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Central National Bank, Canajoharie
Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly period ending June 30, 2000
Commission File Number 33-45522
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CNB FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
New York 22-3203747
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 Church Street, Canajoharie N.Y. 13317
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(Address of principal executive offices - Zip code)
Registrant's telephone number, include area code (518) 673-3243
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Indicated by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the bank
was required to file such reports), and (2) has been subjected to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding
Class on July 31, 2000
----- ----------------
Common Stock, $1.25 par value 7,474,929
-1-
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<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
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.-7.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7.- 24.
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24.-26.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27.
Item 2. Changes in Securities and Use of Proceeds 27.
Item 3. Defaults Upon Senior Securities 27.
Item 4. Submission of Matters to a Vote of Security Holders 27.
Item 5. Other Information 27.
Item 6. Exhibits and Reports on Form 8-K 27.
SIGNATURES 28.
</TABLE>
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Part 1. Financial Information
Item 1. Consolidated Financial Statements
CNB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
Assets (Unaudited)
<S> <C> <C>
Cash and due from banks $ 19,350 $ 25,051
Federal funds sold -- 6,150
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Total cash and cash equivalents 19,350 31,201
Securities available for sale, at fair value 390,192 387,765
Net loans & leases receivable 488,718 449,064
Accrued interest receivable 6,781 6,281
Premises and equipment, net 12,913 12,999
Other real estate owned and repossessed assets 888 1,258
Goodwill 18,799 19,428
Other assets 7,521 6,176
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Total assets $ 945,162 $ 914,172
========= =========
Liabilities, Guaranteed Preferred Beneficial Interests in Corporation's
Junior Subordinated Debentures and Stockholders' Equity
Noninterest-bearing deposits $ 66,240 $ 58,064
Interest-bearing deposits 726,208 738,180
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Total deposits 792,448 796,244
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Short-term borrowings:
Securities sold under agreements to repurchase 29,744 29,054
Borrowings from the Federal Home Loan Bank of New York 35,300 --
Borrowings from the U.S. Treasury 584 530
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Total short-term borrowings 65,628 29,584
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Long-term borrowings 5,851 6,103
Other liabilities 9,175 9,618
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Total liabilities 873,102 841,549
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Guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures ("capital securities") 18,000 18,000
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Stockholders' equity:
Common stock, $1.25 par value, 20,000,000 shares authorized
(7,805,128 issued at June 30, 2000 and December 31, 1999) 9,756 9,756
Additional paid-in capital 6,202 6,202
Retained earnings 51,010 48,265
Accumulated other comprehensive loss (7,477) (5,075)
Treasury stock, at cost (330,199 shares at June 30, 2000 and 268,263
at December 31, 1999) (5,431) (4,525)
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Total stockholders' equity 54,060 54,623
--------- ---------
Total liabilities, guaranteed preferred beneficial
interests in Corporation's junior subordinated
debentures and stockholders' equity $ 945,162 $ 914,172
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
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CNB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest and dividend income: (Unaudited)
Loans & leases, including fees $ 10,086 $ 8,370 $ 19,736 16,759
Securities:
Taxable 6,913 3,864 13,396 7,536
Nontaxable 557 904 1,308 1,837
Federal funds sold and other 41 38 128 71
-------- -------- -------- --------
17,597 13,176 34,568 26,203
-------- -------- -------- --------
Interest expense:
Deposits 8,394 5,990 16,365 12,055
Short-term borrowings 460 292 840 457
Long-term borrowings 112 92 205 177
-------- -------- -------- --------
8,966 6,374 17,410 12,689
-------- -------- -------- --------
Net interest income 8,631 6,802 17,158 13,514
Provision for loan & lease losses 320 450 740 720
-------- -------- -------- --------
Net interest income after provision for loan & lease losses 8,311 6,352 16,418 12,794
-------- -------- -------- --------
Non-interest income:
Service charges on deposit accounts 644 495 1,224 994
Net (loss) on securities transactions (645) (723) (326) (652)
Other 567 404 1,069 924
-------- -------- -------- --------
566 176 1,967 1,266
-------- -------- -------- --------
Non-interest expenses:
Salaries and employee benefits 2,305 2,159 4,982 4,563
Occupancy and equipment 715 457 1,427 1,029
Data processing 595 604 1,231 1,175
Professional fees 178 242 390 487
Advertising and marketing 317 94 480 155
Postage and courier 138 124 293 252
Office supplies and stationary 174 151 332 323
Other real estate owned and repossessed assets 152 203 385 354
Goodwill amortization 331 -- 663 --
Capital securities 420 -- 835 --
Other 957 742 1,805 1,457
-------- -------- -------- --------
6,282 4,776 12,823 9,795
-------- -------- -------- --------
