,862
Savings accounts.................. 136,150 102,446 97,604 98,440 94,582
Money market accounts............. 64,351 52,618 40,043 38,557 38,964
Time deposits of $100,000 or
more........................... 184,594 120,917 114,371 110,145 117,189
Other time deposits............... 256,851 208,926 171,577 151,656 151,480
-------- -------- -------- -------- --------
Total interest-bearing deposits... 738,180 561,803 489,114 458,904 449,077
-------- -------- -------- -------- --------
Total deposits............ $796,244 $628,142 $538,472 $509,217 $496,311
======== ======== ======== ======== ========
</TABLE>
The increase in total deposits from $628.1 million at December 31, 1998 to
$796.2 million at December 31, 1999 can be attributed to the acquisition of five
bank branches from Astoria on August 27, 1999. The Company assumed from Astoria,
all customer-related deposits maintained at the branches totaling approximately
$155.7 million. The breakdown of deposits liabilities acquired in the third
quarter from Astoria were $2.5 million in non-interest bearing deposits, $24.5
million in NOW and money market accounts, $25.1 million in savings accounts, and
$103.5 million in time deposits.
27
<PAGE> 29
The contractual maturity for time deposits of $100,000 or more is as
follows at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Less than or equal to three months.............. 109,505
Three months through six months................. 42,654
Six months through twelve months................ 18,280
Over twelve months.............................. 14,155
--------
$184,594
========
</TABLE>
BORROWINGS
Although deposits are the Company's primary source of funds, the Company
utilizes security repurchase agreements and other 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 7 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 $1.5 million in long-term borrowings with the Federal Home
Loan Bank of New York at December 31, 1999. 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 administrative
and operations complex. As of December 31, 1999, the remaining balance on the
bonds was $4.6 million 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 note 8 to the consolidated
financial statements.
CAPITAL RESOURCES
In 1999, the Company added $6.3 million to equity through net income and
returned $2.8 million 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. In June 1999, the Company established a trust to issue
and sell $18.0 million in capital securities which represents Tier I capital to
the Company. The Company's principal source of funds to pay cash dividends, cost
of the capital securities and to service long-term debt requirements is
dividends from its subsidiary Bank. Various laws and regulations restrict the
ability of Bank to pay dividends to the Company.
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 and
lease 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 February 18, 2000, the Company announced its intention to extend the
repurchase program announced in 1997 and to purchase up to 754,087 shares of its
stock in the open market during the period from March 16, 2000 to March 15,
2001. During 1999, 88,179 shares were repurchased at a cost of $1.4 million. 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 exercise 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.
28
<PAGE> 30
IMPACT OF THE YEAR 2000
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". The total budget for
Year 2000 testing was set at $40,000. For the year ended December 31, 1999, the
Company has expended $29,000 on Year 2000 testing. These figures do not account
for personnel time involved with the installation and testing of these systems.
The Company has funded its Year 2000 related expenditures out of general
operating sources and expensed them as incurred.
Subsequent to December 31, 1999, we experienced no significant events, nor
received any significant reports indicating any material Y2K issues. We are
unaware of any uncorrected problems regarding the Y2K issue at this time, but
will continue to monitor for any potential problems throughout 2000.
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. 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. 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
Investing activities used $176.5 million in 1999 as the Company continued
to leverage its balance sheet by increasing earning assets, principally $87.7
million in securities and $76.5 million in loans. Financing activities provided
$179.2 million as the Company experienced increases in deposits (due mainly to
the Astoria branch acquisition) and borrowings, issuance of capital securities,
somewhat offset by the purchase of treasury stock and the payment of dividends.
For more information concerning the Company's cash flows, see "Consolidated
Statements of Cash Flows."
For liquidity management, unused lines of credit totaling $85.5 million
were maintained at year-end 1999.
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.
29
<PAGE> 31
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement 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
balance sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. As amended, the statement is effective
for fiscal years beginning after June 15, 2000. Management is reviewing the
statement to determine what impact this statement will have on the Company's
accounting and disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item appears above in Item 7 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 January 28, 2000, appearing on pages 34 through 61 of this
report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 Company's
definitive proxy statement for the annual meeting of stockholders on May 4, 2000
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 Company's definitive proxy statement for the annual meeting of
stockholders on May 4, 2000, 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 Company's definitive proxy statement for the annual
meeting of stockholders on May 4, 2000 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will appear under the caption
"Transactions with Directors and Executive Officers" in the Company's definitive
proxy statement for the annual meeting of stockholders on May 4, 2000 and is
incorporated herein by reference.
30
<PAGE> 32
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 this report.
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS PAGE
- --------------------------------- ----
<S> <C>
Report of Management........................................ 33
Independent Auditors' Report................................ 35
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 36
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... 37
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997...... 38
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 39
Notes to Consolidated Financial Statements.................. 40
</TABLE>
- ---------------
(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
<TABLE>
<CAPTION>
EXHIBIT NUMBER REFERRED TO DESCRIPTION OF
IN ITEM 601 OF REGULATION S-K EXHIBIT
- ----------------------------- --------------
<C> <S>
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.
4.1 Instruments defining the rights of holders of long-term debt
of the Corporation and its subsidiaries are not filed as
exhibits because the amount of debt under each instrument is
less than 10% of the consolidated assets of the Corporation.
The Corporation undertakes to file these instruments with
the Commission upon request.
10.1 "Senior Executive Severance Agreements" (signed as of March
31, 1998) for Messrs. Brass and Corso as material,
agreements incorporated herein by reference from
Registrant's Form 10-K (file number 33-4552, filed March 31,
1999).
11 Statements regarding computation of per share earnings
(incorporated herein by reference to footnote 16 in the
consolidated financial statements).
13 1999 Consolidated Financial Statements
21 Subsidiaries of the Registrant (submitted with electronic
filing only)
23 Consent of KPMG LLP (submitted with electronic filing only)
27 Financial Data Schedule (submitted with electronic filing
only)
</TABLE>
- ---------------
(b) During the three-month period ended December 31, 1999, the Registrant
filed no current report on Form 8-K.
(c) See 14(a)(3) above.
