UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly period ending September 30, 2000
Commission File Number 33-45522
CNB FINANCIAL CORP.
-------------------
(Exact name of registrant as specified in its charter)
New York 22-3203747
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 Church Street, Canajoharie N.Y. 13317
----------------------------------------
(Address of principal executive offices - Zip code)
Registrant's telephone number, include area code (518) 673-3243
Indicated by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the bank
was required to file such reports), and (2) has been subjected to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding
Class on October 31, 2000
----- -------------------
Common Stock, $1.25 par value 7,473,691
<PAGE>
PART I. FINANCIAL INFORMATION Page
------
Item 1. Consolidated Interim Financial
Statements and Notes
1. Consolidated Balance Sheets ............................ 3
2. Consolidated Statements of Income ...................... 4
3. Consolidated Statements of Cash Flows .................. 5
4. Notes to Unaudited Consolidated
Interim Financial Statements ......................... 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 8-26
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ....................................... 26-28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 29
Item 2. Changes in Securities and Use of Proceeds ................. 29
Item 3. Defaults Upon Senior Securities ........................... 29
Item 4. Submission of Matters to a Vote
of Security Holders ..................................... 29
Item 5. Other Information ......................................... 29
Item 6. Exhibits and Reports on Form 8-K .......................... 29
SIGNATURES ............................................................. 30
2
<PAGE>
Part 1. Financial Information
Item 1. Consolidated Financial Statements
CNB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
September 30, December 31,
2000 1999
---- ----
Assets (Unaudited)
Cash and due from banks ........................... $ 19,024 $ 25,051
Federal funds sold ................................ -- 6,150
--------- ---------
Total cash and cash equivalents ................. 19,024 31,201
Securities available for sale, at fair value ...... 367,697 387,765
Net loans & leases receivable ..................... 512,917 449,064
Accrued interest receivable ....................... 6,340 6,281
Premises and equipment, net ....................... 12,809 12,999
Other real estate owned and repossessed assets .... 970 1,258
Goodwill .......................................... 18,466 19,428
Other assets ...................................... 6,438 6,176
--------- ---------
Total assets ....................... $ 944,661 $ 914,172
========= =========
Liabilities, Guaranteed Preferred Beneficial
Interests in Corporation's Junior Subordinated
Debentures and Stockholders' Equity
Noninterest-bearing deposits ...................... $ 70,994 $ 58,064
Interest-bearing deposits ......................... 714,250 738,180
--------- ---------
Total deposits ..................... 785,244 796,244
--------- ---------
Short-term borrowings:
Securities sold under agreements to repurchase ... 21,989 29,054
Borrowings from the Federal Home Loan Bank
of New York ..................................... 45,175 --
Borrowings from the U.S. Treasury ................ 517 530
--------- ---------
Total short-term borrowings ........ 67,681 29,584
--------- ---------
Long-term borrowings .............................. 5,723 6,103
Other liabilities ................................. 10,753 9,618
--------- ---------
Total liabilities .................. 869,401 841,549
--------- ---------
Guaranteed preferred beneficial interests
in Corporation's junior subordinated debentures .. 18,000 18,000
--------- ---------
Stockholders' equity:
Common stock, $1.25 par value, 20,000,000 shares
authorized (7,805,115 issued at September 30, 2000
and 7,805,128 issued at December 31, 1999) ....... 9,756 9,756
Additional paid-in capital ........................ 6,202 6,202
Retained earnings ................................. 52,354 48,265
Accumulated other comprehensive loss .............. (5,678) (5,075)
Treasury stock, at cost (331,424 shares at
September 30, 2000 and 268,263
at December 31, 1999) ............................ (5,374) (4,525)
--------- ---------
Total stockholders' equity ........ 57,260 54,623
--------- ---------
Total liabilities, guaranteed
preferred beneficial interests
in Corporation's junior
subordinated debentures and
stockholders' equity ............. $ 944,661 $ 914,172
========= =========
See accompanying notes to unaudited consolidated interim financial statements.
3
<PAGE>
CNB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
Interest and dividend income:
<S> <C> <C> <C> <C>
Loans & leases, including fees ...... $ 10,622 $ 8,722 $ 30,358 $ 25,481
Securities:
Taxable ............................. 6,605 4,406 20,001 11,942
Nontaxable .......................... 354 800 1,662 2,637
Federal funds sold and other ......... 46 368 174 439
-------- -------- -------- --------
17,627 14,296 52,195 40,499
-------- -------- -------- --------
Interest expense:
Deposits ............................ 8,331 6,259 24,696 18,314
Short-term borrowings ............... 1,144 491 1,984 948
Long-term borrowings ................ 90 88 295 265
-------- -------- -------- --------
9,565 6,838 26,975 19,527
-------- -------- -------- --------
Net interest income ............... 8,062 7,458 25,220 20,972
Provision for loan and lease losses . 330 340 1,070 1,060
-------- -------- -------- --------
Net interest income after provision
for loan losses .................. 7,732 7,118 24,150 19,912
-------- -------- -------- --------
Other income:
Service charges on deposit accounts . 645 547 1,869 1,541
Net gain (loss) on securities
transactions ....................... 88 32 (238) (620)
Other ............................... 470 451 1,539 1,375
1,203 1,030 3,170 2,296
-------- -------- -------- --------
Other expenses:
Salaries and employee benefits ...... 2,394 2,579 7,376 7,142
Occupancy and equipment ............. 662 567 2,089 1,596
Data processing ..................... 678 662 1,909 1,837
Professional fees ................... 223 134 613 621
Advertising and marketing ........... 258 176 738 331
Postage and courier ................. 148 139 441 391
Office supplies and stationery ...... 141 218 473 541
Other real estate owned and
repossessed assets ................. 12 151 397 505
Goodwill amortization ............... 332 110 995 110
Capital securities .................. 465 227 1,300 227
Other ............................... 898 890 2,703 2,347
-------- -------- -------- --------
6,211 5,853 19,034 15,648
-------- -------- -------- --------
Income before income tax expense ..... 2,724 2,295 8,286 6,560
Income tax expense ................... 707 637 2,173 1,756
-------- -------- -------- --------
Net income ......................... $ 2,017 $ 1,658 $ 6,113 $ 4,804
======== ======== ======== ========
Earnings per share:
Basic .............................. $ 0.27 $ 0.22 $ 0.82 $ 0.63
Diluted ............................ $ 0.27 $ 0.22 $ 0.81 $ 0.63
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
4
<PAGE>
CNB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine months ended,
-----------------------------
September 30, September 30,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income .......................................... $ 6,113 $ 4,804
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 1,953 1,141
Provision for loan and lease losses .............. 1,070 1,060
Net loss on securities transactions ............... 238 620
Net loss on sales and writedowns of other
real estateowned and repossessed assets .......... 87 118
Net gain from mortgage loan sales ................. (83) --
Proceeds from sales of loans held for sale ........ 5,199 --
Origination of loans held for sale ................ (5,116) --
Purchases of trading securities ................... (5,250) (24,257)
Proceeds from sales of trading securities ......... 5,261 24,304
Increase in accrued interest receivable ........... (59) (564)
Net change in other assets and other liabilities .. 1,230 1,893
--------- ---------
Net cash provided by operating activities ...... 10,643 9,119
--------- ---------
Cash flows from investing activities:
Purchases of securities:
Available for sale ................................ (89,236) (159,899)
Held to maturity .................................. -- (5,831)
Proceeds from sales of securities:
Available for sale ................................ 70,793 74,881
Proceeds from maturities and calls of securities:
Available for sale ................................ 37,376 30,975
Held to maturity .................................. -- 6,417
Net loans and leases made to customers .............. (66,355) (46,548)
Proceeds from sales of other real estate owned and
repossessed assets ................................. 1,559 1,100
Proceeds used from premises and equipment acquired
in branch transaction .............................. -- (2,900)
Purchase of premises and equipment,
exclusive of branch transaction .................... (801) (881)
--------- ---------
Net cash used in investing activities ............ (46,664) (102,686)
--------- ---------
Cash flows from financing activities:
Net (decrease) in deposits, exclusive of
branch acquisition ................................. (11,000) (24,208)
Deposits assumed in branch transaction, net
of premium ......................................... -- 135,866
Net increase (decrease) in short term borrowings .... 38,097 (3,727)
Payments on long-term borrowings .................... (380) (335)
Proceeds from the issuance of capital securities .... -- 18,000
Dividends paid ...................................... (2,024) (1,858)
Proceeds from issuance of shares for options and
Dividend Reinvestment Plan ......................... -- 446
Purchases of treasury stock ......................... (849) (1,257)
--------- ---------
Net cash provided by financing activities ......... 23,844 122,927
--------- ---------
Net (decrease) increase in cash and cash equivalents . (12,177) 29,360
Cash and cash equivalents at beginning of period ..... 31,201 16,128
--------- ---------
Cash and cash equivalents at end of period ........... $ 19,024 $ 45,488
========= =========
</TABLE>
Additional disclosure relative to non-cash investing activities:
On May 1, 1999, the Company transferred its held-to-maturity
investment security portfolio to the available for sale
investment security portfolio. The amortized cost of held-
to-maturity investment securities at the time of transfer
amounted to $112,870.