Income before income tax expense 2,595 1,752 5,562 4,265
Income tax expense 683 457 1,466 1,119
-------- -------- -------- --------
Net income $ 1,912 $ 1,295 $ 4,096 $ 3,146
======== ======== ======== ========
Earnings per share:
Basic $ 0.26 $ 0.17 $ 0.55 $ 0.41
Diluted $ 0.25 $ 0.17 $ 0.54 $ 0.41
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
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CNB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended,
June 30, June 30,
2000 1999
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(Unaudited)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 4,096 $ 3,146
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,330 679
Provision for loan and lease losses 740 720
Net loss on securities transactions 326 652
Net loss on sales and writedowns of other real estate
owned and repossessed assets 76 100
Net gain on sales of loans held for sale (37) --
Proceeds from sales of loans held for sale 2,333 --
Purchases of trading securities (5,250) (19,705)
Proceeds from sales of trading securities 5,261 19,745
(Increase) decrease in accrued interest receivable (500) 335
Net change in other assets and other liabilities (787) 1,967
-------- --------
Net cash provided by operating activities 7,588 7,639
-------- --------
Cash flows from investing activities:
Purchases of securities:
Available for sale (79,716) (95,924)
Held to maturity -- (5,831)
Proceeds from sales of securities:
Available for sale 49,388 65,794
Proceeds from maturities and calls of securities:
Available for sale 24,110 19,839
Held to maturity -- 6,417
Net loans and leases made to customers (43,472) (24,300)
Proceeds from sales of other real estate owned and
repossessed assets 1,076 554
Purchases of premises and equipment (581) (206)
-------- --------
Net cash used in investing activities (49,195) (33,657)
-------- --------
Cash flows from financing activities:
Net (decrease) increase in deposits (3,796) (20,376)
Net increase in short-term borrowings 36,044 51,253
Payments on long-term borrowings (252) (244)
Dividends paid (1,353) (1,214)
Proceeds from issuance of shares for options and Dividend Reinvestment Plan -- 326
Purchase of treasury stock (887) (589)
-------- --------
Net cash provided by financing activities 29,756 29,156
-------- --------
Net (decrease) increase in cash and cash equivalents (11,851) 3,138
Cash and cash equivalents at beginning of period 31,201 16,128
-------- --------
Cash and cash equivalents at end of period $ 19,350 $ 19,266
======== ========
</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.
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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 six-month and three-month period ended
June 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 six months ended June 30:
<TABLE>
<CAPTION>
Three Months Ended 6/30/00 Three Months Ended 6/30/99
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
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<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
common stockholders $1,912 7,487 $0.26 $1,295 7,583 $0.17
Effect of dilutive securities:
Stock options 20 35
--------------------------------------------------------------
Diluted EPS $1,912 7,507 $0.25 $1,295 7,618 $0.17
==============================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended 6/30/00 Six Months Ended 6/30/99
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 $4,096 7,510 $0.55 $3,146 7,587 $0.41
Effect of dilutive securities:
Stock options 23 38
--------------------------------------------------------------
Diluted EPS $4,096 7,533 $0.54 $3,146 7,625 $0.41
==============================================================
</TABLE>
6
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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 six months ended June 30, 2000 and 1999
was $1.694 million and $4.412 million, respectively, and total
comprehensive income for the three months ended June 30, 2000 and 1999 was
$394,000 and $1.751 million, respectively.
4. Recent Accounting Pronouncements:
FASB Statement 133
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the 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 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
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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.
7
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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 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;
8
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b. Changes in market interest rates or changes in the speed at which market
interest rates change;
c. Changes in laws and regulations affecting the financial service industry;
d. Changes in competition and continued pricing pressures on loan and deposit
products;
e. Changes in consumer preferences and customer borrowing, repayment,
investment and deposit practices;
f. The 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 June 30, 2000 amounted to $1.912 million,
compared to the $1.295 million reported for the same period in 1999 while net
income for the six months ended June 30, 2000 amounted to $4.096 million,
compared to the $3.146 million reported for the six months ended June 30, 1999.
Return on average equity and return on average assets were 14.23% and 0.81%,
respectively, for the quarter ended June 30, 2000 and 15.05% and 0.88%,
respectively, for the six months ended June 30, 2000. Diluted earnings per share
amounted to $.25 for the quarter ended June 30, 2000 compared to diluted
earnings per share of $.17 for the quarter ended June 30, 1999, and diluted
earnings per share for the six months ended June 30, 2000 amounted to $.54
compared to diluted earnings per share of $.41 for the six months ended June 30,
1999.