(d) See 14(a)(2) above.
31
<PAGE> 33
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: /s/ DONALD L. BRASS
------------------------------------
Donald L. Brass
President
Dated: March 20, 2000
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By /s/ DONALD L. BRASS President and Director 3/20/00
- ---------------------------------------------------
Donald L. Brass
By /s/ PETER J. CORSO Executive Vice President and 3/20/00
- --------------------------------------------------- Treasurer
Peter J. Corso
By /s/ VAN NESS D. ROBINSON Chairman 3/20/00
- ---------------------------------------------------
Van Ness D. Robinson
By /s/ JOHN P. WOODS, JR. Vice Chairman 3/20/00
- ---------------------------------------------------
John P. Woods, Jr.
By /s/ J. CARL BARBIC Director 3/20/00
- ---------------------------------------------------
J. Carl Barbic
By /s/ DAVID J. NOLAN Director 3/20/00
- ---------------------------------------------------
David J. Nolan
By /s/ JOSEPH A. SANTANGELO Director 3/20/00
- ---------------------------------------------------
Joseph A. Santangelo
</TABLE>
32
<PAGE> 1
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 Company'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 Company 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 Company'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 Company'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.
<TABLE>
<S> <C>
By: /s/ DONALD L. BRASS By: /s/ PETER J. CORSO
-----------------------------------------------------
- ----------------------------------------------------- Peter J. Corso
Donald L. Brass Executive Vice President and Treasurer
President
</TABLE>
33
<PAGE> 2
CNB FINANCIAL CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998, AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
34
<PAGE> 3
[KPMG LETTERHEAD]
515 Broadway
Albany, NY 12207
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, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CNB
Financial Corp. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
LOGO
Albany, New York
January 28, 2000
LOGO
35
<PAGE> 4
CNB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 25,051 16,128
Federal funds sold.......................................... 6,150 --
-------- --------
Cash and cash equivalents................................. 31,201 16,128
-------- --------
Securities available for sale, at fair value................ 387,765 186,651
Investment securities held to maturity, at amortized cost
(estimated fair value of $119,046 in 1998)................ -- 113,456
Net loans and leases receivable............................. 449,064 372,569
Accrued interest receivable................................. 6,281 5,843
Premises and equipment, net................................. 12,999 10,075
Other real estate owned and repossessed assets.............. 1,258 1,099
Goodwill.................................................... 19,428 --
Other assets................................................ 6,176 5,267
-------- --------
Total assets...................................... $914,172 711,088
======== ========
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
COMPANY'S JUNIOR SUBORDINATED DEBENTURES AND STOCKHOLDERS'
EQUITY
Noninterest-bearing deposits................................ 58,064 66,339
Interest-bearing deposits................................... 738,180 561,803
-------- --------
Total deposits.................................... 796,244 628,142
-------- --------
Short-term borrowings:
Securities sold under agreements to repurchase............ 29,054 12,347
Borrowings from the U.S. Treasury......................... 530 304
-------- --------
Total short-term borrowings....................... 29,584 12,651
-------- --------
Long-term borrowings........................................ 6,103 6,530
Other liabilities........................................... 9,618 8,199
-------- --------
Total liabilities................................. 841,549 655,522
-------- --------
Commitments and contingent liabilities (note 14)
Guaranteed preferred beneficial interests in Company's
junior subordinated debentures ("capital securities")..... 18,000 --
Stockholders' equity:
Common stock, $1.25 par value, 20,000,000 shares
authorized (7,805,134 shares issued at December 31,
1999 and 7,796,396 shares issued at December
31,1998)............................................... 9,756 9,746
Additional paid-in capital................................ 6,202 6,144
Retained earnings......................................... 48,265 44,729
Accumulated other comprehensive loss...................... (5,075) (1,376)
Treasury stock, at cost (268,263 shares at December 31,
1999 and 203,510 shares at December 31, 1998).......... (4,525) (3,677)
-------- --------
Total stockholders' equity........................ 54,623 55,566
-------- --------
Total liabilities, guaranteed preferred beneficial
interests in Company's junior subordinated
debentures and stockholders' equity............. $914,172 711,088
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 5
CNB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest and dividend income:
Loans, including fees..................................... $34,234 33,008 30,813
Securities:
Taxable................................................ 17,721 15,710 14,230
Nontaxable............................................. 3,418 3,559 3,173
Federal funds sold and other.............................. 806 265 419
------- ------- -------
56,179 52,542 48,635
------- ------- -------
Interest expense:
Deposits.................................................. 25,911 24,910 21,511
Short-term borrowings..................................... 1,162 868 810
Long-term borrowings...................................... 344 380 401
------- ------- -------
27,417 26,158 22,722
------- ------- -------
Net interest income.................................. 28,762 26,384 25,913
Provision for loan and lease losses......................... 1,456 773 275
------- ------- -------
Net interest income after provision for loan and
lease losses...................................... 27,306 25,611 25,638
------- ------- -------
Other income:
Service charges on deposit accounts....................... 2,157 1,953 1,722
Net (loss) gain on securities transactions................ (803) 616 528
Other..................................................... 2,163 1,961 1,524
------- ------- -------
3,517 4,530 3,774
------- ------- -------
Other expenses:
Salaries and employee benefits............................ 9,776 9,034 8,697
Occupancy and equipment................................... 2,258 1,998 1,881
Data processing........................................... 2,508 1,997 1,643
Professional fees......................................... 818 1,325 1,060
Advertising and marketing................................. 520 345 667
Postage and courier....................................... 573 599 561
Office supplies and stationery............................ 703 600 493
Other real estate owned and repossessed assets............ 696 882 858
Goodwill amortization..................................... 441 -- --
Capital securities........................................ 615 -- --
Other..................................................... 3,429 3,074 2,651
------- ------- -------
22,337 19,854 18,511
------- ------- -------
Income before income tax expense....................... 8,486 10,287 10,901
Income tax expense.......................................... 2,151 2,606 3,235
------- ------- -------
Net income........................................... $ 6,335 7,681 7,666
======= ======= =======
Earnings per share:
Basic..................................................... $ 0.84 1.01 0.99
======= ======= =======
Diluted................................................... $ 0.83 1.00 0.99
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 6
CNB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS' COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK EQUITY INCOME
------ ---------- -------- ------------- -------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
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 on
securities available for sale
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 on securities
