UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999 Commission File Number 0-13396
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _____________________
CNB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1450605
------------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
County National Bank
1 South Second Street
P.O. Box 42
Clearfield, Pennsylvania 16830
(Address of principal executive offices)
Registrant's telephone number, including area code, (814) 765-9621
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock: $1.00 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
---
The number of shares outstanding of the issuer's common stock as of June
30, 1999:
COMMON STOCK: $1.00 PAR VALUE - 3,425,896 SHARES
1
INDEX
PART I.
FINANCIAL INFORMATION
Sequential
Page Number
- -----------
PAGE 3. Notes to Consolidated Financial Statements
PAGE 4. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PAGE 12. Table 1 - Consolidated Balance Sheets - June 30, 1999
PAGE 13. Table 2Q - Consolidated Statements of Income - Quarter ending June
30, 1999
PAGE 14. Table 2Y - Consolidated Statements of Income For Six month period
ending June 30, 1999
PAGE 15. Table 3 - Consolidated Statements of Cash Flows - Six month period
ending June 30, 1999
PAGE 16. Table 4 - Consolidated Yield Comparisons
PART II.
OTHER INFORMATION
PAGE 17. ITEM 4 Submission of Matters for Security Holders Vote
PAGE 17. ITEM 5 Other Information
PAGE 17. ITEM 6 Exhibits and Reports on Form 8-K
PAGE 17. Signatures
2
CNB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
pursuant to rules and regulations of the Securities and Exchange Commission
(SEC) and in compliance with generally accepted accounting principles. Because
this report is based on an interim period, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The registrant believes that the disclosures made are adequate to make the
information presented a fair representation of the Corporation's financial
status.
In the opinion of Management of the registrant, the accompanying
consolidated financial statements for the quarter and six month periods ended
June 30, 1999 and 1998 include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the financial
condition and the results of operations for the period. The financial
performance reported for the Corporation for the six month period ended June 30,
1999 is not necessarily indicative of the result to be expected for the full
year. This information should be read in conjunction with the Corporation's
Annual Report to shareholders and Form 10-K for the period ended December 31,
1998.
COMPREHENSIVE INCOME
Total other comprehensive income for the periods ended June 30, 1999
and 1998 were $725,000 and $2,702,000.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments
- -------------------------------------
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, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It is effective for
fiscal years beginning after June 15, 2000 with earlier adoption permitted. The
Corporation does not currently utilize derivative instruments. This statement
is not expected to materially affect the financial position or operating results
of the Corporation.
Accounting for Internal Use Computer Software
- ---------------------------------------------
The Corporation adopted SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", effective beginning January 1,
1999. SOP 98-1 requires the Corporation to capitalize costs incurred in
designing, coding, installing and testing of software. All other costs are
expensed as incurred. The implementation of the SOP has not had a material
affect on the financial condition, equity or operating results of the
Corporation.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The following discussion and analysis of the consolidated financial
statements of the Corporation is presented to provide insight into management's
assessment of financial results. The Corporation's subsidiary County National
Bank (the "Bank") provides financial services to individuals and businesses
within the Bank's market area made up of the west central Pennsylvania counties
of Clearfield, Centre, Elk, Jefferson, and McKean. County National Bank is a
member of the Federal Reserve System and subject to regulation, supervision and
examination by the Office of the Comptroller of the Currency ("OCC").
The health of the economy in the region is mixed with unemployment rates
running high in most of our market areas except Centre County and somewhat lower
in Elk County. Actual ratings (as of February 1999) by county are as follows:
Cameron 9.6%; Centre 3.2%; Clearfield 9.7%; Elk 6.8% Jefferson 8.3%; and McKean
7.0%. The market area consistently runs higher than the average for all of
Pennsylvania.
On February 12, 1999, the Bank acquired a full service office in
Punxsutawney, PA from an unaffiliated institution (referred to hereafter as the
"acquisition"). The purchase included $10.7 million in loans, $35.5 million in
deposits and certain fixed assets associated with the office. The facility
continues to operate as a full service branch of the Bank.
OVERVIEW OF BALANCE SHEET
Total assets (shown in Table 1 "Consolidated Balance Sheet") have grown
-------
0.8% since year end 1998 and 12.8% over June 30, 1998 to $440.2 million. Growth
for the periods has occurred generally through the acquisition previously
mentioned. The following comments will further explain the details of asset
growth.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $9,409,000 at June 30, 1999 compared to
$23,101,000 on December 31, 1998. This decrease was caused equally through
funding of the investment and loan portfolios as well as covering the shortfall
caused by a decline in the deposit base.
Management believes the liquidity needs of the Corporation are satisfied
by the current balance of cash and cash equivalents, readily available access to
traditional funding sources, and the portion of the investment and loan
portfolios that matures within one year. These sources of funds will enable the
Corporation to meet cash obligations and off-balance sheet commitments as they
come due.