Net income for the quarters ended June 30, 2000 and 1999 was effected 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 $720,000 (pre-tax) in
the second 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 $2.344 million for the
quarter ended June 30, 2000, or $0.31 diluted earnings per share, up 19.2% from
the $0.26 diluted earnings per share, or $2.007 million earned for the same
quarter in 1999. Net income for the six months ended June 30, 2000
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would have been $4.528 million, or $0.60 diluted earnings per share, up 17.6%
from the $0.51 diluted earnings per share, or $3.858 million for the same period
in 1999.
Net interest income for the quarter ended June 30, 2000 was $8.631 million, a
26.9% increase over the $6.802 million for the same quarter in 1999. Net
interest income for the six months ended June 30, 2000 was $17.158 million, a
27.0% increase over the $13.514 million for the same period in 1999. The
increases in net interest income were due primarily to an increase the average
balance of earning assets in the second quarter and six month period ended 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 $136.780 million (net of premium paid), and opening four
new branches from the third quarter of 1999 through the first 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 June 30, 2000 was
$320,000, which is a $130,000 decrease from the provision for loan and lease
losses for the second quarter of 1999. The provision for loan and lease losses
for the six months ended June 30, 2000 was $740,000, which is a $20,000 increase
over the same six-month period in 1999. The decrease in the provision for the
quarter ended June 30, 2000 when compared to the same period in 1999 resulted
primarily from decreased delinquencies and charge-offs, primarily occurring in
the Company's manufactured housing and credit card loan portfolios. The Company
sold its credit card portfolio in the fourth quarter of 1999 and has reduced the
level of originations of manufactured housing loans, which have historically
comprised a substantial portion of net-charge offs. Additionally, non-performing
loans have decreased from $5.934 million at June 30, 1999 to $5.178 million at
June 30, 2000. The allowance for loan and lease losses as a percentage of
non-performing loans was 168.7% at June 30, 2000, compared to 134.5% at June 30,
1999.
Total non-interest income for the quarter ended June 30, 2000 was $566,000, an
increase of $390,000 when compared to the same period in 1999. As noted above,
the quarters ended June 30, 2000 and 1999 were effected by a write-down of a
corporate debt security. The write-down of the corporate debt security amounted
to $720,000 (pre-tax) in the second quarter of 2000 and $1.187 million (pre-tax)
in the second quarter of 1999. Excluding the write-down, total non-interest
income was $1.286 million for the quarter ended June 30, 2000, down $77,000 from
the $1.363 million recognized in the same period in 1999. The decrease in
non-interest income was due primarily to a decrease from net gains on securities
transactions. Net gains on securities transactions amounted to $75,000 for the
quarter ended June 30, 2000 compared to $464,000 for the same period in 1999.
Services charges on deposit accounts increased $149,000 (30.1%), from $495,000
for the quarter ended June 30, 1999 to $644,000 for the same period in 2000. The
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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. Other income increased $163,000
(40.3%), from $404,000 for the quarter ended June 30, 1999 to $567,000 for the
same period in 2000. The increase in other income can be primarily attributed to
the sale of the Company's merchant credit card servicing program which resulted
in a net gain of $82,000, title insurance commissions totaling $30,000, and
$51,000 in ancillary income from branch expansion (the Company had 29 branches
in operation for the second quarter of 2000 compared to 20 branches for the same
period in 1999).
Total non-interest income for the six-months ended June 30, 2000 excluding the
security write-down mentioned above, was $2.687 million, an increase of $234,000
when compared to the $2.453 million for same period in 1999. The increase in
non-interest income resulted from services charges on deposit accounts which
increased $230,000 (23.1%), from $994,000 for the six months ended June 30, 1999
to $1.224 million for the six months ended June 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
$145,000 (15.7%), from $924,000 for the six months ended June 30,1999 to $1.069
million for the six months ended June 30, 2000. The increase in other income can
be primarily attributed to the sale of the Company's merchant credit card
servicing program for $82,000, and title insurance commissions totaling $33,000.
Offsetting these increases was a decrease in net gains on securities
transactions totaling $141,000. 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.
Total non-interest expenses were $6.282 million for the quarter ended June 30,
2000, up $1.506 million 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 (the Company had 29 branches in operation in
the second quarter of 2000 compared to 20 branches for the same period in 1999).