available for sale 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
on securities available for
sale 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 on securities
available for sale 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
Comprehensive income:
Net income....................... -- -- 6,335 -- -- 6,335 6,335
Other comprehensive loss, net of
tax:
Net unrealized gain on
securities transferred from
investment securities held to
maturity to securities
available for sale (pre-tax
$4,877)...................... 3,414
Unrealized net holding losses
on securities available for
sale arising during the year
(pre-tax $11,013)............ (7,709)
Reclassification adjustment for
net losses on securities
available for sale realized
in net income during the year
(pre-tax $851)............... 596
-------
Other comprehensive loss....... -- -- -- (3,699) -- (3,699) (3,699)
-------
Comprehensive income......... $ 2,636
=======
Cash dividends, $.37 per share..... -- -- (2,799) -- -- (2,799)
Purchase of treasury stock......... -- -- -- -- (1,385) (1,385)
Issuance of shares for options and
Dividend Reinvestment Plan....... 10 58 -- -- 537 605
------ ------ ------- ------- ------- -------
Balance at December 31, 1999......... $9,756 6,202 48,265 (5,075) (4,525) 54,623
====== ====== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 7
CNB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income................................................ $ 6,335 7,681 7,666
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,879 1,312 1,100
Provision for loan and lease losses..................... 1,456 773 275
Deferred tax expense.................................... 2,447 1,585 401
Net loss (gain) on securities transactions.............. 803 (616) (528)
Net loss on sales and writedowns of other real estate
owned and repossessed assets.......................... 132 173 310
Purchases of trading securities......................... (24,257) (61,846) (6,312)
Proceeds from sales of trading securities............... 24,305 63,190 5,209
Increase in accrued interest receivable................. (438) (286) (411)
Net change in other assets and other liabilities........ (1,172) 49 (701)
--------- -------- --------
Net cash provided by operating activities............. 11,490 12,015 7,009
--------- -------- --------
Cash flows from investing activities:
Purchases of securities:
Available for sale...................................... (220,367) (169,062) (113,123)
Held to maturity........................................ (5,831) (27,121) (21,750)
Proceeds from sales of securities available for sale...... 79,129 62,534 86,367
Proceeds from maturities and calls of securities:
Available for sale...................................... 46,748 61,774 16,602
Held to maturity........................................ 6,417 23,989 16,196
Net loans and leases made to customers.................... (72,194) (36,274) (26,788)
Loans purchased........................................... (7,972) -- --
Proceeds from sales of other real estate owned and
repossessed assets...................................... 1,924 1,364 704
Purchases of premises and equipment....................... (4,362) (1,324) (1,432)
--------- -------- --------
Net cash used in investing activities................. (176,508) (84,120) (43,224)
--------- -------- --------
Cash flows from financing activities:
Net increase in deposits, exclusive of branch
acquisitions............................................ 12,384 89,670 29,255
Deposits assumed in branch acquisitions, net of premium
paid.................................................... 136,780 -- --
Net increase (decrease) in short-term borrowings.......... 16,933 (15,582) 13,723
Payments on long-term borrowings.......................... (427) (401) (383)
Issuance of capital securities............................ 18,000 -- --
Dividends paid............................................ (2,799) (2,516) (2,272)
Proceeds from issuance of shares for options and Dividend
Reinvestment Plan....................................... 605 1,019 586
Purchases of treasury stock............................... (1,385) (3,455) (1,432)
--------- -------- --------
Net cash provided by financing activities............. 180,091 68,735 39,477
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 15,073 (3,370) 3,262
Cash and cash equivalents at beginning of year.............. 16,128 19,498 16,236
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 31,201 16,128 19,498
========= ======== ========
Additional disclosures relative to cash flows:
Interest paid............................................. $ 26,949 26,105 22,538
========= ======== ========
Taxes paid................................................ $ 635 1,627 2,185
========= ======== ========
Supplemental schedule of non-cash investing and financing
activities:
Transfer of loans to other real estate owned and
repossessed assets...................................... $ 2,215 1,264 1,057
========= ======== ========
Adjustment of securities available for sale to fair value
and decrease in net unrealized loss on securities
available for sale transferred to investment securities
held to maturity, net of tax............................ $ (3,699) (1,769) 1,677
========= ======== ========
Transfer of investment securities held to maturity to
securities available for sale, at amortized cost
(estimated fair value of $117,747 at transfer date) (see
note 3)................................................. $ 112,870 -- --
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 8
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 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 and lease
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 and lease 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 and lease 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 and leases,
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 and lease
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-eight full-service branches and two financial
service centers throughout nine counties in Central New York State. A
substantial portion of the Company's assets are loans secured by real estate
located in these nine 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 nine counties.
(c) Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents consist of cash on hand, due from banks, and federal funds sold.
(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,
40
<PAGE> 9
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 or loss, 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 FHLB stock is pledged to secure FHLB
borrowings.
Securities transferred from the available for sale portfolio to investment
securities held to maturity are recorded at a new cost basis equal to the
securities' fair values at the date of the transfer. Any net unrealized gains or
losses at the transfer date continue to be reported in accumulated other
comprehensive income or loss, net of tax, as long as the securities are carried
in the investment securities held to maturity portfolio. The net unrealized
gains or losses are amortized over the remaining life of the transferred
securities as an adjustment to yield in a manner consistent with the offsetting
amortization of the related premium or discount.
(e) Net Loans and Leases Receivable
Loans and leases receivable are stated at the unpaid principal amount, net
of unearned income, net deferred fees and costs, and the allowance for loan and
lease losses. Loans and leases 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 and leases 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
and leases is applied to reduce the carrying amount of the loan or lease or, if
principal is considered fully collectible, recognized as interest income. Loans
and leases are removed from non-accrual status when they become current as to
principal and interest or when, in the opinion of management, the loans or
leases are considered to be fully collectible as to principal and interest. Loan
and lease fees received at the inception of a loan or lease and certain direct
costs of origination are deferred and amortized into interest income over the
life of the loan or lease.