INVESTMENT SECURITIES
Investment securities increased $272,000 since December 31, 1998. Of the
Corporation's total investment portfolio of $108,075,000 as of June 30, 1999,
$101,177,000 (or 93.6%) is classified as available for sale with the balance of
$6,898,000 classified as held to maturity.
The increase is mainly from the Corporation's strategy to utilize
favorable funding rates from the Federal Home Loan Bank of Pittsburgh to
purchase investment securities. In the first quarter of 1999, this strategy was
implemented with a $5 million borrowing utilized to take advantage of pricing
differences in borrowings and trust preferred securities against the same
pricing index. This increase was offset by a decrease in the fair market value
of the portfolio caused by a general rise in market interest rates. Also
contributing to the decrease was a sale of $2 million of securities which was
used to extinquish short term debt.
4
Management monitors the earnings performance and the effectiveness of the
liquidity of the investment portfolio on a regular basis through Asset /
Liability Committee ("ALCO') meetings. The ALCO also reviews and manages
interest rate risk for the Corporation. Through active balance sheet management
and analysis of the investment securities portfolio, the Corporation maintains
sufficient liquidity to satisfy depositor requirements and various credit needs
of its customers.
LOANS
The Corporation's internal loan volume was moderate through the six
months of 1999. The majority of the loan growth that occurred was a result of
the acquisition of $10.7 million in loans. Also, volumes were sufficient to
replace loan paydowns and or payoffs. The Corporation's lending is focused in
the west central Pennsylvania market and consists principally of retail lending,
which includes single family residential mortgages and other consumer lending,
and also commercial lending primarily to locally owned small businesses for
operations as well as mortgages.
At June 30, 1999, the Corporation had $302,660,000 in loans and leases
outstanding up $39,444,000 (or 15.0%) since June 30, 1998. The additional
growth above the acquisition is the result of our increased penetration into the
commercial lending opportunities within our market. Our focus on commercial
lending has expanded over the past year with additional staff increases to
handle the growth of small business loans. This focus has resulted in an
increase in commercial loans of 19.2% or $17.8 million since June 30, 1998.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Allowance for Loan and Lease Losses as a percentage of loans
decreased from 1.16% at June 30, 1998 and increased from 1.07% at December 31,
1998 to 1.08% at June 30, 1999. The dollar amount of the reserve increased
$227,000 since year end 1998. The increase is a result of the net reserve
expensed during the six months and an adjustment made to the loans that were
acquired during the first quarter. The gross charge-offs for the six months of
1999 were $330,000 while recoveries were $80,000. This level of charge-offs is
comparable to the six months of 1998 when charge-offs were $338,000 with
recoveries of $62,000. Net charge-offs remain consistent with prior periods.
The financial services industry is aware of a general trend towards
higher charge offs. It is mainly the result of increased consumer credit
problems often resulting in bankruptcies. Management of the Corporation has
implemented a proactive loan collection program which has resulted in sustained
low levels of loan delinquency.
Management continues to closely monitor loan delinquency and loan losses.
Non-performing assets, which include loans 90 or more days past due, non-accrual
loans and other real estate owned were $1,724,000 or 0.39% of total assets on
June 30, 1999 compared to $1,870,000 or 0.42% on December 31, 1998 and $939,000
or 0.24% on June 30, 1998.
The adequacy of the allowance for loan and lease losses is subject to a
formal analysis by the loan review staff of the Bank and is deemed to be
adequate to absorb inherent losses in the portfolio as of June 30, 1999. The
Corporation has disclosed in its annual report on Form 10-K the process and
methodology supporting the loan loss provision.
FUNDING SOURCES
The Corporation considers deposits, short-term borrowings, and term debt
when evaluating funding sources. Traditional deposits continue to be the most
significant source of funds for the Corporation reaching $366,938,000, or 94.1%
of all sources of funds, at June 30, 1999. Deposit runoff of 1.0% since year
end 1998 primarily resulted from a runoff of a large short-term deposit received
in December of 1998.
5
The Corporation utilizes term borrowings from the Federal Home Loan Bank
(FHLB) to meet funding needs not accommodated by deposit growth. During the
first six months of 1999, the Corporation borrowed $5 million as mentioned on
page 4 in the investment securities section. Management plans to maintain
access to short and long-term FHLB borrowings as appropriate funding sources for
the various needs of the Corporation.
SHAREHOLDERS' EQUITY
A strong stockholders' equity position provides the Corporation with the
capability to meet cash obligations and absorb unforeseen losses, if any. For
these reasons capital adequacy has been, and will continue to be, of paramount
importance.
