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 September 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
September 30, 1999:
COMMON STOCK: $1.00 PAR VALUE - 3,663,825 SHARESINDEX
PART I.
FINANCIAL INFORMATION
Sequential
Page Number
- -----------
PAGE 3. Notes to Consolidated Financial Statements
PAGE 5. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PAGE 14. Table 1 - Consolidated Balance Sheets - September 30, 1999
PAGE 15. Table 2Q - Consolidated Statements of Income - Quarter ending
September 30, 1999
PAGE 16. Table 2Y - Consolidated Statements of Income for nine months ending
September 30, 1999
PAGE 17. Table 3 - Consolidated Statements of Cash Flows - nine months ending
September 30, 1999
PAGE 18. Table 4 - Consolidated Yield Comparisons
PART II.
OTHER INFORMATION
PAGE 19. ITEM 4 Submission of Matters for Security Holders Vote
PAGE 19. ITEM 5 Other Information
PAGE 19. ITEM 6 Exhibits and Reports on Form 8-K
PAGE 19. 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.
During the third quarter of 1999, the Corporation acquired The First
National Bank of Spangler. This merger was accounted for as a pooling of
interest. All prior period numbers have been restated, unless otherwise
indicated, to include The First National Bank of Spangler. The Corporation also
purchased five branches throughout the course of 1999 and have accounted for
these using the purchase method of accounting.
In the opinion of Management of the registrant, the accompanying
consolidated financial statements for the quarter and nine month periods ended
September 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 nine month period ended
September 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.
COMMON STOCK PLAN
The Corporation has a common stock plan for key employees and independent
directors. The Stock Incentive Plan, which is administered by a disinterested
committee of the Board of Directors, provides for 250,000 shares of common stock
in the form of qualified options, nonqualified options, stock appreciation
rights or restrictive stock. The Corporation applies Accounting Principles
Board Opinion 25 and related interpretations in accounting for its common stock
plan. Accordingly, no compensation expense has been recognized for the plans.
OTHER COMPREHENSIVE INCOME
Total other comprehensive income for the quarters ended September 30, 1999
and 1998 were $867,000 and $1,350,000 and through the nine months of 1999 and
1998 were $1,727,000 and $3,636,000.
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.
3
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.
4
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 higher than the state average in most of our market areas except Centre
County. Actual ratings (as of August 1999) by county are as follows: Cameron
8.6%; Centre 3.0%; Clearfield 6.2%; Elk 5.1% Jefferson 6.0%; and McKean 7.0%.
On February 12, 1999, the Bank acquired a full service office in
Punxsutawney, PA from an unaffiliated institution (referred to hereafter as
"Punxsy"). 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. Expenses incurred to
date related to merger costs were $50,000.
On September 24, 1999, the Bank acquired four full service offices in north
central PA from an unaffiliated institution (referred to hereafter as "four
branches"). The offices are located in the communities of Johnsonburg and
Ridgway in Elk County and Bradford and Kane in McKean County. The purchase
included $21.7 million in loans, $116.2 million in deposits and certain fixed
assets associated with the offices. All locations continue to operate as full
service branches of the Bank. The acquisition costs incurred to date have been
$73,000.
ACQUISITION OF THE FIRST NATIONAL BANK OF SPANGLER
On August 18, 1999, the Corporation acquired The First National Bank of
Spangler ("Spangler") located in Spangler, PA. The merger, which was accounted
for as a pooling of interest, was affected by issuing 237,500 shares of CNB
Financial Corporation common stock in exchange for 100% of the outstanding
shares of Spangler. After consummation of the acquisition, Spangler was merged
into County National Bank. The purchase included $23.0 million in loans, $29.0
million in deposits, $4.6 million in capital and other assets and liabilities.
The facility will continue to operate as The First National Bank of Spangler
until the first quarter of 2000 at which time it will be fully integrated with
County National Bank as an operating branch. Merger related expenses incurred
as a result of this event have amounted to $164,000 to date.