See accompanying notes to unaudited consolidated interim financial statements.
5
<PAGE>
CNB Financial Corp.
Notes to Unaudited Consolidated Interim Financial Statements
1. The accompanying unaudited consolidated interim financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered necessary for a fair
presentation have been included. The accompanying unaudited consolidated
interim financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K as of and for the year ended December
31, 1999. Operating results for the nine-month and three-month period ended
September 30, 2000 are not necessarily indicative of the results that may
be expected for the full year.
2. Earnings Per Share - Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity (such as the Company's stock options).
The following table provides the calculation of basic and diluted EPS for
the three and nine months ended September 30:
<TABLE>
<CAPTION>
Three Months Ended 9/30/00 Three Months Ended 9/30/99
----------------------------------- -------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
common stockholders ... $2,017 7,474 $ 0.27 $1,658 7,564 $ 0.22
Effect of dilutive securities:
Stock options ............ 12 34
-------------------------------------------------------------------------------
Diluted EPS .................. $2,017 7,486 $ 0.27 $1,658 7,598 $ 0.22
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended 9/30/00 Nine Months Ended 9/30/99
----------------------------------- -------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
common stockholders ... $6,113 7,498 $ 0.82 $4,804 7,579 $ 0.63
Effect of dilutive securities:
Stock options ............ 19 39
-------------------------------------------------------------------------------
Diluted EPS .................. $6,113 7,517 $ 0.81 $4,804 7,618 $ 0.63
===============================================================================
</TABLE>
6
<PAGE>
3. 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.
Total comprehensive income for the nine months ended September 30, 2000 and
1999 was $5.510 million and $3.679 million, respectively, and total
comprehensive income (loss) for the three months ended September 30, 2000
and 1999 was $3.816 million and ($733,000), respectively.
4. Recent Accounting Pronouncements:
FASB Statement 133
The Company will adopt the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective January 1, 2001. 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. Changes in the fair value of the derivative financial
instruments will be reported in either earnings or comprehensive income,
depending on the use of the derivative and whether or not it qualifies for
hedge accounting. Consequently, there may be increased volatility in net
income and stockholders' equity on an ongoing basis as a result of
accounting for derivatives in accordance with SFAS No. 133.
Special hedge accounting treatment is permitted only if specific criteria
are met, including a requirement that the hedging relationship be highly
effective both at inception and on an ongoing basis. Accounting for hedges
varies based on the type of hedge - fair value or cash flow. Results of
effective hedges are recognized in current earnings for fair value hedges
and in other comprehensive income for cash flow hedges. Ineffective
portions of hedges are recognized immediately in earnings and are not
deferred.
As of September 30, 2000, the Company has certain debt securities which
have embedded derivatives that will have to be accounted for separately
under SFAS No. 133. The purpose of these debt securities is to hedge
against the exposure associated with certain of the Company's variable rate
assets that have a decrease in interest payments in a falling interest rate
environment. The Company is in the process of determining if the above
mentioned hedge will qualify for cash flow hedge accounting treatment under
SFAS No. 133. If the intended cash flow hedge does not qualify for hedge
accounting under SFAS No. 133, changes in the fair value of the embedded
derivatives will need to be reported in net income in the first quarter of
2001. As of September 30, 2000, the book value and market value of the debt
7
<PAGE>
securities with embedded derivatives amounted to approximately $3.854
million and $2.619 million, respectively.
In addition, the Company has certain other embedded derivatives (related to
a time deposit with returns linked to an equity index) which management
expects will need to be separately accounted for at fair value. At this
time, management expects that the net adjustment to fair value upon the
adoption of SFAS No. 133 for these embedded derivatives will not have a
material effect on the Company's consolidated financial statements.
The above estimates are based on current market rates and economic
conditions, which are subject to change. The effect of adoption on January
1, 2001 cannot be estimated with certainty at this time, as it is subject
to unknown variables such as (1) actual derivatives and related hedge
positions, (2) market values of derivatives and related hedged items, and
(3) further ongoing interpretation on SFAS No. 133 by the FASB.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
CNB Financial Corp. (the Company) is a one-bank holding company, registered
under the Bank Holding Company Act of 1956, as amended. It was organized under
the laws of the State of New York and became a bank holding company on January
5, 1993 through the consummation of a reorganization plan with Central National
Bank, Canajoharie, (Bank) which became the wholly owned subsidiary of the
Company. The Company maintains its headquarters in Canajoharie, New York. The
principal business of the Company is to provide, through the Bank, comprehensive
banking services through its network of twenty nine 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.
8
<PAGE>
The Company's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government polices, changes in accounting standards and actions of
regulatory agencies. Future changes in applicable laws, regulations or
government policies may have a material impact on the Company. The demand for
and supply of real estate, competition among lenders, the level of interest
rates and the availability of funds substantially influence lending activities.
The ability to gather deposits and the cost of funds are influenced by
prevailing market interest rates, fees and terms on deposit products, as well as
the availability of alternative investments, including mutual funds and stocks.