Total Shareholders' Equity was $43,536,000 at June 30, 1999 compared to
$44,781,000 at December 31, 1998 a decrease of $1,245,000 (or 2.8%) and
$43,527,000 at June 30, 1998, an increase of $9,000 (or 0.02%). In the first
six months of 1999, the Corporation earned $2,145,000 and declared dividends of
$1,370,000, a dividend payout ratio of 63.9% of net income. Also, the
Corporation increased treasury stock by $612,000.
Approximately 94% of the investment securities in the Corporation's
portfolio are classified as available-for-sale making this portion of the
Corporation's balance sheet more sensitive to the changing market value of
investments. Interest rates in the six months of 1999 have increased, causing
the Bank's bond portfolio to experience a decrease in its market value gains.
Also, the financial services sector of the equity markets have leveled off in
their growth giving the Corporation no or little appreciation in value, during
the period, in it's equity holdings. This has caused an overall decline in
stockholders' equity of $1,420,000 since December 31, 1998.
The Corporation has also complied with the standards of capital adequacy
mandated by the banking regulators. Bank regulators have established "risk-
based" capital requirements designed to measure capital adequacy. Risk-based
capital ratios reflect the relative risks of various assets banks hold in their
portfolios. A weight category of either 0% (lowest risk assets), 20%, 50%, or
100% (highest risk assets), is assigned to each asset on the balance sheet. The
Corporation's total risk-based capital ratio of 12.59% at June 30, 1999 is well
above the minimum standard of 8%. The Corporation's Tier 1 capital ratio of
11.46% is above the regulatory minimum of 4%. The leverage ratio at June 30,
1999 was 8.06%, also above the minimum standard of 4%. The Corporation is
deemed to be well capitalized under regulatory industry standards. The ratios
provide quantitative data demonstrating the strength and future opportunities
for use of the Corporation's capital base. Management continues to evaluate
risk-based capital ratios and the capital position of the Corporation as part of
its strategic decision making process.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity measures an organizations' ability to meet cash obligations as
they come due. The Consolidated Statement of Cash Flows presented on page 15 of
the accompanying financial statements provide analysis of the Corporation's cash
and cash equivalents. Additionally, management considers that portion of the
loan and investment portfolio that matures within one year as part of the
Corporation's liquid assets. The Corporation's liquidity is monitored by the
ALCO which establishes and monitors ranges of acceptable liquidity. Management
feels the Corporation's current liquidity position is acceptable.
In the course of conducting business activities, the Corporation is
exposed to market risk, principally interest rate risk, through the operation of
the Bank. Interest rate risk arises from market driven fluctuations in interest
rates which affect cash flows, income, expense and values of all financial
instruments. Interest rate risk is monitored by management and the ALCO
Committee of the Board. No material changes have occurred during the period in
the Bank's market risk strategy, a discussion of which can be found in the SEC
Form-10K filed for the period ended December 31, 1998.
6
RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
The Corporation earned $1,156,000 and $2,145,000 for the second quarter
and first six months of 1999, respectively, which shows decreases of 10.8% and
9.6% from $1,296,000 and $2,372,000 for the same periods last year. Net income
has been affected by the acquisition through one time costs associated with the
operation of the branch and its customers. In addition, the Bank is absorbing
the amortization expense from the premium paid in the form of goodwill. The
following discussions provide more details regarding the components of net
income.
INTEREST INCOME AND EXPENSE
Net interest income totaled $4,181,000 in the second quarter, an increase
of 6.5% over the second quarter of 1998 and totaled $8,200,000 for the six
months of 1999, an increase of 6.6% over the prior year. The bank experienced
an increase in earning assets in the past twelve months of 12.9% which came
primarily through strong loan growth. Along with the acquisition, this created
a resulting increase in overall interest income. However, the net interest
margin was hindered from a diminishing loan to deposit ratio as deposit growth
exceeded loan growth for the period. Total interest income increased during the
quarter by $586,000 or 8.1% while interest expense increased by $328,000 or 9.9%
when compared to the second quarter of 1998. The growth of interest income was
impaired by the write-off of premiums paid on collaterialized mortgage
obligations in the investment portfolio. The rapid write-down of the premium
has occurred due to the drop in interest rates since the time of purchase.
Interest Income should not be affected by this during the remainder of 1999 as
these bonds were sold for liquidity purposes during June and July of 1999.
The Corporation recorded a provision for loan and lease losses in the
second quarter of $150,000 matching the second quarter of 1998 and $300,000 for
the six months of 1999 compared to $375,000 in 1998.
NON-INTEREST INCOME
Non-interest income increased $157,000 (21.9%) and $205,000 (15.2%) in
the second quarter and six months of 1999, respectively, when compared to the
same periods in 1998. Increased deposit account service charges have been the
primary source of the growth in non-interest income. In the six months, account
service charges totaled $683,000 up $153,000 (or 28.9%) over last year. These
increases in fee income were the result of the growth in the number of customers
and related deposit accounts over the past twelve months. Also, the recognition
of income from our mortgage servicing portfolio shows an increase of $157,000.