Capital securities expense and goodwill amortization amounted to $420,000 and
$331,000, respectively, for the quarter ended June 30, 2000 compared to $0 for
the same period in 1999. These expenses are a result of the capital securities
offering and the Astoria branch acquisition that occurred in August of 1999.
Salaries and employee benefits increased $146,000 from $2.159 million for the
quarter ended June 30, 1999 to $2.305 million for the quarter ended June 30,
2000. The increase in salaries and benefits can be attributed to an increase in
full-time equivalent employees, which resulted from branch expansion. Occupancy
and equipment and advertising and marketing increased $258,000 and $223,000,
respectively, for the quarter ended June 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.
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Other expenses increased $215,000 from $742,000 for the quarter ended June 30,
1999 to $957,000 for the quarter ended June 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 $56,000, insurance on leased
vehicles of $21,000 and correspondent bank service charges of $42,000. The
increase in expenses related to lease vehicle receivables is a result of the
growth in the lease vehicle receivables portfolio, which has increased from
$56.740 million at June 30, 1999 to $87.528 million at June 30, 2000. This
increase in the lease vehicle receivables portfolio has resulted in an increase
in the number of vehicles sold when the lease term expires and insurance costs.
The Company anticipates the level of expense related to lease vehicle
receivables to increase as the portfolio continues to grow.
Total non-interest expenses were $12.823 million for the six months ended June
30, 2000, up $3.028 million from the same period in 1999. Capital securities
expense and goodwill amortization amounted to $835,000 and $663,000,
respectively, for the six months ended June 30, 2000 compared to $0 for the same
period in 1999. These expenses are a result of the capital securities offering
and the Astoria branch acquisition that occurred in August of 1999. Salaries and
employee benefits increased $419,000 from $4.563 million for the six months
ended June 30, 1999 to $4.982 million for the six months ended June 30, 2000.
Occupancy and equipment and advertising and marketing increased $398,000 and
$325,000, respectively, for the six months ended June 30, 2000 when compared to
the same period in 1999. The increases are due mainly to the branch expansion.
Other expenses increased $348,000 from $1.457 million for the six months ended
June 30, 1999 to $1.805 million for the six months ended June 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 $103,000, insurance
on leased vehicles of $41,000, correspondent bank service charges of $61,000,
and tele-communications expense of $31,000.
Income tax expense was $683,000 for the quarter ended June 30, 2000, up $226,000
from the $457,000 recognized in the same period in 1999. The effective tax rate
for the second quarter of 2000 and 1999 was 26.3% and 26.1%, respectively.
Income tax expense was $1.466 million for the six months ended June 30, 2000, up
$347,000 from the $1.119 million recognized for the same period in 1999. The
effective tax rate for the six months ended June 30, 2000 and 1999 was 26.4% and
26.2%, respectively.
Net Interest Income
-------------------
(The accompanying schedule entitled "Average Balances/Net Interest Margin -
Fully Taxable Equivalent Basis (FTE)" is the basis of and should be read in
conjunction with this discussion).
Net Interest Income FTE Basis
FTE net interest income was $8.833 million for the quarter ended June 30, 2000,
up from the $7.081 million for the same period in 1999. The net interest margin
for the quarter ended June 30, 2000 was 3.92%, down from the 4.03% for the same
period in 1999. FTE net interest income was $17.589 million for the six months
ended June 30, 2000, up from the $14.123 million for the same period in 1999.
The net interest margin for the six
12
<PAGE>
months ended June 30, 2000 was 3.96%, down from the 4.06% 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 six months ended June 30, 2000 and 1999.
Earning Assets
Total average earning assets increased $197.341 million from $703.294 million
for the quarter ended June 30, 1999 to $900.635 million for the same period in
2000. This increase was primarily the result of the Astoria branch acquisition
during the quarter ended September 30, 1999. Total average earning assets
increased $192.646 million from $695.646 million for the six months ended June
30, 1999 to $888.292 million for the same period in 2000. This increase can also
be attributed to the Astoria branch acquisition. FTE interest income for the
quarter ended June 30, 2000 was $17.799 million, up $4.344 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 June 30, 2000 was 7.91%, a 26 basis point ("bp") increase over the
same period in 1999. The primary reason for the increase in yield was a 113 bp
increase in yield from taxable securities. FTE interest income for the six
months ended June 30, 2000 was $34.999 million, up $8.187 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 six
months ended June 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 115 bp increase in
yield from taxable securities.