(f) Allowance for Loan and Lease Losses
The allowance for loan and lease losses is increased through a provision
for loan and lease losses charged to operations. Loans and leases are charged
against the allowance when management believes that collectibility of the
principal is unlikely. The allowance is maintained at a level deemed appropriate
by management based on an evaluation of the known and inherent risks in the
portfolio, historical loan and lease losses, estimated value of underlying
collateral, and current and prospective economic conditions that may affect
borrowers' ability to pay.
41
<PAGE> 10
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 a commercial-type loan) 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 January 1, 1995. 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.
Other real estate owned includes both formally foreclosed and insubstance
foreclosed real properties. 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 over 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) Goodwill
Goodwill relates to the acquisition of branches during August 1999.
Goodwill is being amortized on a straight-line basis over 15 years. The
unamortized balance is reviewed for possible impairment if events or changes in
circumstances indicate that the carrying amount may not be fully recoverable.
(j) 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.
(k) Income Taxes
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
42
<PAGE> 11
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(l) Earnings Per Share
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (such as the Company's stock
options) were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
(m) 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.
(n) Comprehensive Income
Comprehensive income represents the sum of net income and items of other
comprehensive income or loss, 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. Accumulated other comprehensive income or loss,
which is included in stockholders' equity, represents the net unrealized gain or
loss on securities available for sale, net of tax.
(o) Segment Reporting
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 and surrounding areas.
(p) Reclassifications
Amounts in the prior periods' consolidated financial statements are
reclassified whenever necessary to conform to the current period's presentation.
(q) Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board 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 balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. As
amended, SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Management is reviewing the Statement to
determine what impact this Statement will have on the Company's accounting and
disclosures.
43
<PAGE> 12
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) ACQUISITION OF BRANCHES
In August 1999, the Company completed the acquisition of five branch
offices located in Central New York State, in the communities of Oneonta (three
offices), Cooperstown and Norwich, from Astoria Federal Savings and Loan
Association (Astoria). The Company purchased from Astoria approximately $3.7
million in branch-related assets, primarily the real and personal property
associated with the branches, vault cash at the branches, as well as a limited
amount of deposit-related loans. The Company assumed all customer deposit
liabilities maintained at the branches (including accrued interest payable),
totaling approximately $156.5 million. The premium paid on the deposits
transferred and other direct incremental costs associated with the transaction
are reported as goodwill in the consolidated balance sheet. The Company also
received a net cash payment from Astoria of approximately $133.9 million.
(3) SECURITIES
The amortized cost and approximate fair value of securities available for
sale at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Collateralized mortgage obligations.... $115,561 288 (2,294) 113,555
Mortgage-backed securities............. 37,656 74 (869) 36,861
Asset-backed securities................ 32,187 629 (431) 32,385
U.S. Treasury securities............... 5,969 -- (31) 5,938
U.S. Government agency securities...... 60,662 15 (2,612) 58,065
Corporate and taxable municipal debt
securities........................... 77,307 320 (2,357) 75,270
Tax-exempt state and municipal
obligations.......................... 57,542 1,605 (1,401) 57,746
-------- ----- ------- -------
Total debt securities................ 386,884 2,931 (9,995) 379,820
Non-marketable equity securities....... 4,040 -- -- 4,040
Mutual funds........................... 3,464 -- (19) 3,445
Preferred stock........................ 625 1 (166) 460
-------- ----- ------- -------
$395,013 2,932 (10,180) 387,765
======== ===== ======= =======
</TABLE>
44
<PAGE> 13
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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
Non-marketable equity securities............... 2,448 -- -- 2,448
Mutual funds................................... 1,811 -- -- 1,811
Preferred stock................................ 625 -- (22) 603
-------- ----- ------ -------
$188,504 1,937 (3,790) 186,651
======== ===== ====== =======
</TABLE>
The amortized cost and approximate fair value of debt securities available
for sale at December 31, 1999, 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..................................... $ 6,299 6,338
Due after one year through five years....................... 39,115 38,891
Due after five years through ten years...................... 72,751 71,043
Due after ten years......................................... 83,315 80,747
-------- -------
201,480 197,019
Collateralized mortgage obligations, mortgage-backed
securities and asset-backed securities.................... 185,404 182,801
-------- -------
$386,884 379,820
======== =======
</TABLE>
The Company recorded a $1.4 million pre-tax charge during 1999 related to
estimated other-than-temporary impairment of a corporate debt security
classified as available for sale. The $1.4 million charge was recorded in net
(loss) gain on securities transactions in the consolidated statement of income.
Gross gains of $626,000 and gross losses of $37,000 were realized on sales of
trading securities and securities available for sale in 1999. 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.
During 1999, the Company transferred all investment securities held to
maturity to securities available for sale. At the date of transfer, the
amortized cost of investment securities held to maturity was approximately
$112.9 million and the estimated fair value was approximately $117.7 million.
The transfer was made for asset/liability management purposes and to allow the
Company flexibility with certain tax planning strategies. The Company no longer
maintains an investment securities held to maturity portfolio.
45
<PAGE> 14
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and approximate fair value of investment securities held
to maturity at December 31, 1998 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>
Tax-exempt 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
======== ===== ==== =======
</TABLE>
There were no sales of investment securities held to maturity during 1999,
1998 or 1997.
Securities with a carrying value of approximately $222.3 million and $163.9
million at December 31, 1999 and 1998, respectively, were pledged to secure
public deposits, repurchase agreements and borrowings from the U.S. Treasury.