The increases compared with the prior period are adversely affected by a
decrease in security gains of $101,000.
NON-INTEREST EXPENSE
Non-interest expense increased $706,000 or 26.2% during the second
quarter of 1999 and $1,327,000 or 24.5% in the six months of 1999 when compared
to the same periods in 1998. This increased level of non-interest expense is
partly attributable to the acquisition that occurred in February 1999. The
associated costs incurred through the first six months of 1999 were $332,000.
Also, the Bank has experienced increases in data processing of 28.1% or $53,000.
These costs are for upgrades to the Bank's overall technology plan intended to
provide more efficiencies in the future.
On April 27, 1999 the Corporation signed a definitive merger agreement
with the First National Bank of Spangler, headquartered in Spangler, PA. This
will provide an increase of assets of $33,000,000 and deposits of $26,644,000,
based on December 31, 1998. The merger will create higher non-interest
7
costs in the future. The merger will occur during the third quarter of 1999. The
Corporation anticipates accounting for this transaction as a pooling of
interest.
The Bank has entered into an agreement to purchase four offices from an
unaffiliated bank. The purchase will include approximately $114 million in
deposits, $28 million in loans and certain fixed assets associated with the
offices. The offices are located in Bradford, Kane, Ridgway and Johnsonburg,
all located in north central Pennsylvania. Again, non-interest expenses will
rise as a result of this transaction due to normal operations of the branches as
well as amortization of the deposit premium.
RETURN ON ASSETS
For the quarter ended June 30, 1999, the Corporation's return on average
assets ("ROA") totaled 1.03% down from the 1.36% recorded in the second quarter
of 1998. For the six months ended June 30, 1999, ROA was 0.96% compared to
1.24% in 1998
Decreased ROA can be attributed to the increase in non-interest expenses.
Management expects ROA to increase through the third quarter of 1999 resulting
from enhanced net interest income, security gains, and operating efficiencies
when compared to the first two quarters of 1999. The fourth quarter ROA is
expected to be lower as a result of acquisition costs that will be incurred as
previously mentioned.
RETURN ON EQUITY
The Corporation's return on average shareholder's equity ("ROE") in the
first six months was 9.96% compared to 10.99% for 1998. The decrease again can
be attributed primarily to increased non-interest expenses as discussed above
which caused a decline in earnings.
Management expects improvement in ROE during 1999 and anticipates further
increases with earnings growth and growth in earning assets during the third
quarter of 1999. The Corporation is currently well capitalized under regulatory
industry standards.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $343,000 in the second quarter of 1999
compared to $496,000 in the second quarter of 1998. For the six month period
comparisons, the federal tax expense was $573,000 in 1999 and $882,000 in 1998.
The decrease primarily reflects lower pre-tax income in the period when compared
to the same period of the prior year, as well as a $323,000 (or 35%) increase in
tax free income comparing 1999 with 1998.
8
YEAR 2000
Management is aware of the possibility of exposure by banks to a computer
problem known as the "Year 2000 Issue" or the "Millennium Bug" (the inability of
some computer programs to distinguish between the year 1900 and the year 2000).
Potential impacts to the Corporation may arise from software, computer hardware,
and other equipment both within the Corporation's direct control and outside of
the Corporation's ownership, which the Corporation electronically interfaces
with.
The Corporation has developed and implemented a plan for this issue with
the following major components: Assessment; Remediation; Testing; and
Implementation. The Corporation uses third party vendors for its core
processing, item processing and trust processing needs. The following table
depicts the status for the Corporation during each phase and for its various
exposure types:
Resolution
Phases Assessment Remediation Testing Implementation
- ---------------------------------------------------------------------------------------------------
Information 100% Complete 100% Complete 100% Complete 100% Complete
Technology
(PC's,
Servers,
etc.)
- ---------------------------------------------------------------------------------------------------
Operating 100% Complete 100% Complete 100% Complete 100% Complete
Equipment with
Embedded chips
or software
- -----------------------------------------------------------------------------------------------------------
Products The Corporation does not sell or deliver software or hardware items to its customers.
- -----------------------------------------------------------------------------------------------------------
Third Party
Vendors:
Core Processing 100% Complete 100% Complete 100% Complete 100% Complete
Item Processing 100% Complete 100% Complete 100% Complete 100% Complete
Trust Processing 100% Complete 100% Complete 100% Complete 100% Complete
Other important segments of the Plan for Year 2000 are to identify
customers whose possible lack of Year 2000 preparedness might expose the
Corporation to financial loss. Our major customers have been reviewed through
discussions and questionnaires for their Year 2000 preparedness. This has
become a factor in the risk weighting characteristics of our loan portfolio.