Loans
The average balance of loans increased $94.211 million, from $392.751 million
for the quarter ended June 30, 1999 to $486.962 million for the quarter ended
June 30, 2000. The increase in the average balance of loans resulted in an
increase of $1.728 million in FTE interest income for the quarter ended June 30,
2000 when compared to the same period in 1999. The increase in FTE interest
income was offset by a decrease in yield of 23 basis points, from 8.53% for the
quarter ended June 30, 1999 to 8.30% for the same period in 2000. On a year to
date basis, average loans were $476.925 million, up from $388.586 million in
1999. The yield on loans for the six months ended June 30, 2000 was 8.29%, down
35 bp from the 8.64% in 1999. FTE interest income was up $2.979 million for the
six months ended June 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 June
30, 2000 when compared to the same period in 1999. The average balance of loans
secured by residential real estate increased $30.465 million (51.1%), from an
average balance of $59.619 million for the quarter ended June 30, 1999 to
$90.084 million for the same period in 2000. FTE interest income from loans
secured by residential real estate increased 34.6% comparing the second quarter
of 2000 to the same period in 1999, despite a 51.1% increase in the average
balance during the same period. This is primarily
13
<PAGE>
a result of a decrease in the yield from loans secured by residential real
estate of 96 bp, from 8.78% for the second quarter of 1999 to 7.82% 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 $25.070 million, from an
average balance of $60.179 million for the quarter ended June 30, 1999 to
$85.249 million for the same period in 2000. The yield on commercial real estate
increased 57 basis points, from 8.19% for the second quarter of 1999 to 8.76%
for the same period in 2000.
The average balance of auto lease financed receivables increased $29.495
million, from $46.876 million for the quarter ended June 30, 1999 to $76.371
million for the same period in 2000. The yield on auto lease financed
receivables decreased 38 basis points, from 7.24% for the second quarter of 1999
to 6.86% for the same period in 2000. The average balance of consumer auto loans
increased $11.681 million, from $42.941 million for the second quarter of 1999
to $54.622 million for the same period in 2000. The average balance of
manufactured housing loans decreased $3.549 million, from $58.720 million for
the second quarter 1999 to $55.171 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 113 basis points from 6.40% for the
quarter ended June 30, 1999 to 7.53% for the quarter ended June 30, 2000. FTE
interest income on taxable securities increased $3.049 million from $3.864
million for the quarter ended June 30, 1999 to $6.913 million for the quarter
ended June 30, 2000. The increase in FTE interest income on taxable securities
can be attributed to the increase in yield of 113 basis points and an increase
in the average balance of taxable securities of $125.693 million, from $241.688
million for the quarter ended June 30, 1999 to $367.381 million for the quarter
ended June 30, 2000. For the six months ended June 30, 2000, FTE interest income
on taxable securities amounted to $13.396 million, up $5.860 million when
compared to the same period in 1999. The yield on taxable securities for the six
months ended June 30, 2000 was 7.49%, up 115 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 Astoria 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
14
<PAGE>
securities decreased $22.942 million, from $65.947 million for the quarter ended
June 30, 1999 to $43.005 million for the same period in 2000. Consistent with
the Company's tax planning strategy, tax-exemptsecurities 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
$793.771 million for the quarter ended June 30, 2000 from $607.457 million for
the same period in 1999. For the six months ended June 30, 2000, the average
balance of interest-bearing liabilities was $786.354 million, up from the
$599.045 million for the same period in 1999. This increase in the average
balances is attributed primarily to the Astoria 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 32 bp,
from 4.20% for the quarter ended June 30, 1999 to 4.52% for the same period in
2000. For the six months ended June 30, 2000, the average rate paid on interest
bearing liabilities was 4.43%, up from the 4.24% 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 125 bp since the fourth quarter of
1999).
Deposits
The average balance for time deposits increased $122.930 million, from $322.972
million for the quarter ended June 30, 1999 to $445.902 million for the same
period in 2000. For the six months ended June 2000, the average balance of time
deposits was $447.062 million, up from the $327.805 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 assumption of $103.508 million in time deposits.