(4) NET LOANS AND LEASES RECEIVABLE
The composition of the loan and lease portfolio is as follows at December
31:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
One-to-four family mortgages.............................. $ 83,949 62,675
Commercial................................................ 79,349 56,466
Agricultural.............................................. 16,960 17,193
Construction.............................................. 2,286 3,643
Home equity............................................... 25,183 24,893
-------- -------
207,727 164,870
-------- -------
Other loans and leases:
Lease receivables......................................... 76,002 43,486
Commercial................................................ 42,743 33,238
Agricultural.............................................. 17,252 18,399
Manufactured housing...................................... 55,774 60,975
Tax-exempt................................................ 6,116 2,989
Consumer.................................................. 57,944 59,573
-------- -------
255,831 218,660
-------- -------
Less: Net deferred fees/costs and unearned discount......... (5,965) (2,577)
Allowance for loan and lease losses................... (8,529) (8,384)
-------- -------
Net loans and leases receivable...................... $449,064 372,569
======== =======
</TABLE>
46
<PAGE> 15
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the activity in the allowance for loan and lease losses for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................. $8,384 8,378 8,367
Provision for loan and lease losses...................... 1,456 773 275
Charge-offs.............................................. (1,686) (1,325) (1,531)
Recoveries............................................... 375 558 1,267
------ ------ ------
Balance at end of year................................... $8,529 8,384 8,378
====== ====== ======
</TABLE>
The following table sets forth information with regard to non-performing
loans at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Loans in non-accrual status................................ $5,212 3,996 2,107
Loans contractually past due 90 days or more and still
accruing interest........................................ 722 1,279 2,386
------ ----- -----
Total non-performing loans....................... $5,934 5,275 4,493
====== ===== =====
</TABLE>
There are no material commitments to extend further credit to borrowers
with non-performing loans.
Interest income not recognized on the above non-accrual loans was
approximately $164,000, $318,000 and $190,000 for the years ended December 31,
1999, 1998 and 1997, respectively. Approximately $244,000, $71,000 and $21,000
of interest on the above non-accrual loans was collected and recognized as
income during the years ended December 31, 1999, 1998 and 1997, respectively.
The Company had impaired loans of $4.3 million and $3.3 million at December
31, 1999 and 1998, respectively. Included in this amount are impaired loans of
$2.1 million and $886,000, respectively, which had an allowance for loan losses
of $681,000 and $345,000, respectively. Average impaired loans were $3.1 million
for 1999, $2.7 million for 1998, and $2.0 million for 1997. Interest income
recognized on impaired loans was not significant for 1999, 1998 and 1997.
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, 1999 and 1998. (See also note 7)
47
<PAGE> 16
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 969 549
Buildings and improvements.................................. 11,726 8,896
Furniture, fixtures and equipment........................... 5,187 4,811
Construction-in-progress.................................... 71 38
------- ------
17,953 14,294
Less accumulated depreciation............................... (4,954) (4,219)
------- ------
Total premises and equipment, net................. $12,999 10,075
======= ======
</TABLE>
Land, buildings and improvements with a carrying value of approximately $4.6
million and $4.8 million at December 31, 1999 and 1998, respectively, are
pledged to secure long-term borrowings. (See also note 8)
(6) DEPOSITS
The components of interest-bearing deposits are as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
NOW accounts.............................................. $ 96,234 $ 76,896
Savings accounts.......................................... 136,150 102,446
Money market accounts..................................... 64,351 52,618
Time deposits of $100,000 or more......................... 184,594 120,917
Other time deposits....................................... 256,851 208,926
-------- --------
Total............................................. $738,180 $561,803
======== ========
</TABLE>
The approximate amount of contractual maturities of time deposit accounts
for the years subsequent to December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
------------------------- (IN THOUSANDS)
<S> <C>
2000.................................... $349,131
2001.................................... 68,519
2002.................................... 9,295
2003.................................... 6,743
2004.................................... 4,572
Thereafter.............................. 3,185
--------
$441,455
========
</TABLE>
(7) 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
48
<PAGE> 17
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1999 1998 1997
------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at year-end..................................... $29,054 12,347 17,330
Average daily balance during the year................... 13,452 13,882 14,345
Maximum month-end balance during the year............... 29,054 18,068 17,330
Weighted-average interest rate at year-end.............. 5.62% 4.37% 5.04%
Weighted-average interest rate during the year.......... 4.63% 4.86% 4.84%
</TABLE>
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
$14.4 million and $10.9 million being owed to these entities at December 31,
1999 and 1998, respectively.
The Company has two lines of credit, expiring in December 2000, which are
available from the FHLB of New York. The first is an overnight line of credit
for approximately $42.7 million with interest based on existing market
conditions. The second is a one-month overnight repricing line of credit for
approximately $42.7 million with interest based on existing market conditions.
There were no amounts outstanding on these lines at December 31, 1999 or 1998.
Borrowings on these lines are secured by FHLB stock, certain securities and
one-to-four family first lien mortgage loans.
(8) LONG-TERM BORROWINGS
Long-term borrowings consist of a Federal Home Loan Bank borrowing of
approximately $1.5 million and $1.9 million at December 31, 1999 and 1998,
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 $4.6 million at both December 31, 1999 and 1998, which bears
interest at a variable commercial paper rate, with payments due through 2025.
The weighted-average interest rate on the IDA note was 5.43% during 1999 and
5.70% during 1998.
The amount of principal payments due over the next five years (2000 through
2004) for long-term borrowings is $445,000, $477,000, $504,000, $418,000 and
$90,000, with $4.2 million in principal payments due thereafter.
(9) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED
DEBENTURES
On June 14, 1999, the Company established CNBF Capital Trust I (the Trust),
which is a statutory business trust. The Trust exists for the exclusive purpose
of issuing and selling 30 year guaranteed preferred beneficial interests in the
Company's junior subordinated debentures (capital securities). On August 4,
1999, the Trust issued $18.0 million in capital securities at 3-month LIBOR plus
275 basis points, which equaled 8.12% at issuance. The rate on the capital
securities resets quarterly, equal to the 3-month LIBOR plus 275 basis points
(8.26% for the December 31, 1999 quarterly payment). The Company used the net
proceeds from the sale of the capital securities for general corporate purposes
and to provide equity to the Bank. The capital securities, with associated
expense that is tax deductible, qualify as Tier I capital under regulatory
definitions, subject to certain restrictions. The Company's primary source of
funds to pay interest on the debentures owed to the Trust are current dividends
from the Bank. Accordingly, the Company's ability to service the debentures is
dependent upon the continued ability of the Bank to pay dividends. The capital
securities are not classified as debt for financial statement purposes and
therefore the expense associated with the capital securities is recorded as
non-interest expense in the consolidated statements of income.