The Corporation has been in the process of educating and evaluating all
customers on the Year 2000 and their own readiness. During this process, a
public relations / education plan has been developed for 1999 to inform
customers and the general public about the Year 2000 and the Corporation's
ability to handle the issue.
The Corporation has budgeted total Year 2000 costs not to exceed $100,000.
This estimated cost is based upon currently available information and includes
expenses for the review and testing by third parties, including government
entities. Of the estimated costs of $100,000, $68,000 of capitalized costs and
approximately $26,000 expensed costs have been spent to date. The remaining
$6,000 is expected to be used for personnel costs associated with training
issues. There can be no guarantee, however, that hardware, software, and
systems created by third parties will be free of unfavorable Year 2000 issues
and therefore not present a material impact upon the Corporation. The cost
estimate may change as the Corporation progresses in its Year 2000 plan and
further information associated with and concerning third parties is obtained.
At this time, no significant projects have been delayed as a result of the
Corporation's Year 2000 effort.
9
As a precautionary measure, the Corporation has developed a Year 2000
contingency plan. This plan was created to provide for operating procedures in
the event that a failure would occur even after the above five phases were
performed positively. This document while currently complete will be
continually updated as 1999 progresses and more information is provided by third
parties as well as through in house testing.
The federal banking agencies have been conducting Year 2000 compliance
examinations for several months. The failure to implement an adequate Year 2000
program can be identified as an unsafe and unsound banking practice. The
Corporation and the Bank are subject to supervision by the Office of the
Comptroller of the Currency (OCC). Failure to adequately prepare for Year 2000
issues could negatively impact the Corporation's banking operations, including
the imposition of restriction upon its operations by the OCC.
Despite the Corporation's activities as detailed above, pertaining to the
Year 2000, there can be no assurance that partial or total systems interruptions
or the costs necessary to update hardware and software would not have a material
adverse effect upon the Corporation's business, financial condition, results of
operations, and business prospects. Forward looking statements about the Year
2000 should be read in conjunction with the Corporation's disclosures under the
heading: "Safe Harbor" Statement Under the Private Securities Litigation Reform
Act of 1995.
FUTURE OUTLOOK
June 30, 1999 results of net income showed a decrease over the prior year's
six months and were below management's expectations. Management continues to
focus on asset growth from general growth via increased market share as well as
external opportunities through acquisition as previously mentioned on pages 7
and 8. The goal of asset growth is general increase in shareholder value as
well as favorable results in long-term profitability.
Loan demand was moderate during the quarter as per management's
expectations. Loan growth is expected to continue at a moderate pace throughout
the remainder of the year. The Corporation's loan to deposit ratio has
increased at the end of the second quarter to 81.6% compared to 78.1% at year-
end 1998 as the large deposit made in December of 1998 left the Bank.
Management expects the loan to deposit ratio to decrease during the third and
fourth quarter as the acquisition of the branch offices being acquired from a
nonaffiliated institution brings only a 25% loan to deposit ratio.
Consumer loan charge-offs in the second quarter continued to comprise the
majority of the Corporation's recent charge-offs. In the second quarter, total
net charge-offs were $151,000 of which consumer net charge-offs totaled
$151,000. The level of net charge-offs has been stable over the past twelve
months. Management believes that the increased efforts of loan review and
collections and our quality underwriting standards will give the Bank continued
good charge-off experience when compared to peer institutions.
Enhanced non-interest income and controlled non-interest expense are
important factors in the success of the Corporation and is measured in the
financial services industry by the efficiency ratio, calculated according to the
following: non-interest expense (less amortization of intangibles) as a
percentage of fully taxable net interest income and non-interest income (less
non-recurring income). For the three months ended June 30, 1999, the
Corporation's efficiency ratio was 60.40% compared to 58.41% for the same period
last year.
The efficiency ratio has increased as the level of non-interest expense has
increased during 1999 more rapidly than non-interest income has increased.
Management believes controlling the operating costs of the Corporation is
imperative to the future increased profitability derived from core earnings. A
strong focus by management will be placed on noninterest expenses during the
remainder of 1999 as the Bank will undergo a profitability enhancement program
with expectations that swings will begin during the third quarter.
The interest rate environment will continue to play an important role in
the future earnings of the Corporation. The net interest margin has tightened
as the interest rate cycle we are in causes competitive pressures in the form of
reduced lending rates coupled with higher cost of funds in the financial
services
10
industry. Overall net interest income continues to increase due to growth in
interest earning assets. Management expects further growth in net interest
income for the remainder of 1999.