Forward Looking Statements
When used in this filing or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project",
"believe", or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. In addition, certain disclosures and information customarily provided
by financial institutions, such as an analysis of the adequacy of the allowance
for loan 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:
a. Deterioration in local, regional, national or global economic conditions
which could result, among other things, in an increase in loan
delinquencies, a decrease in property values, or a change in the housing
turnover rate;
b. Changes in market interest rates or changes in the speed at which market
interest rates change;
c. Changes in laws and regulations affecting the financial service industry;
d. Changes in competition and continued pricing pressures on loan and deposit
products;
e. Changes in consumer preferences and customer borrowing, repayment,
investment and deposit practices;
9
<PAGE>
f. 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; and
g. Ability of the Bank to implement successfully its strategy to increase the
level of loans on its balance sheet at acceptable levels of risk.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including those described above, could affect the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected. The Company does not undertake, and specifically disclaims any
obligations, to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Results of Operations
Net income for the quarter ended September 30, 2000 amounted to $2.017 million,
compared to the $1.658 million reported for the same period in 1999 while net
income for the nine months ended September 30, 2000 amounted to $6.113 million,
compared to the $4.804 million reported for the nine months ended September 30,
1999. Return on average equity and return on average assets were 14.66% and
0.86%, respectively, for the quarter ended September 30, 2000 and 14.92% and
0.87%, respectively, for the nine months ended September 30, 2000. Diluted
earnings per share amounted to $.27 for the quarter ended September 30, 2000
compared to diluted earnings per share of $.22 for the quarter ended September
30, 1999, and diluted earnings per share for the nine months ended September 30,
2000 amounted to $.81 compared to diluted earnings per share of $.63 for the
nine months ended September 30, 1999.
Net income for the nine months ended September 30, 2000 and 1999 was affected by
a write-down of a corporate debt security that is other than temporarily
impaired. The write-down of the corporate debt security amounted to $875,000
(pre-tax) for the nine months ended September 30, 2000, $720,000 was recorded in
the second quarter of 2000 and $155,000 in the third quarter of 2000; and $1.187
million (pre-tax) in the second quarter of 1999. The write-downs were recognized
in net loss on securities transactions. Excluding the write-downs, net income
would have been $2.110 million for the quarter ended September 30, 2000, or
$0.28 diluted earnings per share, up 27.3% from the $0.22 diluted earnings per
share, or $1.658 million earned for the same quarter in 1999. Net income for the
nine months ended September 30, 2000 would have been $6.638 million, or $0.88
diluted earnings per share, up 22.2% from the $0.72 diluted earnings per share,
or $5.516 million in net income that would have been recorded for the same
period in 1999 excluding the 1999 write-down of this corporate debt security.
Net interest income for the quarter ended September 30, 2000 was $8.062 million,
an 8.1% increase over the $7.458 million for the same quarter in 1999. Net
interest income for the nine months ended September 30, 2000 was $25.220
million, a 20.3% increase over the $20.972 million for the same period in 1999.
The increases in net interest
10
<PAGE>
income were due primarily to an increase the average balance of earning assets
in the third quarter and nine-month period ended 2000 when compared to the same
periods in 1999. The increase in earning assets can mainly be attributed to an
acquisition of five bank branches in August of 1999 with deposits totaling
$135.866 million (net of premium paid), and opening five new branches from the
third quarter of 1999 through the third quarter of 2000. (See additional
discussion under the caption "Net Interest Income").
The Company establishes an allowance for loan and lease losses through a
provision for loan and lease losses charged to operations. The adequacy of the
amount of the allowance is determined by management's evaluation of various risk
factors inherent in the loan and lease portfolio. This analysis takes into
consideration such factors as the historical loan and lease loss experience,
changes in the nature and volume of the loan and lease portfolio, overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect borrowers' ability to pay.
The provision for loan and lease losses for the quarter ended September 30, 2000
was $330,000, which is a $10,000 decrease from the provision for loan and lease
losses for the third quarter of 1999. The provision for loan and lease losses
for the nine months ended September 30, 2000 was $1.070 million, which is a
$10,000 increase over the same nine-month period in 1999. The relative
consistency in the provision for loan and lease losses is due primarily to the
slight decrease in the level of non-performing loans offset by the growth in the
loan and lease portfolio. Non-performing loans as a percentage of total loans
were 1.02% at September 30, 2000 compared to 1.21% at September 30, 1999. The
allowance for loan losses as a percentage of non-performing loans was 166.7% at
September 30, 2000 compared to 165.6% at September 30, 1999. Net charge-offs
decreased from $936,000 for the nine months ended September 30, 1999 to $756,000
for the same period in 2000. The decrease in net charge-offs can be attributed
to the sale of the Company's credit card portfolio in the fourth quarter of 1999
and a decrease in manufactured housing lending which comprised a significant
portion of net charge-offs in 1999.
Total non-interest income for the quarter ended September 30, 2000 was $1.203
million, an increase of $173,000 when compared to the same period in 1999.
Services charges on deposit accounts increased $98,000 (17.9%), from $547,000
for the quarter ended September 30, 1999 to $645,000 for the same period in
2000. The increase in service charges on deposit accounts can be attributed to
an increase in the number of transaction accounts the Company services that
resulted from the Company's branch expansion activities. Net gain on securities
transactions increased $56,000 despite a $155,000 write-down on an impaired
corporate debt security during the quarter ended September 30, 2000. The gain on
securities resulted primarily from the sale of tax-exempt investment securities
during the quarter. The Company's securities available for sale portfolio is
used to maintain its liquidity position and to maximize its tax position; from
time to time, securities are sold when deemed prudent by management, to adjust
the interest rate sensitivity of the Company's balance sheet and maximize the
Company's tax position. Other income increased $19,000 (4.2%), from $451,000 for
the quarter ended September 30, 1999 to $470,000 for the same period in 2000.
Merchant fees on credit cards decreased $98,000 in the third quarter of 2000
when compared to the same period in 1999 due to the sale of the merchant
processing business in the second quarter of 2000.
11
<PAGE>
Offsetting this decrease was an increase in mortgage banking revenue of $94,000,
which resulted from commissions on the sale of title insurance of $48,000 and an
increase in gains on the sale of residential real estate loans of $46,000.
Total non-interest income for the nine months ended September 30, 2000 was
$3.170 million, an increase of $874,000 when compared to the $2.296 million for
same period in 1999. As noted above, the nine months ended September 30, 2000
and 1999 were affected by a write-down of a corporate debt security. The
write-down of the corporate debt security amounted to $875,000 (pre-tax) for the
nine months ended September 30, 2000 and $1.187 million (pre-tax) for the same
period in 1999. Excluding the write-down, total non-interest income was $4.045
million for the nine months ended September 30, 2000, up $562,000 (16.1%) from
the $3.483 million recognized in the same period in 1999. The increase in
non-interest income resulted from services charges on deposit accounts which
increased $328,000 (21.3%), from $1.541 million for the nine months ended
September 30, 1999 to $1.869 million for the nine months ended September 30,
2000. The increase in service charges on deposit accounts can be attributed to
an increase in the number of transaction accounts the Company services that
resulted from the Company's branch expansion activities. Additionally, other
income increased $164,000 (11.9%), from $1.375 million for the nine months ended
September 30,1999 to $1.539 million for the nine months ended September 30,
2000. The increase in other income can be primarily attributed to the sale of
the Company's merchant processing business for $82,000, commissions on the sale
of title insurance totaling $82,000, and an increase in the gain on sale of
residential real estate loans of $39,000. Partially offsetting these increases
was a decrease in merchant fee income of $65,000 due to the sale of the merchant
processing business.