49
<PAGE> 18
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) 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.
(11) INCOME TAXES
The following is a summary of the components of income tax expense for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense (benefit):
Federal.................................................. $ (296) 864 2,085
State.................................................... -- 157 749
------ ----- -----
(296) 1,021 2,834
Deferred tax expense....................................... 2,447 1,585 401
------ ----- -----
$2,151 2,606 3,235
====== ===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tax expense at statutory rate........................... $ 2,885 3,498 3,706
Tax-exempt income....................................... (1,156) (1,268) (1,080)
State income tax, net of Federal tax benefit............ 387 386 554
Other, net.............................................. 35 (10) 55
------- ------ ------
Actual tax expense.................................... $ 2,151 2,606 3,235
======= ====== ======
Effective tax rate...................................... 25.3% 25.3% 29.7%
======= ====== ======
</TABLE>
50
<PAGE> 19
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences and tax credit carryforwards that
give rise to significant portions of the deferred tax assets and liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................. $ 3,604 3,605
Deferred compensation..................................... 1,775 1,576
Writedown of corporate debt security...................... 599 --
Other real estate owned and repossessed assets............ 40 106
Deferred loan fees........................................ 63 55
Pension and postretirement benefits....................... 343 353
Accrued liabilities....................................... 190 191
Alternative minimum tax credit carryforward............... 1,096 314
New York State tax credit carryforward.................... 125 --
Other..................................................... 452 221
------- ------
Gross deferred tax assets.............................. 8,287 6,421
------- ------
Deferred tax liabilities:
Leases.................................................... (9,338) (5,113)
Deferred loan costs....................................... (267) (122)
Other..................................................... (46) (103)
------- ------
Gross deferred tax liabilities......................... (9,651) (5,338)
------- ------
Net deferred tax (liability) asset................... $(1,364) 1,083
======= ======
</TABLE>
In addition to the deferred tax assets and liabilities described above, the
Company had a deferred tax asset of $2.2 million and $556,000 at December 31,
1999 and 1998, respectively, related to the net unrealized loss on securities
available for sale.
As of December 31, 1999 and 1998, the Company had alternative minimum tax
(AMT) credit carryforwards of $1.1 million and $314,000, respectively. 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.
As of December 31, 1999, the Company had New York State tax credit
carryforwards of $125,000. These credits may be used indefinitely to reduce New
York State taxes 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 prior years, as well as the time period that the
items giving rise to the deferred tax assets are expected to reverse, a deferred
tax asset valuation allowance was not considered necessary as of December 31,
1999 and 1998.
(12) STOCK OPTION PLAN
During 1994, the Company established a Stock Option Plan (the Plan) which
permits the issuance of options to employees. The Company has reserved 300,000
shares (adjusted for stock splits) of common stock for issuance under the Plan.
As of December 31, 1999, 226,500 options have been granted. Stock options are
51
<PAGE> 20
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
non-transferable 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>
NO. OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding at January 1, 1997............................. 124,500 $ 7.21
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) 16.25
------- ------
Outstanding at December 31, 1998........................... 126,931 11.58
Granted.................................................. 3,000 15.38
Exercised................................................ (8,752) 8.01
Forfeited................................................ (4,500) 17.42
------- ------
Outstanding at December 31, 1999........................... 116,679 $11.73
======= ======
</TABLE>
The following table summarizes information about the Company's stock
options at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE REMAINING
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------- ----------- ---------------- -----------
<S> <C> <C> <C>
$ 5.43 27,923 4.2 years 27,923
9.38 33,256 6.2 33,256
15.38 3,000 9.6 --
16.25 51,000 8.8 5,100
19.75 1,500 9.0 150
------- ------
116,679 7.0 66,429
======= ======
</TABLE>
As of December 31, 1998 and 1997, respectively, 58,431 and 102,500 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 1999 and 1998 was $4.05 and
$4.22, 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 1999 and 1998, respectively:
dividend yield of 2.5% and 1.5%; expected volatility of 19.6% and 19.1%; risk
free interest rate of 6.2% and 4.5%; expected option life of 7.0 years for both
years; and estimated forfeiture rate of 10% for both years. Pro-
52
<PAGE> 21
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Net income (in thousands):
As reported.............................................. $6,335 7,681 7,666
Pro-forma................................................ 6,305 7,656 7,636
Basic earnings per share:
As reported.............................................. 0.84 1.01 0.99
Pro-forma................................................ 0.83 1.00 0.99
Diluted earnings per share:
As reported.............................................. 0.83 1.00 0.99
Pro-forma................................................ 0.83 1.00 0.98
</TABLE>
(13) 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 table provides 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, together with a reconciliation of the plan's funded status at
December 31:
<TABLE>
<CAPTION>
1999 1998
------- -----
(IN THOUSANDS)
<S> <C> <C>
Reconciliation of projected benefit obligation:
Projected benefit obligation at January 1................. $ 8,109 7,510
Service cost........................................... 476 504
Interest cost.......................................... 532 538
Benefits paid.......................................... (885) (540)
Actuarial (gain) loss.................................. (1,013) 97
------- -----
Projected benefit obligation at December 31............... 7,219 8,109
------- -----
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1.................... 8,826 8,906
Actual return on plan assets........................... 527 563
Benefits paid.......................................... (885) (540)
Actuarial gain (loss) due to measurement date prior to
December 31........................................... 633 (103)
------- -----
Fair value of plan assets at December 31.................. 9,101 8,826
------- -----
Funded status:
Funded status at December 31.............................. 1,882 717
Unrecognized portion of net asset at transition........... (671) (758)
Unrecognized prior service cost........................... 93 104
Unrecognized net gain..................................... (2,104) (825)
------- -----
Pension liability recognized in other liabilities...... $ (800) (762)
======= =====
</TABLE>
53
<PAGE> 22
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the components of net periodic pension cost
for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost................................................ $ 476 504 380
Interest cost............................................... 532 538 477
Expected return on plan assets.............................. (882) (775) (695)
Amortization of unrecognized net asset at transition........ (87) (87) (87)
Amortization of unrecognized prior service cost............. 11 10 11
Amortization of unrecognized actuarial gain................. (12) -- (12)
----- ---- ----
Net periodic pension cost................................. $ 38 190 74
===== ==== ====
</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 are shown in the table below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted-average assumptions at December 31:
Discount rate............................................. 7.50% 6.50% 7.00%
Expected return on plan assets............................ 9.50 9.50 9.00
Rate of increase in future compensation levels............ 4.00 4.00 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.