Additionally, due to recent market expansion, average time deposits greater than
$100,000, which are primarily comprised of deposits from municipalities and
school districts, increased $48.838 million, from $115.057 million for the six
months ended June 30, 1999 to $163.895 million for the same period in 2000. The
rate paid on time deposits for the quarter ended June 30, 2000 was 5.46%, up
from the 5.31% 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 $19.697 million, from $78.905
million for the quarter ended June 30, 1999 to $98.602 million for the same
period in 1999. The average balance of savings accounts increased $25.684
million, from $110.034 million for the quarter ended June 30, 1999 to $135.718
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 Astoria branch acquisition. The total amount of N.O.W and savings
accounts assumed from the Astoria branch acquisition
16
<PAGE>
totaled $12.754 million and $25.273 million, respectively. The remaining
increase in N.O.W. accounts of $6.943 million resulted from the Company's
continued market expansion. The rate paid on N.O.W. and savings accounts
remained relatively unchanged from 1.80% and 2.73% for the quarter ended June
30, 1999 to 1.79% and 2.82% for the same period in 2000. The rate paid on money
market accounts increased 105 bp, from 3.76% for the quarter ended June 30, 1999
to 4.81% 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 60% and 70% of the total average balance of money market
accounts for the quarters ended June 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 4.75% for the quarter
ended June 30, 1999 compared to 6.27% for the quarter ended June 30, 2000.
The average balance of non-interest bearing deposits was $67.360 million for the
quarter ended June 30, 2000, up from $62.341 million for the same period in
2000. The average balance of non-interest bearing deposits for the six months
ended June 30, 2000 was $64.987 million, up from the $62.090 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 $31.847 million for the quarter
ended June 30, 2000, up from $25.755 million for the same period in 1999. For
the six months ended June 30, 2000, the average balance of short-term borrowings
was $30.303 million, up from $19.633 million for the same period in 1999. The
rate paid on short-term borrowings increased 124 bp, from 4.54% for the quarter
ended June 30, 1999 to 5.78% for the same period in 2000. The increase in
short-term borrowings is primarily the result of funding loan and lease growth.
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.
16
<PAGE>
<TABLE>
<CAPTION>
Three months ended June 30, 2000 999
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and Leases $486,962 $ 10,107 8.30% $392,751 $ 8,379 8.53%
Taxable Securities 367,381 6,913 7.53% 241,688 3,864 6.40%
Tax-exempt Securities 43,005 738 6.86% 65,947 1,174 7.12%
Federal Funds Sold 3,287 41 4.99% 2,908 38 5.23%
-------- -------- ------- -------- -------- -------
Total interest-earning assets $900,635 17,799 7.91% $703,294 13,455 7.65%
======== -------- ------- ======== -------- -------
Interest-bearing liabilities:
Deposits
NOW $ 98,602 441 1.79% $ 78,905 356 1.80%
Savings 135,718 957 2.82% 110,034 750 2.73%
Money Market 75,572 909 4.81% 63,437 596 3.76%
Time Deposits 445,902 6,087 5.46% 322,972 4,288 5.31%
-------- -------- ------- -------- -------- -------
Total Interest Bearing Deposits 755,794 8,394 4.44% 575,348 5,990 4.16%
-------- -------- ------- -------- -------- -------
Short-term Borrowings 31,847 460 5.78% 25,755 292 4.54%
Long-term Borrowings 6,130 112 7.31% 6,354 92 5.79%
-------- -------- ------- -------- -------- -------
Total Interest-bearing
liabilities $793,771 8,966 4.52% $607,457 6,374 4.20%
======== -------- ------- ======== -------- -------
Interest Rate Spread $ 8,833 3.39% $ 7,081 3.45%
======== ========
Net Interest Margin 3.92% 4.03%
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2000 1999
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and Leases $476,925 $ 19,778 8.29% $388,586 $ 16,799 8.64%
Taxable Securities 357,588 13,396 7.49% 237,731 7,536 6.34%
Tax-exempt Securities 49,135 1,697 6.91% 66,579 2,406 7.23%
Federal Funds Sold 4,644 128 5.51% 2,750 71 5.17%
-------- -------- ------- -------- -------- -------
Total interest-earning assets $888,292 34,999 7.88% $695,646 26,812 7.70%
======== -------- ------- ======== -------- -------
Interest-bearing liabilities:
Deposits
NOW 95,960 859 1.79% 76,674 703 1.83%
Savings 135,014 1,903 2.82% 106,539 1,469 2.76%
Money Market 71,927 1,639 4.56% 61,970 1,128 3.64%
Time Deposits 447,062 11,964 5.35% 327,805 8,755 5.34%
-------- -------- ------- -------- -------- -------
Total Interest Bearing Deposits 749,963 16,365 4.36% 572,988 12,055 4.21%
-------- -------- ------- -------- -------- -------
Short-term Borrowings 30,303 840 5.54% 19,633 457 4.66%
Long-term Borrowings 6,088 205 6.73% 6,424 177 5.52%
-------- -------- ------- -------- -------- -------
Total Interest-bearing
liabilities $786,354 17,410 4.43% $599,045 12,689 4.24%
======== -------- ------- ======== -------- -------
Interest Rate Spread $ 17,589 3.45% $ 14,103 3.46%
======== ========
Net Interest Margin 3.96% 4.06%
</TABLE>
17
<PAGE>
Financial Condition and Liquidity
The Company's total assets at June 30, 2000 were $945.162 million, an increase
of $30.990 million (6.80% annual rate of increase) when compared to December 31,
1999. The increase includes increases in loans and leases of $39.654 million and
securities available for sale of $2.427 million, offset in part by a decrease in
cash and cash equivalents of $11.851 million. Total deposits decreased $3.796
million and short-term borrowings increased $36.044 million. Stockholders'
equity decreased $563,000, due to an increase in accumulated other comprehensive
loss of $2.402 million and an increase in treasury stock of $906,000, offset by
earnings retention of $2.745 million.