Total non-interest expenses were $6.211 million for the quarter ended September
30, 2000, up $358,000 from the same period in 1999. The increase in non-interest
expenses was due primarily to the branch expansion activity that occurred in the
second half of 1999. Capital securities expense and goodwill amortization
amounted to $465,000 and $332,000, respectively, for the quarter ended September
30, 2000 compared to $227,000 and $110,000, respectively, for the same period in
1999. These expenses are a result of the capital securities offering and
branches acquisition that occurred in August of 1999. Salaries and employee
benefits decreased $185,000 from $2.579 million for the quarter ended September
30, 1999 to $2.394 million for the quarter ended September 30, 2000. The
decrease in salaries and benefits can be primarily attributed to an increase in
loan origination activity. Salaries and benefits deferrals associated with loan
origination activity increased $285,000 in the third quarter of 2000 when
compared to the same period in 1999. Occupancy and equipment and advertising and
marketing increased $95,000 and $82,000, respectively, for the quarter ended
September 30, 2000 when compared to the same period in 1999. The increases are
due mainly to the branch expansion noted previously. Additionally, these
branches are located in new markets, which required expenditures for advertising
and marketing campaigns. Professional fees increased $89,000 and other real
estate owned and repossessed assets decreased $139,000 in the third quarter of
2000 when compared to 1999. These two expense items were affected by a
reclassification of a $55,000 legal expense that was mistakenly classified as
other real estate owned and repossessed assets expense in the second quarter of
2000. Excluding this reclassification, other real estate owned and repossessed
assets expense
12
<PAGE>
would have been $67,000 and professional fees would have been $168,000 for the
third quarter of 2000.
Other expenses increased $8,000 from $890,000 for the quarter ended September
30, 1999 to $898,000 for the quarter ended September 30, 2000. The stable level
of other expense for the quarter ended September 30, 2000 when compared to the
same period in 1999 can be primarily attributed to the sale of the merchant
processing business in the second quarter of 2000. Expenses associated with the
merchant processing business decreased $86,000 for the quarter ended September
30, 2000 when compared to the same period in 1999. Partially offsetting this
decrease was an increase in telephone and fax expenses of $32,000 primarily due
to an increase in branch expansion activities. Additionally, leasing fees and
insurance associated with the Company's leasing portfolio increased $27,000 due
to the continued growth in the Company's leasing portfolio.
Total non-interest expenses were $19.034 million for the nine months ended
September 30, 2000, up $3.386 million from the same period in 1999. Capital
securities expense and goodwill amortization amounted to $1.300 million and
$995,000, respectively, for the nine months ended September 30, 2000 compared to
$227,000 and $100,000, respectively, for the same period in 1999. These expenses
are a result of the capital securities offering and the branch acquisition that
occurred in August of 1999. Salaries and employee benefits increased $234,000
from $7.142 million for the nine months ended September 30, 1999 to $7.376
million for the nine months ended September 30, 2000. Total salaries and
compensation increased $855,000 for the nine months ended September 30, 2000
compared to the same period 1999, even though there was an increase in loan
origination cost deferrals of $637,000 and a $106,000 decrease in pension costs.
Occupancy and equipment and advertising and marketing increased $493,000 and
$407,000, respectively, for the nine months ended September 30, 2000 when
compared to the same period in 1999. The increases are due mainly to the branch
expansion.
Other expenses increased $356,000 from $2.347 million for the nine months ended
September 30, 1999 to $2.703 million for the nine months ended September 30,
2000. The increase in other expenses resulted mainly from an increase in losses
incurred on the sale of vehicles sold at the end of the lease term of $109,000,
insurance and fees on leased vehicles of $68,000, correspondent bank service
charges of $58,000, and tele-communications expense of $64,000. Partially
offsetting these increases was a $127,000 decrease in expenses related to the
merchant processing business that was sold in the second quarter of 2000.
Income tax expense was $707,000 for the quarter ended September 30, 2000, up
$70,000 from the $637,000 recognized in the same period in 1999. The effective
tax rate for the third quarter of 2000 and 1999 was 26.0% and 27.8%,
respectively. Income tax expense was $2.173 million for the nine months ended
September 30, 2000, up $417,000 from the $1.756 million recognized for the same
period in 1999. The effective tax rate for the nine months ended September 30,
2000 and 1999 was 26.2% and 26.8%, respectively.
13
<PAGE>
Net Interest Income
(The accompanying schedule entitled "Average Balances/Net Interest Margin -
Fully Taxable Equivalent Basis (FTE)" is the basis of and should be read in
conjunction with this discussion).
Net Interest Income FTE Basis
FTE net interest income was $8.171 million for the quarter ended September 30,
2000, up from the $7.732 million for the same period in 1999. The net interest
margin for the quarter ended September 30, 2000 was 3.63%, down from the 4.09%
for the same period in 1999. FTE net interest income was $25.761 million for the
nine months ended September 30, 2000, up from the $21.847 million for the same
period in 1999. The net interest margin for the nine months ended September 30,
2000 was 3.85%, down from the 4.07% for the same period in 1999. The decrease in
net interest margin is primarily a result of the percentage increase in
interest-bearing liabilities and interest expense exceeding the percentage
increase in earning assets and FTE interest income for the quarters and nine
months ended September 30, 2000 and 1999. Additionally, the Company is liability
sensitive, which means interest-bearing liabilities re-price faster than
interest earning assets. In a rising rate environment, the Company's cost of
funds will increase faster than its yield on interest earning assets. Since the
end of the second quarter of 1999, the Federal Reserve Bank has increased
borrowing rates 150 basis points which has resulted in a decreasing net interest
margin. The Company anticipates that its trend in a decreasing net interest
margin will continue if short-term borrowing rates remain stable.
Earning Assets
Total average earning assets increased $142.945 million from $757.076 million
for the quarter ended September 30, 1999 to $900.021 million for the same period
in 2000. This increase was primarily the result of the branch acquisition during
the quarter ended September 30, 1999. Total average earning assets increased
$176.079 million from $716.123 million for the nine months ended September 30,
1999 to $892.202 million for the same period in 2000. This increase can also be
attributed to the branch acquisition. FTE interest income for the quarter ended
September 30, 2000 was $17.737 million, up $3.167 million from the same period
in 1999. The increase in average earning assets was the primary reason for the
increase in FTE interest income. The yield on earning assets for the quarter
ended September 30, 2000 was 7.88%, a 18 basis point ("bp") increase over the
same period in 1999. The primary reason for the increase in yield was a 52 bp
increase in yield from taxable securities. FTE interest income for the nine
months ended September 30, 2000 was $52.737 million, up $11.363 million from the
same period in 1999. The increase in average earning assets was the primary
reason for the increase in FTE interest income. The yield on earning assets for
the nine months ended September 30, 2000 was 7.88%, an 18 bp increase over the
same period in 1999. The primary reason for the increase in yield was a 93 bp
increase in yield from taxable securities.
Loans
The average balance of loans increased $98.748 million, from $412.723 million
for the quarter ended September 30, 1999 to $511.471 million for the quarter
ended September
14
<PAGE>
30, 2000. The increase in the average balance of loans resulted in an increase
of $1.907 million in FTE interest income for the quarter ended September 30,
2000 when compared to the same period in 1999. The increase in FTE interest
income was offset by a decrease in yield of 14 basis points, from 8.47% for the
quarter ended September 30, 1999 to 8.33% for the same period in 2000. On a year
to date basis, average loans were $488.440 million, up from $396.632 million in
1999. The yield on loans for the nine months ended September 30, 2000 was 8.30%,
down 28 bp from the 8.58% in 1999. FTE interest income was up $4.906 million for
the nine months ended September 30, 2000 when compared to the same period in
1999, due primarily to the increase in the average balance of loans offset by a
decrease in the yield on loans.