Management concentrates on return on average equity and earnings per share
evaluations, plus other methods, to measure and direct the performance of the
Corporation. While past results are not an indication of future earnings,
management feels the Corporation is positioned to enhance performance of normal
operations through the remainder of 1999.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements in this Form 10-Q which are not historical fact are forward
looking statements that involve risks and uncertainties, including, but not
limited to, the interest rate environment, the effect of federal and state
banking and tax regulations, the effect of economic conditions, the impact of
competitive products and pricing, and other risks detailed in the Corporation's
Securities and Exchange Commission filings.
11
TABLE 1
CONSOLIDATED BALANCE SHEETS
CNB FINANCIAL CORPORATION
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
June 30, Dec. 31 June 30,
ASSETS 1999 1998 1998
-------- -------- --------
Cash and Due from Banks................................................ $ 9,313 $ 10,370 $ 10,557
Interest bearing deposits with other banks............................. 190 256 265
Federal Funds Sold..................................................... 0 12,475 5,200
Investment Securities Available for sale............................... 101,177 100,121 88,600
Investment Securities Held to Maturity, fair value of $6,984
at June 30, 1999, $7,867 at December 31, 1998 and
$9,105 at June 30, 1998................................................ 6,898 7,682 8,941
Loans and Leases....................................................... 307,535 292,959 267,142
Less: Unearned Discount............................................. 4,875 4,570 3,926
Less: Allowance for Loan Losses..................................... 3,268 3,100 3,041
-------- -------- --------
NET LOANS............................................................ 299,392 285,289 260,175
Premises and Equipment................................................. 10,037 10,257 9,661
Accrued Interest Receivable............................................ 2,507 2,454 2,165
Loans held for sale.................................................... 1,737 4,299 924
Intangible, net........................................................ 7,043 2,522 2,679
Other Assets........................................................... 1,911 1,127 1,103
-------- -------- --------
TOTAL ASSETS......................................................... $440,205 $436,852 $390,270
LIABILITIES
Deposits:
Non-interest bearing deposits........................................ $ 36,926 $ 36,612 $ 34,080
Interest bearing deposits............................................ 330,012 334,202 290,537
-------- -------- --------
TOTAL DEPOSITS....................................................... 366,938 370,814 324,617
Other Borrowings....................................................... 22,804 16,378 18,033
Accrued Interest and Other Liabilities................................. 6,927 4,879 4,093
-------- -------- --------
TOTAL LIABILITIES.................................................... $396,669 $392,071 $346,743
SHAREHOLDERS' EQUITY
Common Stock $1.00 Par Value
Authorized 10,000,000 Shares
Issued 3,456,000 Shares.............................................. $ 3,456 $ 3,456 $ 3,456
Additional paid in Capital........................................... 3,468 3,456 3,456
Retained Earnings.................................................... 37,287 36,512 35,378
Treasury Stock, At Cost.............................................. (724) (112) (100)
(30,104 Shares for 1999, 11,106 for December 1998, and 10,332
shares for June 30, 1998)
Accumulated other comprehensive income............................... 49 1,469 1,337
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY........................................... 43,536 44,781 43,527
-------- -------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............................. $440,205 $436,852 $390,270
12
TABLE 2-Q
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION: June 30, 1999
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data) THREE MONTHS ENDED JUNE 30...
INTEREST INCOME 1999 1998
--------- ---------
Loans including Fees........................................................... $ 6,351 $ 5,781
Deposits with Other Banks...................................................... 6 1
Federal Funds Sold............................................................. 19 44
Investment Securities:
Taxable..................................................................... 914 1,014
Tax-Exempt.................................................................. 474 338
Dividends................................................................... 54 54
--------- ---------
TOTAL INTEREST INCOME....................................................... $ 7,818 $ 7,232
INTEREST EXPENSE
Deposits....................................................................... $ 3,373 $ 3,063
Borrowed Funds................................................................. 264 244
--------- ---------
TOTAL INTEREST EXPENSE...................................................... $ 3,637 $ 3,307
Net Interest Income......................................................... $ 4,181 $ 3,925
Provision for possible loan losses.......................................... 150 150
--------- ---------
NET INTEREST INCOME AFTER PROVISION............................................ $ 4,031 $ 3,775
OTHER INCOME
Trust & Asset Management Fees.................................................. $ 198 $ 194
Service charges on deposit accounts............................................ 375 288
Other service charges and fees................................................. 94 100
Securities gains............................................................... 29 78
Gains on Sale of Loans......................................................... 26 17
Other income................................................................... 151 39
--------- ---------
TOTAL OTHER INCOME.......................................................... $ 873 $ 716
OTHER EXPENSES
Salaries....................................................................... $ 1,320 $ 1,217
Employee benefits.............................................................. 499 381
Net occupancy expense.......................................................... 438 415
Amortization of Intangible..................................................... 216 79
Other.......................................................................... 932 607
--------- ---------
TOTAL OTHER EXPENSES........................................................ $ 3,405 $ 2,699
Income Before Income Taxes..................................................... $ 1,499 $ 1,792
Applicable Income Taxes........................................................ 343 496
--------- ---------
NET INCOME.................................................................. $ 1,156 $ 1,296
========= =========
Per Share Data
- --------------
Net Income..................................................................... 0.34 0.38
Cash Dividends Per Share....................................................... 0.20 0.18
13
TABLE 2-Y