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
portfolio in dollar amounts and percentages at the dates indicated:
June 30, 2000
Carrying Percent of
Value Total
-------- -------
CMO & asset-backed securities $149,632 38.4%
Mortgaged backed securities 40,281 10.3%
Corporate and taxable municipal debt
securities 76,835 19.7%
U.S. government agency securities 72,507 18.6%
State and municipal obligations 34,680 8.9%
U.S. treasury securities 7,889 2.0%
-------- -------
Total debt securities 381,824 97.9%
Non-marketable equity securities 4,040 1.0%
Mutual funds and preferred stock 4,328 1.1%
-------- -------
$390,192 100.0%
======== =======
18
<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 increased $3.692 million from December 31,
1999, and represent 38.4% of the securities available for sale ("SAFS")
portfolio at June 30, 2000. The weighted-average life and weighted-average rate
of CMOs and asset-backed securities was 7.5 years and 7.61%, respectively, at
June 30, 2000. Mortgage-backed securities ("MBS") increased $3.420 million from
December 31, 1999, and represent 10.3% of the SAFS portfolio at June 30, 2000.
The weighted-average life and weighted-average rate of the MBS was 8.1 years and
7.23%, respectively, at June 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 $1.565 million from
December 31, 1999, and represent 19.7% of SAFS at June 30, 2000. The
weighted-average life and weighted-average rate of the corporate and taxable
municipal debt portfolio was 9.8 years and 8.49%, respectively, at June 30,
2000. Included in corporate debt securities is a corporate obligation that
management believes is other-than-temporarily impaired. For the quarter ended
June 30, 2000, the Company wrote-down this corporate debt security a total of
$720,000 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 $810,000, which management will continue to monitor for additional
other-than-temporary impairment.
U.S. government agency securities increased $14.442 million from December 31,
1999, and represents 18.6% of the SAFS at June 30, 2000. The weighted-average
life and weighted-average rate of U.S. agency securities was 10.7 years and
8.01%, respectively, at June 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 $23.066 million from December 31, 1999 and represents 8.9% of the SAFS
portfolio at June 30, 2000. The weighted-average life of the total SAFS
portfolio at March 31, 2000 was 8.8 years.
19
<PAGE>
Loans and leases
Net loans and leases receivable increased $39.654 million from $449.064 million
at December 31, 1999 to $488.718 million at June 30, 2000. The following
schedule details the Company's loan and lease portfolio:
June 30, December 31,
2000 1999
--------- ---------
Loans secured by real estate:
Residential $ 96,079 $ 83,949
Commercial 85,009 79,349
Agricultural 17,527 16,960
Construction 1,594 2,286
Home equity 27,125 25,183
--------- ---------
227,334 207,727
--------- ---------
Other loans and leases:
Commercial 41,220 42,743
Agricultural 17,445 17,252
Manufactured housing 52,210 55,774
Lease receivables 87,528 76,002
Tax exempt 6,568 6,116
Consumer 71,686 57,944
--------- ---------
276,657 255,831
--------- ---------
Net deferred loan fees/costs
and unearned discount (6,537) (5,965)
Allowance for loan and lease losses (8,736) (8,529)
--------- ---------
Net loans and leases receivable $ 488,718 $ 449,064
========= =========
Loans secured by residential real estate increased $12.130 million, from $83.949
million at December 31, 1999 to $96.079 million at June 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 $1.833 million, from $8.389 million at December
31, 1999 to $10.222 million at June 30, 2000. Commercial real estate increased
$5.660 million, from $79.349 million at December 31, 1999 to $85.009 million at
June 30, 2000. Home equity loans increased $1.942 million, from $25.183 million
at December 31, 1999 to $27.125 million at June 30, 2000.