Four product lines experienced significant growth during the quarter ended
September 30, 2000 when compared to the same period in 1999. The average balance
of loans secured by residential real estate increased $34.424 million (52.8%),
from an average balance of $65.245 million for the quarter ended September 30,
1999 to $99.669 million for the same period in 2000. FTE interest income from
loans secured by residential real estate increased 40.4% comparing the third
quarter of 2000 to the same period in 1999, despite a 52.8% increase in the
average balance during the same period. This is primarily a result of a decrease
in the yield from loans secured by residential real estate of 68 bp, from 8.40%
for the third quarter of 1999 to 7.72% for the same period in 2000. The decrease
in the yield on loans secured by residential real estate can be attributed to
loans, which have been paid off or re-financed and have been replaced with new
loans, which yield lower rates. The average balance of loans secured by
commercial real estate increased $21.180 million, from an average balance of
$66.012 million for the quarter ended September 30, 1999 to $87.192 million for
the same period in 2000. The yield on commercial real estate increased 51 basis
points, from 8.46% for the third quarter of 1999 to 8.97% for the same period in
2000.
The average balance of auto lease financed receivables, net of unearned
discounts, increased $26.058 million from $54.555 million for the quarter ended
September 30, 1999 to $80.613 million for the same period in 2000. The average
balance of consumer auto loans increased $17.548 million, from $44.029 million
for the third quarter of 1999 to $61.577 million for the same period in 2000.
The average balance of manufactured housing loans decreased $4.493 million, from
$57.613 million for the third quarter 1999 to $53.120 million for the same
period in 2000. Management intends to continue to reduce the manufactured
housing loan portfolio through normal pay-down activity while it continues to
focus on commercial real estate and commercial lending, auto lease financing,
consumer auto lending, as well as residential lending.
Securities
The yield on taxable securities increased 52 basis points from 6.88% for the
quarter ended September 30, 1999 to 7.40% for the quarter ended September 30,
2000. Interest income on taxable securities increased $2.199 million from $4.406
million for the quarter ended September 30, 1999 to $6.605 million for the
quarter ended September 30, 2000. The increase in interest income on taxable
securities can be attributed to the increase in yield of 52 basis points and an
increase in the average balance of taxable securities of $100.758 million, from
$256.241 million for the quarter ended September 30, 1999 to
15
<PAGE>
$356.996 million for the quarter ended September 30, 2000. For the nine months
ended September 30, 2000, interest income on taxable securities amounted to
$20.001 million, up $8.059 million when compared to the same period in 1999. The
yield on taxable securities for the nine months ended September 30, 2000 was
7.46%, up 93 basis points when compared to the same period in 1999.
The increase in the average balance of taxable securities is due mainly to the
acquisition of five bank branches and the assumption of related deposit
liabilities, which resulted in a net cash payment of $133.900 million in August
of 1999. The lower yield on taxable securities in 1999 is due to accelerated
pay-downs on mortgage-backed securities and collaterlized mortgage obligations
(CMOs) that resulted from a substantial decrease in long-term mortgage rates
which led to a higher than normal re-finance period that occurred at the end of
the fiscal year 1998 and into the beginning of fiscal year 1999. As these
mortgage-backed securities and CMOs paid down, the amortization of associated
premiums was accelerated. Additionally, funds received from the branch
acquisition were deployed in securities in a rising rate environment. The
average balance of tax-exempt securities decreased $29.772 million, from $58.377
million for the quarter ended September 30, 1999 to $28.605 million for the same
period in 2000. Consistent with the Company's tax planning strategy, the
tax-exempt securities portfolio will continue to decrease.
Funding Sources
The Company utilizes deposit products such as time, savings, N.O.W. and money
market deposits as its primary source for funding. Other sources such as
short-term borrowings and long-term debt are utilized as necessary to support
the Company's growth in assets and to achieve interest rate sensitivity
objectives. The average balance of interest-bearing liabilities increased to
$792.454 million for the quarter ended September 30, 2000 from $646.921 million
for the same period in 1999. For the nine months ended September 30, 2000, the
average balance of interest-bearing liabilities was $788.388 million, up from
the $615.003 million for the same period in 1999. This increase in the average
balances is attributed primarily to the branch acquisition in August 1999, which
resulted in the assumption of approximately $155.700 million in deposits. The
average rate paid on interest-bearing liabilities increased 60 bp, from 4.23%
for the quarter ended September 30, 1999 to 4.83% for the same period in 2000.
For the nine months ended September 30, 2000, the average rate paid on interest
bearing liabilities was 4.56%, up from the 4.23% paid in the same period in
1999. The increase in the rate paid for interest-bearing liabilities can be
attributed to an increase in short-term interest rates (the Federal Reserve Bank
has raised its overnight borrowing rate 150 bp since the second quarter of
1999).
Deposits
The average balance for time deposits increased $78.353 million, from $343.869
million for the quarter ended September 30, 1999 to $422.222 million for the
same period in 2000. For the nine months ended September 2000, the average
balance of time deposits was $438.782 million, up from $333.160 million for the
same period in 1999. The increase in the average balance of time deposits can be
attributed primarily to two factors. The acquisition of five bank branches in
the third quarter of 1999 resulted in the
16
<PAGE>
assumption of $103.508 million in time deposits. Additionally, due to recent
market expansion, average municipal time deposits greater than $100,000, which
are primarily comprised of deposits from municipalities and school districts,
increased $62.541 million, from $78.077 million for the nine months ended
September 30, 1999 to $140.618 million for the same period in 2000. The rate
paid on time deposits for the quarter ended September 30, 2000 was 5.81%, up
from the 5.22% for the same period in 1999. If short-term rates continue to
rise, the Company anticipates that the rate paid on time deposits will increase,
as municipal time deposits greater than $100,000 have terms generally less than
six months and re-price more quickly than other time deposit products.
The average balance of N.O.W. accounts increased $15.387 million, from $83.072
million for the quarter ended September 30, 1999 to $98.459 million for the same
period in 2000. The average balance of savings accounts increased $13.476
million, from $120.493 million for the quarter ended September 30, 1999 to
$133.969 million for the same period in 2000. The increase in N.O.W. and savings
accounts can be primarily attributed to the assumption of deposit liabilities
associated with the branch acquisition. The total amount of N.O.W and savings
accounts assumed from the branch acquisition totaled $12.754 million and $25.273
million, respectively. The remaining increase in N.O.W. accounts of $2.633
million resulted from the Company's continued market expansion. The rate paid on
N.O.W. and savings accounts remained relatively unchanged from 1.89% and 2.85%
for the quarter ended September 30, 1999 to 1.81% and 2.85% for the same period
in 2000. The rate paid on money market accounts increased 130 bp, from 3.72% for
the quarter ended September 30, 1999 to 5.02% for the same period in 2000. The
increase in the rate paid on money market accounts is due mainly to a municipal
money market product which amounted to approximately 53% and 65% of the total
average balance of money market accounts for the quarters ended September 30,
2000 and 1999, respectively. The municipal money market product re-prices weekly
and is indexed to an overnight borrowing rate. The average overnight borrowing
rate was 5.09% for the quarter ended September 30, 1999 compared to 6.52% for
the quarter ended September 30, 2000.