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION: June 30, 1999
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data) SIX MONTHS ENDED JUNE 30
INTEREST AND DIVIDEND INCOME 1999 1998
---------------- -----------------
Loans including Fees............................................................ $12,537 $11,526
Deposits with Other Banks....................................................... 9 4
Federal Funds Sold.............................................................. 140 140
Investment Securities:
Taxable...................................................................... 1,790 1,810
Tax-Exempt................................................................... 947 670
Dividends.................................................................... 110 104
---------------- -----------------
TOTAL INTEREST AND DIVIDEND INCOME........................................... $15,533 $14,254
---------------- -----------------
INTEREST EXPENSE
Deposits........................................................................ $ 6,798 $ 6,142
Borrowed Funds.................................................................. 535 423
---------------- -----------------
TOTAL INTEREST EXPENSE....................................................... $ 7,333 $ 6,565
Net Interest Income.......................................................... $ 8,200 $ 7,689
Provision for possible loan losses........................................... 300 375
---------------- -----------------
NET INTEREST INCOME AFTER PROVISION............................................. $ 7,900 $ 7,314
---------------- -----------------
OTHER INCOME
Trust & Asset Management Fees................................................... $ 383 $ 348
Service charges on deposit accounts............................................. 683 530
Other service charges and fees.................................................. 179 205
Realized Securities gains (losses).............................................. 29 130
Gains on Sale of Loans.......................................................... 52 21
Other........................................................................... 232 119
---------------- -----------------
TOTAL OTHER INCOME........................................................... $ 1,558 $ 1,353
---------------- -----------------
OTHER EXPENSES
Salaries........................................................................ $ 2,643 $ 2,408
Employee benefits............................................................... 946 745
Net occupancy expense of premises............................................... 888 846
Amortization of Intangible...................................................... 387 158
Other........................................................................... 1,876 1,256
---------------- -----------------
TOTAL OTHER EXPENSES......................................................... $ 6,740 $ 5,413
---------------- -----------------
Income Before Income Taxes...................................................... $ 2,718 $ 3,254
Applicable Income Taxes......................................................... 573 882
---------------- -----------------
NET INCOME................................................................... $ 2,145 $ 2,372
================ =================
EARNINGS PER SHARE, BASED ON WEIGHTED
AVERAGE SHARES OUTSTANDING
Net Income...................................................................... $ 0.63 $ 0.69
Cash Dividends Per Share........................................................ $ 0.40 $ 0.36
14
TABLE 3
CONSOLIDATED STATEMENTS OF CASHFLOWS
CNB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (unaudited)
(Dollars in thousands)
Six months ended June 30,
Cash flows from operating activities: 1999 1998
-------------- --------------
Net Income......................................................................... $ 2,145 $ 2,372
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses...................................................... 300 375
Depreciation and amortization.................................................. 823 559
Amortization and accretion and deferred loan fees.............................. 223 (207)
Deferred Taxes................................................................. (411) 568
Security ( Gains) Losses....................................................... (29) (130)
Gain on sale of loans.......................................................... (52) (21)
Net (Gains) losses on dispositions of acquired property........................ 22 (98)
Changes in:
Proceeds from sale of loans..................................................... 12,355 8,597
Origination of loans for sale................................................... (9,741) 0
Interest receivable............................................................ (112) 34
Other assets and intangibles................................................... (5,635) (8,136)
Interest payable............................................................... 168 (12)
Other liabilities.............................................................. 3,024 325
-------------- --------------
Net cash provided by operating activities.......................................... 3,080 4,226
Cash flows from investing activities:
Proceeds from maturities of:
Securities held to maturity.................................................. 800 5,067
Securities available for sale................................................ 13,755 11,902
Proceeds from sales of securities available for sale............................. 4,329 3589
Purchase of:
Securities available for sale................................................ (21,837) (40,350)
Net principal disbursed on loans................................................. (14,069) 925
(Purchase) of Federal Home Loan Bank Stock....................................... 0 (499)
Purchase of premises and equipment............................................... (214) (1,267)
Proceeds from the sale of foreclosed assets...................................... (22) 142
-------------- --------------
Net cash used in investing activities.............................................. (17,258) (20,491)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts.................................. (31,018) 7,171
Certificates of deposit...................................................... 27,142 (2,027)
Acquisition of treasury stock................................................. (612) 0
Sale of treasury stock....................................................... 12 0
Cash dividends paid.......................................................... (1,370) (1,240)
Net advances (repayments) from other borrowings.................................. 6,426 9,962
-------------- --------------
Net cash provided by financing activities.......................................... 580 13,866
Net increase (decrease) in cash and cash equivalents.............................. (13,598) (2,399)
Cash and cash equivalents at beginning of year..................................... 23,101 18,436
-------------- --------------
Cash and cash equivalents at end of period......................................... $ 9,503 $ 16,037
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to............................... $ 7,501 $ 6,553
certificate accounts).