The post merger combined operating results provided in the table below are
presented to show the 30 day period from September 1, through September 30, 1999
and 1998 as if the merger were in effect for both periods.
1999 1998
------ ------
Net Interest Income $1,642 $1,377
Net Income $ 408 $ 401
Net Income per common share $ 0.11 $ 0.11
5
The following schedule provides a summary of CNB Financial Corporation and
Spangler on a consolidated basis for the period ending December 31, 1999:
Total
CNB(audited) CNB & Spangler
(excluding Spangler) Spangler Combined
---------------------- ---------- ----------------
Assets
- ------
Cash and deposits in banks $ 23,101 $ 2,992 $ 26,093
Investment available for sale 100,121 5,872 105,993
Investment held to maturity 7,682 - 7,682
Net loans and leases 285,289 22,538 307,827
Premises and equipment, net 10,257 413 10,670
Intangible, net 2,522 - 2,522
Accrued Interest and other assets 7,880 250 8,130
---------- ---------- ----------
Total Assets $436,852 $32,065 $468,917
========== ========== ==========
Liabilities
- -----------
Deposits $370,814 $27,268 $398,082
Short-term borrowings 359 - 359
Other borrowings 16,019 - 16,019
Accrued expenses and other liab. 4,879 204 5,083
---------- ---------- ----------
Total Liabilities 392,071 27,472 419,543
Total Shareholder's Equity 44,781 4,593 49,374
---------- ---------- ----------
Total Liabilities and Shareholder's Equity $436,852 $32,065 $468,917
========== ========== ==========
OVERVIEW OF BALANCE SHEET
Total assets (shown in Table 1 "Consolidated Balance Sheet") have grown
-------
23.3% since year end 1998 to $578.0 million. Growth for the period has occurred
generally through the acquisitions previously mentioned. The following comments
will further explain the details of the asset fluctuation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $54,285,000 at September 30, 1999
compared to $26,093,000 on December 31, 1998. This increase was caused as a
result of the four branches acquired late in the quarter. All excess funds had
not yet been deployed and are expected to be invested in bonds or to fund
lending in the market area.
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 mature 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 $23.2 million (or 20.4%) since December 31,
1998. Of the Corporation's total investment portfolio of $136,854,000 as of
September 30, 1999, $129,009,000 (or 94.3%) is classified as available for sale
with the balance of $7,845,000 classified as held to maturity.
The increase is a combination of funds acquired from Punxsy and the four
branches. The Bank also utilized favorable funding rates from the Federal Home
Loan Bank of Pittsburgh to purchase investment securities in the amount of $5
million.
6
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 growth, exclusive of purchased loans, was
$10.1 million or 3.2% through the nine months of 1999. The 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.
At September 30, 1999, the Corporation had $353,887,000 in loans and leases
outstanding up $42,746,000 (or 13.7%) since December 31, 1998. The remainder of
the loan growth that occurred was a result of the acquisition of $32.9 million
in loans. 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 and capital
expenditures.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Allowance for Loan and Lease Losses as a percentage of loans decreased
from 1.07% at December 31, 1998 to 1.04% at September 30, 1999. The dollar
amount of the reserve increased $349,000 since year end 1998. The increase is a
result of the net reserve of $450,000 expensed during the nine months and an
adjustment made to the loans that were acquired in the Punxsy and four branches
acquisitions made during the year. The gross charge-offs for the nine months of
1999 were $418,000 while recoveries were $170,000. This level of charge-offs is
comparable to the nine months of 1998 when charge-offs were $345,000 with
recoveries of $94,000. 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 $1,641,000 or 0.28% of total assets on
September 30, 1999 compared to $1,870,000 or 0.42% on December 31, 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 September 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 $507,887,000, or 96.7%
of all sources of funds, at September 30, 1999. Deposit growth of 27.6% since
year end 1998 resulted from the three acquisitions previously mentioned.