The average balance of non-interest bearing deposits was $68.647 million for the
quarter ended September 30, 2000, up from $64.479 million for the same period in
1999. The average balance of non-interest bearing deposits for the nine months
ended September 30, 2000 was $66.207 million, up from the $62.887 million for
the same period in 1999. The increases in non-interest bearing deposits can be
attributed to the Company's continued market expansion.
Short-Term Borrowings
The average balance of short-term borrowings was $68.292 million for the quarter
ended September 30, 2000, up from $37.256 million for the same period in 1999.
For the nine months ended September 30, 2000, the average balance of short-term
borrowings was $42.966 million, up from $25.507 million for the same period in
1999. The rate paid on short-term borrowings increased 143 bp, from 5.27% for
the quarter ended September 30, 1999 to 6.70% for the same period in 2000. The
increase in the rate paid on short-term borrowings is a result of the 125 basis
point increase in the Federal Reserve Bank overnight borrowing rate during the
past four quarters. The increase in short-term
17
<PAGE>
borrowings is primarily the result of funding loan and lease growth and run-off
of municipal time deposits.
Average Balances/Net Interest Margin - Fully Taxable Equivalent (FTE) Basis
The following table sets forth average balance and interest rate information.
The average balances used for these tables and other statistical disclosures
were calculated using daily averages. Tax exempt income has been adjusted to a
tax equivalent basis by tax effecting such income at the Federal tax rate.
Non-accruing loans have been included in loans with interest earned recognized
on a cash basis only. Securities include securities available for sale,
investment securities held to maturity, and trading securities, if any, all at
amortized cost.
18
<PAGE>
<TABLE>
<CAPTION>
Three months ended September 30,
-----------------------------------------------------------------------------------
2000 1999
---------------------------------------- --------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans and Leases ......................... $511,471 $ 10,645 8.33% $412,722 $ 8,738 8.47%
Taxable Securities ....................... 356,999 6,605 7.40% 256,241 4,406 6.88%
Tax-exempt Securities .................... 28,605 441 6.17% 58,377 1,058 7.25%
Federal Funds Sold ....................... 2,946 46 6.25% 29,735 368 4.95%
-------- -------- ---- -------- -------- ----
Total interest-earning assets ............ $900,021 17,737 7.88% $757,075 14,570 7.70%
======== -------- ---- ======== -------- ----
Interest-bearing liabilities:
Deposits
NOW ...................................... $ 98,459 445 1.81% $ 83,072 393 1.89%
Savings .................................. 133,969 953 2.85% 120,493 859 2.85%
Money Market ............................. 63,706 800 5.02% 55,994 521 3.72%
Time Deposits ............................ 422,222 6,133 5.81% 343,869 4,486 5.22%
-------- -------- ---- -------- -------- ----
Total Interest Bearing Deposits .......... 718,356 8,331 4.64% 603,428 6,259 4.15%
-------- -------- ---- -------- -------- ----
Short-term Borrowings .................... 68,292 1,144 6.70% 37,256 491 5.27%
Long-term Borrowings ..................... 5,806 91 6.27% 6,237 88 5.64%
-------- -------- ---- -------- -------- ----
Total Interest-bearing
liabilities .............................. $792,454 9,566 4.83% $646,921 6,838 4.23%
======== -------- ---- ======== -------- ----
Interest Rate Spread ..................... $ 8,171 3.05% $ 7,732 3.47%
======== ========
Net Interest Margin ...................... 3.63% 4.09%
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------------------------------------------------------
2000 1999
---------------------------------------- --------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans and Leases ......................... $488,440 $ 30,423 8.30% $396,632 $ 25,517 8.58%
Taxable Securities ....................... 357,392 20,001 7.46% 243,901 11,942 6.53%
Tax-exempt Securities .................... 42,292 2,139 6.74% 63,845 3,476 7.26%
Federal Funds Sold ....................... 4,078 174 5.69% 11,745 439 4.98%
-------- -------- ---- -------- -------- ----
Total interest-earning assets ............ $892,202 52,737 7.88% $716,123 41,374 7.70%
======== -------- ---- ======== -------- ----
Interest-bearing liabilities:
Deposits
NOW ...................................... 96,793 1,304 1.80% 78,806 1,095 1.85%
Savings .................................. 134,666 2,855 2.83% 111,190 2,328 2.79%
Money Market ............................. 69,187 2,440 4.70% 59,978 1,649 3.67%
Time Deposits ............................ 438,782 18,097 5.50% 333,160 13,242 5.30%
-------- -------- ---- -------- -------- ----
Total Interest Bearing Deposits .......... 739,428 24,696 4.45% 583,134 18,134 4.19%
-------- -------- ---- -------- -------- ----
Short-term Borrowings .................... 42,966 1,984 6.16% 25,507 948 4.96%
Long-term Borrowings ..................... 5,994 295 6.56% 6,362 265 5.55%
-------- -------- ---- -------- -------- ----
Total Interest-bearing
liabilities .............................. $788,388 26,975 4.56% $615,003 19,527 4.23%
======== -------- ---- ======== -------- ----
Interest Rate Spread ..................... $ 25,762 3.32% $ 21,847 3.47%
======== ========
Net Interest Margin ...................... 3.85% 4.07%
</TABLE>
19
<PAGE>
Financial Condition and Liquidity
The Company's total assets at September 30, 2000 were $944.661 million, an
increase of $30.489 million (4.4% annual rate of increase) when compared to
December 31, 1999. The increase was primarily in net loans and leases of $63.853
million, offset in part by a decrease in securities available for sale of
$20.068 million, and cash and cash equivalents of $12.177 million. Total
deposits decreased $11.000 million and short-term borrowings increased $38.097
million. Stockholders' equity increased $2.637 million, due to earnings
retention of $4.089 million, partially offset by an increase in accumulated
other comprehensive losses of $603,000, and treasury stock purchases of
$849,000.
Securities
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
available for sale portfolio in dollar amounts and percentages at the dates
indicated:
September 30, 2000
--------------------------
Carrying Percent of
Value Total
----- -----
CMO & asset-backed securities .................... $139,264 37.9%
Mortgaged backed securities ...................... 38,126 10.4%
Corporate and taxable municipal debt
securities ....................................... 77,376 21.0%
U.S. government agency securities ................ 71,956 19.6%
State and municipal obligations .................. 23,458 6.4%
U.S. treasury securities ......................... 7,955 2.1%
-------- -----
Total debt securities ................... 358,135 97.4%
Non-marketable equity securities ................. 4,040 1.1%
Mutual funds and preferred stock ................. 5,522 1.5%
-------- -----
$367,697 100.0%
======== =====
20
<PAGE>
At December 31, 1999
--------------------------
Carrying Percent of
Value Total
----- -----
CMO & asset-backed securities .................... $145,940 37.6%
Mortgaged backed securities ...................... 36,861 9.5%
Corporate and taxable municipal debt
securities ....................................... 75,270 19.4%
U.S. government agency securities ................ 58,065 15.0%
State and municipal obligations .................. 57,746 14.9%
U.S. treasury securities ......................... 5,938 1.5%
-------- -----
Total debt securities ................... 379,820 97.9%
Non-marketable equity securities ................. 4,040 1.1%
Mutual funds and preferred stock ................. 3,905 1.0%
-------- -----
$387,765 100.0%
======== =====
CMOs and asset-backed securities decreased $6.676 million from December 31,
1999, and represent 37.9% of the securities available for sale ("SAFS")
portfolio at September 30, 2000. The weighted-average life and weighted-average
rate of CMOs and asset-backed securities was 7.0 years and 7.99%, respectively,
at September 30, 2000. Mortgage-backed securities ("MBS") increased $1.265
million from December 31, 1999, and represent 10.4% of the SAFS portfolio at
September 30, 2000. The weighted-average life and weighted-average rate of the
MBS was 7.2 years and 7.48%, respectively, at September 30, 2000. If interest
rates continue to rise, the Company anticipates that the weighted-average lives
of CMOs and MBS will increase and the fair value of the securities will
decrease. Alternatively, if rates decrease, the weighted-average lives of CMOs
and MBS will decrease and the fair value of the securities will increase.