Lease receivables increased $11.562 million, from $76.002 million at December
31, 1999 to $87.528 million at June 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 $13.742 million, from
$57.944 million at December 31, 1999 to $71.686 million at June 30, 2000. The
increase in consumer loans was primarily related to indirect automobile loans
which is the result of an increase in the number of dealers the Company
20
<PAGE>
contracts. Manufactured housing decreased $3.564 million during the first half
of 2000 and represents 10.4% of the total loan and lease portfolio at June 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 $3.796 million, from $796.244 million at December 31,
1999 to $792.448 million at June 30, 2000. The following schedule details the
Company's deposit liabilities:
June 30, December 31,
2000 1999
-------- --------
Non-interest bearing deposits $ 66,240 $ 58,064
NOW accounts 101,578 96,234
Savings accounts 136,777 136,150
Money market accounts 66,074 64,351
Time deposits of $100,000 or more 140,218 184,594
Other time deposits 281,561 256,851
-------- --------
Total deposits $792,448 $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 June 30, 2000, the Company had overnight borrowings
with the FHLB amounting to $5.300 million and
21
<PAGE>
short-term re-purchase agreements totaling $59.257 million. The Company has $1.4
million in long-term borrowings with the Federal Home Loan Bank of New York at
June 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 March 31, 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:
June 30, December 31,
2000 1999
------ ------
Non-accrual loans $4,792 $5,212
Accruing loans past due 90 days 386 722
------ ------
Total non-performing loans 5,178 5,934
Other real estate owned and
repossessed assets 888 1,258
------ ------
Total non-performing assets (loan related) 6,066 7,192
Impaired corporate debt security 810 1,535
------ ------
Total non-performing assets $6,876 $8,727
====== ======
Non-performing loans as a % of total loans 1.04% 1.30%
Non-performing assets as a
of total assets (loan related) 0.64% 0.79%
Allowance for loan and lease losses to
non-performing loans 168.71% 143.73%
Non-accrual loans at June 30, 2000 were comprised of $1.840 million of
commercial/commercial real estate, $2.137 million of agricultural loans,
$693,000 of residential real estate, and $122,000 of manufactured housing loans.
Loans past due 90 days or more and still accruing were comprised mainly of
manufactured housing loans and residential real estate at June 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 $810,000
million. 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 six months ended June 30, 2000 amounted to $688,000.
Charge-offs were mainly comprised of consumer/manufactured housing loans
amounting to $408,000 and commercial loans amounting to $135,000. Recoveries for
the six months ended June 30, 2000 amounted to $155,000. Provisions for loan and
lease losses amounted to $740,000 for the six months ended June 30, 2000. The
allowance for loan losses increased $207,000, from $8.529 million at December
31, 1999 to $8.736 million at June 30, 2000. The allowance for loan and lease
losses represents management's estimate of an amount adequate to provide for
probable losses inherent in the loan and
22
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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 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-capitalized." As of June 30, 2000, the Tier 1
leverage and risk-based capital ratios for the Company and its subsidiary were
as follows:
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Summary of Capital Ratios
<TABLE>
<CAPTION>
Tier 1 Total
Risk-Based Risk-Based
Capital Leverage Capital
Ratio Ratio Ratio
----- ----- -----
<S> <C> <C> <C>
CNB Financial Corp. 9.31 6.83 10.56
Central National Bank 8.83 6.28 10.08
Regulatory Minimum 4.00 4.00 8.00
FDICIA's "Well-Capitalized" Standard 6.00 5.00 10.00
----- ----- -----
</TABLE>
All capital ratios for the Company and its subsidiary bank at June 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 $54.060 million at June 30, 2000, which
is a $563,000 decrease from the $54.623 million at December 31, 1999. The
decrease resulted primarily from an increase in accumulated other comprehensive
loss of $2.402 million and an increase in treasury stock of $906,000, offset by
earnings retention of $2.745 million.
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 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
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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 June 30, 2000, under
this analysis, a 200 basis point increase in interest rates resulted in a $2.142
million decrease (6.2%) in annual net interest income and a 200 basis point
decrease in interest rates resulted in a $346,000 (1.0%) increase 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 23.8% of
interest-bearing liabilities at June 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. 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.
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
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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
On April 25, 2000, the Company filed a Form 8-K related to the
issuance of a press release for the announcement of the first
quarter operating results.
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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: August 10, 2000 By: /s/DONALD L. BRASS
------------------ --------------------
Donald L. Brass
President
Date: August 10, 2000 By: /s/PETER J. CORSO
------------------ --------------------
Peter J. Corso
Executive Vice President
28