Income Taxes.................................................................. $ 525 $ 360
Noncash Investing Activities:
Inc.(Dec.) in net unrealized gain on securities available for sale........... ($ 1,420) $ 187
15
TABLE 4
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation
Average Balances and Net Interest Margin
(Dollars in thousands)
June 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest
Balance Rate Balance Rate Inc./Exp.
- --------------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits with banks $ 325 5.54% $ 9 $ 264 3.03% $ 4
Federal funds sold and securities
purchased under agreements to resell 5,758 4.86% 140 5,004 5.60% 140
Investment Securities:
Taxable 68,643 5.25% 1,803 58,639 6.17% 1,810
Tax-Exempt (1) 37,769 6.98% 1,319 25,544 7.23% 924
Equity Investments 5,361 4.96% 133 5,218 4.79% 125
- --------------------------------------------------------------------------------------------------------------------------
Total Investments 117,856 5.78% 3,404 94,669 6.34% 3,003
Loans
Commercial (1) 62,250 8.16% 2,541 54,427 8.41% 2,290
Mortgage (1) 172,333 8.55% 7,363 152,961 8.87% 6,780
Installment 38,041 8.96% 1,705 39,117 9.55% 1,868
Leasing 27,478 7.50% 1,030 17,300 7.73% 669
- --------------------------------------------------------------------------------------------------------------------------
Total loans (2) 300,102 8.42% 12,639 263,805 8.80% 11,607
Total earning assets 417,958 7.68% 16,043 358,474 8.15% 14,610
Non Interest Bearing Assets
Cash & Due From Banks 10,274 0 9,236 0
Premises & Equipment 10,182 0 9,407 0
Other Assets 11,977 0 8,099 0
Allowance for Possible Loan Losses (3,224) 0 (2,953) 0
- --------------------------------------------------------------------------------------------------------------------------
Total Non-interest earning assets 29,209 0 23,789 0
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $447,167 $16,043 $382,263 $14,610
============================================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing $106,037 2.64% $ 1,402 $ 82,279 2.75% $ 1,133
Savings 60,641 3.28% 993 56,636 3.36% 951
Time 171,737 5.13% 4,403 148,460 5.47% 4,058
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 338,415 4.02% 6,798 287,375 4.27% 6,142
Short-term borrowings 3,558 4.72% 84 1,447 5.39% 39
Long-term borrowings 17,839 5.06% 451 14,135 5.43% 384
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 359,812 4.08% 7,333 302,957 4.33% 6,565
Demand - non-interest-bearing 37,383 32,067 0
Other liabilities 5,648 4,059 0
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities 402,843 7,333 339,083 6,565
Shareholders' equity 44,324 0 43,180 0
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $447,167 $ 7,333 $382,263 $ 6,565
============================================================================
Interest income/earning assets 7.68% 16,043 8.15% 14,610
Interest expense/interest bearing
liabilities 4.08% 7,333 4.33% 6,565
- --------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.60% $ 8,710 3.82% $ 8,045
============================ =====================
Interest Income/Interest Earning Assets 7.68% $16,043 8.15% $14,610
Interest expense/Interest Earning
Assets 3.51% 7,333 3.66% 6,565
- --------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.17% $ 8,710 4.49% $ 8,045
============================ =====================
- --------------------------------------------------------------------------------------------------------------------------
(1) The amounts are reflected on a fully tax equity basis using the federal
statutory rate of 34% in 1999 and 1998, adjusted for certain tax preferences
(2) Average outstanding includes the average balance outstanding of all non-
accrual loans. Loans consist of the average of total loans less average
unearned income. The amount of loan fees included in the interest income on
loans in not material.
16
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDERS VOTE
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports for the period ended June 30, 1999.
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 CORPORATION
(Registrant)
DATE: August 16, 1999 /s/ James P. Moore
----------------------- -----------------------------
James P. Moore
President and Director
(Principal Executive Officer)
DATE: August 16, 1999 /s/ Joseph B. Bower, Jr.
----------------------- -----------------------------
Joseph B. Bower, Jr.
Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)
17