Corporate and taxable municipal debt securities increased $2.106 million from
December 31, 1999, and represent 21.0% of SAFS at September 30, 2000. The
weighted-average life and weighted-average rate of the corporate and taxable
municipal debt portfolio was 9.2 years and 9.44%, respectively, at September 30,
2000. Included in corporate debt securities is a corporate obligation that
management believes is other-than-temporarily impaired. For the nine months
ended September 30, 2000, the Company wrote-down this corporate debt security a
total of $875,000 to net (loss) gain on securities transactions. During 1999,
the Company wrote-down this corporate debt security a total of $1.4 million to
net (loss) on securities transactions. The remaining carrying value of the
corporate obligation is $660,000, which management will continue to monitor for
additional other-than-temporary impairment.
U.S. government agency securities increased $13.891 million from December 31,
1999, and represents 19.6% of the SAFS at September 30, 2000. The
weighted-average life and weighted-average rate of U.S. agency securities was
10.5 years and 8.01%, respectively, at September 30, 2000. A substantial number
of U.S. government agency securities have call features, and in a decreasing
interest rate environment, these securities may likely be called. Consistent
with the Company's tax planning strategy, the state and municipal obligation
portfolio decreased $34.288 million from December 31, 1999 and represents 6.4%
of the SAFS portfolio at September 30, 2000. The weighted-average life of the
total SAFS portfolio at September 30, 2000 was 8.5 years.
21
<PAGE>
Loans and leases
Net loans and leases receivable increased $63.853 million from $449.064 million
at December 31, 1999 to $512.917 million at September 30, 2000. The following
schedule details the Company's loan and lease portfolio:
September 30, December 31,
2000 1999
---- ----
Loans secured by real estate:
Residential .................................. $ 102,863 $ 83,949
Commercial ................................... 89,932 79,349
Agricultural ................................. 17,980 16,960
Construction ................................. 2,716 2,286
Home equity .................................. 29,046 25,183
--------- ---------
242,537 207,727
--------- ---------
Other loans and leases:
Commercial ................................... 42,997 42,743
Agricultural ................................. 17,286 17,252
Manufactured housing ......................... 50,079 55,774
Lease receivables ............................ 92,347 76,002
Tax exempt ................................... 8,361 6,116
Consumer ..................................... 74,946 57,944
--------- ---------
286,016 255,831
--------- ---------
Net deferred loan fees/costs
and unearned discount ........................ (6,794) (5,965)
Allowance for loan and lease losses .......... (8,842) (8,529)
--------- ---------
Net loans and leases receivable .............. $ 512,917 $ 449,064
========= =========
Loans secured by residential real estate increased $18.914 million, from $83.949
million at December 31, 1999 to $102.863 million at September 30, 2000. The
increase in residential real estate is primarily attributed to adjustable rate
consumer mortgage products that the Company began offering during the first
quarter of 2000. The Company anticipates that its residential real estate
activity will continue to increase. In light of this anticipated increase in
residential real estate activity, the Company has begun selling its fixed rate
residential real estate loans on the secondary market, and intends to retain
servicing rights on the majority of the loans it sells. The Company's
residential real estate servicing portfolio increased $4.377 million, from
$8.389 million at December 31, 1999 to $12.766 million at September 30, 2000.
Commercial real estate increased $10.583 million, from $79.349 million at
December 31, 1999 to $89.932 million at September 30, 2000. The increase in
commercial real estate can be attributed to successful efforts in penetrating
new markets. Home equity loans increased $3.863 million, from $25.183 million at
December 31, 1999 to $29.046 million at September 30, 2000.
Lease receivables increased $16.345 million, from $76.002 million at December
31, 1999 to $92.347 million at September 30, 2000. The Company has expanded its
leasing market area, which has led to the increase. Lease receivables are
secured by automobiles and sport utility vehicles and generally have terms
ranging from three to five years. Consumer loans increased $17.002 million, from
$57.944 million at December 31, 1999 to $74.946 million at September 30, 2000.
The increase in consumer loans was primarily related to
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indirect automobile loans which is the result of an increase in the number of
dealers the Company contracts. Manufactured housing decreased $5.695 million and
represents 9.6% of the total loan and lease portfolio at September 30, 2000. The
Company will continue to focus its efforts in growth related to the lease
receivables, residential real estate, and commercial real estate/commercial loan
portfolios. The Company's manufactured housing portfolio will continue to
decline as the Company is de-emphasizing its efforts in originating this loan
type, due to competitive pressures and higher credit risk associated with this
product.
Deposits
Total deposits decreased $11.000 million, from $796.244 million at December 31,
1999 to $785.244 million at September 30, 2000. The following schedule details
the Company's deposit liabilities:
September 30, December 31,
2000 1999
---- ----
Non-interest bearing deposits .................. $ 70,994 $ 58,064
NOW accounts ................................... 97,587 96,234
Savings accounts ............................... 131,973 136,150
Money market accounts .......................... 70,227 64,351
Time deposits of $100,000 or more .............. 142,305 184,594
Other time deposits ............................ 272,158 256,851
-------- --------
Total deposits ................................. $785,244 $796,244
======== ========
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 include
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 sources 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.
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. For liquidity management,
lines of credit have also been established with correspondent banks to meet
short-term funding needs. At September 30, 2000, the
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Company had short-term borrowings with the FHLB amounting to $45.175 million and
short-term re-purchase agreements totaling $21.989 million. The Company has $1.2
million in long-term borrowings with the Federal Home Loan Bank of New York at
September 30, 2000. 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 September 30, 2000, the remaining balance on the bonds was $4.5
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.
Non-performing Assets
Non-performing assets are summarized in the following table:
September 30, December 31,
2000 1999
---- ----
Non-accrual loans ............................... $4,838 $5,212
Accruing loans past due 90 days ................. 468 722
------ ------
Total non-performing loans ...................... 5,306 5,934
Other real estate owned and
repossessed assets .............................. 970 1,258
------ ------
Total non-performing assets (loan related) ...... 6,276 7,192
Impaired corporate debt security ................ 660 1,535
------ ------
Total non-performing assets ..................... $6,936 $8,727
====== ======
Non-performing loans as a % of total loans ...... 1.02% 1.30%
Non-performing assets as a
of total assets (loan related) .................. 0.66% 0.79%
Allowance for loan and lease losses to
non-performing loans ............................ 166.64% 143.73%
Non-accrual loans at September 30, 2000 were comprised of $1.577 million of
commercial/commercial real estate, $2.068 million of agricultural loans, $1.078
million of residential real estate, and $116,000 of manufactured housing loans.
Loans past due 90 days or more and still accruing were comprised mainly of
manufactured housing loans at September 30, 2000.