In 1999 and 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 1999 and 1998, employees could elect to contribute any portion
of the incentive award to the 401(k) plan. In 1997, the Company maintained a
profit sharing plan for all employees and an incentive plan for certain key
officers. Awards under the 1997 profit sharing plan were based on certain
pre-determined criteria set by the Board of Directors. Awards under the 1997
incentive plan were based on the Bank achieving certain pre-determined
performance targets set by the Board of Directors. In 1997, 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 $1.0 million in 1999, $948,000 in 1998, and $940,000 in 1997.
Salary Continuation Agreements
The Company also has salary continuation agreements with certain key
officers and former officers. The Company had accrued $1.8 million and $1.9
million at December 31, 1999 and 1998, respectively, to reflect its liability
under these agreements. The expense related to these agreements amounted to
$260,000 in 1999, $292,000 in 1998, and $100,000 in 1997.
54
<PAGE> 23
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with these agreements, the Company has purchased life
insurance on the related officers with the Company named as beneficiary. At
December 31, 1999 and 1998, the cash surrender value of these policies was $1.7
million and $1.5 million, respectively. The income recorded related to the cash
surrender value of these policies was $270,000 in 1999, $243,000 in 1998, and
$180,000 in 1997. The Company paid life insurance premiums of $187,000 in 1999,
$178,000 in 1998, and $180,000 in 1997.
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 significant.
(14) 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.
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
amount of the instrument. 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>
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit and unused lines of credit..... $40,137 42,122
Letters of credit and standby letters of credit............. 577 1,313
------- ------
$40,714 43,435
======= ======
</TABLE>
55
<PAGE> 24
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company does not currently utilize futures contracts, forwards
(excluding forward sale commitments on residential mortgage loans), swaps,
option contracts or other derivative instruments with similar characteristics.
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, 1999 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
<S> <C>
2000........................................... $ 767
2001........................................... 750
2002........................................... 637
2003........................................... 425
2004........................................... 409
Thereafter..................................... 3,942
------
$6,930
======
</TABLE>
Serviced Loans
The total amount of loans serviced by the Company for unrelated third
parties was approximately $17.9 million and $14.4 million at December 31, 1999
and 1998, 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 $2.6
million and $8.1 million at December 31, 1999 and 1998, respectively.
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.
56
<PAGE> 25
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) 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 capital adequacy measures require banking institutions to
maintain minimum 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, 1999 and 1998, the Company and the Bank met
all capital adequacy requirements to which they were subject.
As of December 31, 1999 and 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>
MINIMUM MINIMUM RATIOS
RATIOS FOR TO BE WELL
1999 ACTUAL 1998 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):
Bank..................... $54,904 6.3% $56,035 7.8% 4.0% 5.0%
Consolidated............. 58,240 6.6 56,932 7.9 4.0
Tier 1 Capital (to Risk
Weighted Assets):
Bank..................... 54,904 8.9 56,035 11.2 4.0 6.0
Consolidated............. 58,240 9.4 56,932 11.3 4.0
Total Capital (to Risk
Weighted Assets):
Bank..................... 62,612 10.2 62,303 12.5 8.0 10.0
Consolidated............. 65,985 10.7 63,315 12.5 8.0
</TABLE>
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. As of December 31, 1999, the Bank could pay dividends of
approximately $12.5 million to the Parent Company without prior regulatory
approval.
57
<PAGE> 26
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) EARNINGS PER SHARE
The following table provides the calculation of basic and diluted EPS for
the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- -------------------------------- --------------------------------
NET WEIGHTED PER SHARE NET WEIGHTED PER SHARE NET WEIGHTED PER SHARE
INCOME AVG. SHARES AMOUNT INCOME AVG. SHARES AMOUNT INCOME AVG. SHARES AMOUNT
------ ----------- --------- ------ ----------- --------- ------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income
available to
common
stockholders..... $6,335 7,571 $0.84 $7,681 7,625 $1.01 $7,666 7,712 $0.99
====== ===== ====== ===== ====== ===== =====
Effect of dilutive
securities:
Stock options...... 35 48 44
----- ----- -----
Diluted EPS.......... $6,335 7,606 $0.83 $7,681 7,673 $1.00 $7,666 7,756 $0.99
====== ===== ===== ====== ===== ===== ====== ===== =====
</TABLE>
Options to purchase 52,500 shares of common stock at a weighted-average
price of $16.35 per share were outstanding at December 31, 1999, but were not
included in the computation of diluted EPS for the year ended December 31, 1999
because the options' exercise price was greater than the average market price of
the common stock during 1999.
(17) 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, if any,
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. Cash flows are discounted using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan.
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. The discount rate is estimated using
the rates currently offered for deposits with similar remaining maturities. 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.
58
<PAGE> 27
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Guaranteed Preferred Beneficial Interests in Company's Junior Subordinated
Debentures
Given the variable rate nature of this financial instrument, the carrying
value approximates fair value.
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 not
significant.
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............... $ 31,201 31,201 16,128 16,128
Securities available for sale........... 387,765 387,765 186,651 186,651
Investment securities held to
maturity............................. -- -- 113,456 119,046
Net loans and leases receivable(1)...... 449,064 429,292 372,569 376,268
Accrued interest receivable............. 6,281 6,281 5,843 5,843
Financial liabilities:
Noninterest-bearing deposits............ 58,064 58,064 66,339 66,339
Interest-bearing deposits............... 738,180 739,137 561,803 563,943
Short-term borrowings................... 29,584 29,584 12,651 12,651
Long-term borrowings.................... 6,103 6,075 6,530 6,506
Accrued interest payable................ 2,964 2,964 2,496 2,496
Guaranteed preferred beneficial
interests in Company's junior
subordinated debentures.............. 18,000 18,000 -- --
</TABLE>
- ---------------
(1) Lease receivables, although excluded from the scope of SFAS No. 107, are
included in the estimated fair value at their carrying amounts.