The remaining carrying value of the impaired corporate debt security, which is
not accruing interest and is considered to be non-performing is $660,000. This
debt security, which is not actively traded, is monitored closely by management
and at this time, management does not believe any additional write-down is
required. However, if adverse conditions continue or worsen, an additional
write-down may be necessary.
Gross charge-offs for the nine months ended September 30, 2000 amounted to
$996,000. Charge-offs were mainly comprised of consumer/manufactured housing
loans amounting to $459,000 and commercial loans amounting to $218,000.
Recoveries for the nine months ended September 30, 2000 amounted to $239,000.
Provisions for loan and lease losses amounted to $1.070 million for the nine
months ended September 30, 2000. The allowance for loan losses increased
$313,000, from $8.529 million at December 31, 1999 to $8.842 million at
September 30, 2000. The allowance for loan and lease losses
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represents management's estimate of an amount adequate to provide for probable
losses inherent in the loan and lease 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.
Liquidity and Capital Resources
Liquidity is the ability of the Company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining the ability to meet the
day-to-day cash flow requirements of our customers, whether they be depositors
wishing to withdraw funds or borrowers requiring funds to meet their credit
needs.
Asset and liability management functions not only to assure adequate liquidity
in order to meet the needs of our customers, but also to maintain an appropriate
balance between interest-sensitive assets and interest-sensitive liabilities in
order to generate an appropriate return to stockholders. In the banking
environment, both assets and liabilities are considered sources of liquidity
funding and both are monitored on a daily basis. The asset portion of the
balance sheet provides liquidity primarily through loans, mortgage backed
security and collateralized mortgage obligation principal repayments, maturities
and calls of securities and sales from the available for sale and trading
portfolios.
Management closely monitors the timing of cash inflows and outflows although
changes in interest rates, economic conditions and competitive forces strongly
impact the predictability of these cash flows. The Company attempts to provide
stable and flexible sources of funding through its branch network as well as
with limited use of borrowings. Management believes that the level of the
Company's liquid assets combined with daily monitoring of cash inflows and
outflows provide adequate liquidity to fund outstanding loan commitments, meet
daily withdrawal requirements of depositors, and meet all other daily
obligations of the Company.
The Company and its bank subsidiary are currently subject to two sets of
regulatory capital measures, a leverage ratio test and risk-based capital
guidelines. The risk-based guidelines assign weightings to all assets and
certain off-balance sheet items and establish an 8% minimum ratio of qualified
total capital to risk-weighted assets. At least half of total capital must
consist of "Tier 1" capital, which comprises common equity, retained earnings
and a limited amount of minority interest in consolidated subsidiaries
(subordinated debt), less goodwill. Up to half of total capital may consist of
so-called "Tier 2" capital, comprising a limited amount of subordinated debt,
other preferred stock, certain other instruments and a limited amount of the
allowance for loan and lease losses. The leverage ratio test establishes minimum
limits on the ratio of Tier 1 capital to total tangible assets, without risk
weighting. For top-rated companies, the minimum leverage ratio is 4%, but
lower-rated or rapidly expanding companies may be required to meet substantially
higher minimum leverage ratios. The FDIC Improvement Act of 1991 ("FDICIA")
mandated actions to be taken by banking regulators for financial institutions
that are undercapitalized as measured by these ratios. FDICIA established five
levels of capitalization for financial institutions ranging from "critically
undercapitalized" to "well-
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capitalized." As of September 30, 2000, the Tier 1 leverage and risk-based
capital ratios for the Company and its bank subsidiary were as follows:
Summary of Capital Ratios
Tier 1 Total
Risk-Based Risk-Based
Capital Leverage Capital
Ratio Ratio Ratio
----- ----- -----
CNB Financial Corp. ........................ 9.32 6.81 10.58
Central National Bank ...................... 8.98 6.51 10.23
Regulatory Minimum ......................... 4.00 4.00 8.00
FDICIA's "Well-Capitalized" Standard ....... 6.00 5.00 10.00
All capital ratios for the Company and its subsidiary bank at September 30, 2000
were above minimum capital standards for financial institutions. Additionally,
the Company and its subsidiary bank capital ratios at that date were above
FDICIA's "well-capitalized" standard.
Total stockholders' equity amounted to $57.260 million at September 30, 2000,
which is a $2.637 million increase from the $54.623 million at December 31,
1999. The increase resulted primarily from an increase in earnings retention of
$4.089 million, partially offset by an increase in accumulated other
comprehensive loss of $603,000 and an increase in treasury stock of $849,000.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity risk, do not arise in the normal course of the Company's business
activities.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on the Company's net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or 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 income.
An important element of both earnings performance and liquidity is management of
interest rate sensitivity. Interest rate sensitivity management involves
comparison
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between the maturity and re-pricing dates of earning assets and interest-bearing
liabilities, with the goal being to minimize the impact on net interest income
in periods of extreme fluctuations in interest rates. Quarterly, the change in
net interest income, as well as several other strategic measurement ratios, are
presented to the Company's Asset/Liability Committee (ALCO) and Board of
Directors and compared to Company-established guidelines. The Company
consistently maintains the ratios within the acceptable ranges of the guidelines
established. On a weekly basis, the ALCO, which is comprised of Senior
Management, meets to monitor the interest rate sensitivity and liquidity
position.
The ALCO utilizes the results of a detailed and dynamic simulation model to
quantify the estimated exposure of net interest income to sustained interest
rate changes. While ALCO routinely monitors simulated net interest income
sensitivity over a one-year period, it also utilizes additional tools to monitor
longer-term interest rate risk. The simulation model captures the impact of
changing interest rates on the interest income received and interest expense
paid on all earning assets and interest-bearing liabilities reflected on the
Company's balance sheet. This sensitivity analysis is compared to ALCO policy
limits which specify a maximum tolerance level for net interest income exposure
over a one year horizon, assuming no balance sheet growth, a 200 basis point
upward and downward shift in interest rates, and the use of convexity factors
which estimate the change in interest rate risk caused by changes in the
Company's structure in response to the rate change. As of September 30, 2000,
under this analysis, a 200 basis point increase in interest rates resulted in a
$1.380 million decrease (4.1%) in annual net interest income and a 200 basis
point decrease in interest rates resulted in a $986,000 decrease (2.9%) in
annual net interest income. These amounts were within the Company's ALCO policy
limits.
Interest rate risk analyses performed by the Company indicates 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 and short-term borrowings (which represented 24.5% of
interest-bearing liabilities at September 30, 2000), which are more volatile
when rates change due to their short-terms which typically range from 1 day 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. The Company is asset sensitive in a rapidly declining rate environment,
as earning assets would re-price faster than interest-bearing liabilities would
re-price. 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 analyses
and industry standards for prepayments. Management continuously evaluates
various alternatives to address interest rate risk.
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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.
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CNB Financial Corp.
Part II - Other Information
Item 1 - Legal Proceedings
No material changes since filing of the Registrant's Form 10-K for the
year end December 31, 1999
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and reports on Form 8-K
(A) Exhibits
Exhibit 27 - Financial Data Schedule (electronic filing only)
(B) Current Reports filed on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB FINANCIAL CORP.
Registrant
Date: November 13, 2000 By: /s/ DONALD L. BRASS
----------------- --------------------------
Donald L. Brass
President
Date: November 13, 2000 By: /s/ PETER J. CORSO
----------------- --------------------------
Peter J. Corso
Executive Vice President
30