The reported fair values of financial instruments are based on a variety of
factors. Accordingly, the fair values may not represent the 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 estimates of fair value
under SFAS No. 107.
59
<PAGE> 28
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) 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:
Condensed Balance Sheets
<TABLE>
<CAPTION>
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents................................. $ 614 135
Securities available for sale............................. 1,273 603
Premises and equipment, net............................... 4,566 4,795
Investment in subsidiaries................................ 69,775 54,846
Other assets.............................................. 1,200 58
------- ------
$77,428 60,437
======= ======
Liabilities and stockholders' equity:
Long-term borrowings...................................... 4,564 4,630
Liability to trust subsidiary related to capital
securities............................................. 18,000 --
Other liabilities......................................... 241 241
Stockholders' equity...................................... 54,623 55,566
------- ------
$77,428 60,437
======= ======
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries.............................. $4,134 4,031 2,289
Interest income.......................................... 115 74 120
Net gain on securities transactions...................... -- 20 182
Other income............................................. 657 685 597
------ ----- -----
Total income........................................ 4,906 4,810 3,188
------ ----- -----
Expenses:
Interest on long-term borrowings......................... 249 266 269
Interest on liability to trust subsidiary related to
capital securities.................................... 615 -- --
Other.................................................... 527 697 568
------ ----- -----
Total expenses...................................... 1,391 963 837
------ ----- -----
Income before equity in undistributed earnings of
subsidiaries............................................. 3,515 3,847 2,351
Equity in undistributed earnings of subsidiaries........... 2,820 3,834 5,315
------ ----- -----
Net income.......................................... $6,335 7,681 7,666
====== ===== =====
</TABLE>
60
<PAGE> 29
CNB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income........................................... $ 6,335 7,681 7,666
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of
subsidiaries.................................... (2,820) (3,834) (5,315)
Depreciation and amortization..................... 284 266 251
Net gain on securities transactions............... -- (20) (182)
Net change in other assets and other
liabilities..................................... (1,103) (69) (8)
-------- ------ ------
Net cash provided by operating activities....... 2,696 4,024 2,412
-------- ------ ------
Cash flows from investing activities:
Purchases of securities available for sale........... (1,797) -- (625)
Proceeds from sales of securities available for
sale.............................................. -- 520 1,299
Maturities and calls of securities available for
sale.............................................. 1,000 -- --
Purchases of premises and equipment.................. (55) (162) (197)
Investment in bank subsidiary........................ (15,000) -- --
Investment in non-bank subsidiaries.................. (720) -- (125)
-------- ------ ------
Net cash (used in) provided by investing
activities................................... (16,572) 358 352
-------- ------ ------
Cash flows from financing activities:
Payments on long-term borrowings..................... (66) (60) (60)
Issuance of liability to trust subsidiary related to
capital securities................................ 18,000 -- --
Dividends paid....................................... (2,799) (2,516) (2,272)
Proceeds from issuance of shares for options and
Dividend Reinvestment Plan........................ 605 1,019 586
Purchases of treasury stock.......................... (1,385) (3,455) (1,432)
-------- ------ ------
Net cash provided by (used in) financing
activities................................... 14,355 (5,012) (3,178)
-------- ------ ------
Net increase (decrease) in cash and cash equivalents... 479 (630) (414)
Cash and cash equivalents at beginning of year......... 135 765 1,179
-------- ------ ------
Cash and cash equivalents at end of year............... $ 614 135 765
======== ====== ======
</TABLE>
These condensed financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
61
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Central National Bank, Canajoharie
Incorporated in New York
2. Central Asset Management, Inc.
Incorporated in New York
3. CNBF Capital Trust I
Incorporated in Delaware
<PAGE> 1
Exhibit 23
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 January 28, 2000, relating to the
consolidated balance sheets of CNB Financial Corp. and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1999, which report appears in the December
31, 1999 Annual Report on Form 10-K of CNB Financial Corp.
/s/ KPMG LLP
Albany, New York
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 25,051 16,128
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 6,150 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 387,765 186,651
<INVESTMENTS-CARRYING> 0 113,456
<INVESTMENTS-MARKET> 0 119,046
<LOANS> 457,593 380,953
<ALLOWANCE> 8,529 8,384
<TOTAL-ASSETS> 914,172 711,088
<DEPOSITS> 796,244 628,142
<SHORT-TERM> 29,584 12,651
<LIABILITIES-OTHER> 9,618 8,199
<LONG-TERM> 24,103 6,530
0 0
0 0
<COMMON> 9,756 9,746
<OTHER-SE> 44,867 45,820
<TOTAL-LIABILITIES-AND-EQUITY> 914,172 711,088
<INTEREST-LOAN> 34,234 33,008
<INTEREST-INVEST> 21,139 19,269
<INTEREST-OTHER> 806 265
<INTEREST-TOTAL> 56,179 52,542
<INTEREST-DEPOSIT> 25,911 24,910
<INTEREST-EXPENSE> 1,506 1,248
<INTEREST-INCOME-NET> 28,762 26,384
<LOAN-LOSSES> 1,456 773
<SECURITIES-GAINS> (803) 616
<EXPENSE-OTHER> 22,337 19,854
<INCOME-PRETAX> 8,486 10,287
<INCOME-PRE-EXTRAORDINARY> 6,335 7,681
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,335 7,681
<EPS-BASIC> 0.84<F1> 1.01<F1>
<EPS-DILUTED> 0.83<F2> 1.00<F2>
<YIELD-ACTUAL> 3.99<F3> 4.20<F3>
<LOANS-NON> 5,212 3,996
<LOANS-PAST> 722 1,279
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 8,384 8,378
<CHARGE-OFFS> 1,686 1,325
<RECOVERIES> 375 558
<ALLOWANCE-CLOSE> 8,529 8,384
<ALLOWANCE-DOMESTIC> 6,850 6,032
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,679 2,352
<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>