The Corporation utilizes term borrowings from the Federal Home Loan Bank
(FHLB) to meet funding needs not accommodated by deposit growth. During the
first nine months of 1999, the Corporation borrowed $5 million as mentioned on
page 5 in the investment securities section.
7
Management plans to maintain access to short and long-term FHLB borrowings as
appropriate funding sources for the various needs of the Corporation. In
addition, the Bank has increased its ability to borrow at the discount window of
the Federal Reserve Bank to $15 million.
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 $48,288,000 at September 30, 1999 compared
to $49,374,000 at December 31, 1998 a decrease of $1,086 (or 2.2%). In the
first nine months of 1999, the Corporation earned $3,573,000 and declared
dividends of $2,103,000, a dividend payout ratio of 58.9% of net income. Also,
the Corporation increased treasury stock by $607,000.
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 nine 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 declined in value
during 1999 due to general market conditions and the rise in interest rates.
This situation has caused a decline in stockholders' equity of $1,905,000 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 9.62% at September 30, 1999 is
above the minimum standard of 8%. The Corporation's Tier 1 capital ratio of
8.67% is above the regulatory minimum of 4%. The leverage ratio at September
30, 1999 was 6.70%, also above the minimum standard of 4%. The Corporation is
deemed to be adequately 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 17 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.
8
RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
The Corporation had net income, before merger related charges, of
$1,483,000 and $3,763,000 for the third quarter and first nine months of 1999,
respectively. The earnings per diluted share for the respective periods were
$0.40 and $1.03. After merger-related charges, net income was $1,293,000 and
$3,573,000 for the third quarter and first nine months of 1999, which equates to
earnings per diluted share of $0.35 and $1.01, respectively. The return on
assets and the return on equity for the nine months are 0.99% and 9.88%.
Operating cash earnings for the quarter and nine months was $1,630,000 and
$4,165,000 increases of 28.3% and 7.3%, respectively, over reported earnings of
$1,270,000 and $3,881,000 for the same periods in 1998. Operating cash return
on assets and return on equity for the nine months of 1999 are 1.15% and 11.52%
respectively. Operating cash earnings are earnings before the amortization of
goodwill and core deposit intangibles and merger charges. The following
discussions provide further details regarding the components of net income.
INTEREST INCOME AND EXPENSE
Net interest income totaled $4,887,000 in the third quarter, an increase of
17.25% over the third quarter of 1998 and totaled $13,645,000 for the nine
months of 1999, an increase of 9.9% over the prior year. The Bank experienced
an increase in earning assets in the past twelve months of 40.2% which came
primarily through the three acquisitions previously mentioned. Total interest
income increased during the quarter by $956,000 or 12.1% while interest expense
increased by $237,000 or 6.4% when compared to the third quarter of 1998.
The Corporation recorded a provision for loan and lease losses in the third
quarter of $153,000 compared to the third quarter of 1998 at $158,000 and
$460,000 for the nine months of 1999 compared to $553,000 in 1998.
NON-INTEREST INCOME
Non-interest income increased $76,000 (9.1%) and $286,000 (12.9%) in the
third quarter and nine 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 nine months,
account service charges totaled $1,119,000 up $240,000 (or 27.3%) 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. The
increases compared with the prior period are adversely affected by a decrease in
security gains of $157,000.
NON-INTEREST EXPENSE
Non-interest expense increased $702,000 or 21.9% during the third quarter
of 1999 and $2,018,000 or 22.4% in the nine months of 1999 when compared to the
same periods in 1998. This increased level of non-interest expense is partly
attributable to the acquisitions that occurred during 1999. The associated
costs incurred through the first nine months of 1999 were $288,000 for merger
costs and $365,000 for amortization of intangible assets. Also, the Bank has
experienced increases in data processing of 34.5% or $198,000. These costs are
for upgrades to the Bank's overall technology plan intended to provide more
efficiencies in the future and for new reporting software.
9
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $528,000 in the third quarter of 1999
compared to $484,000 in the third quarter of 1998. For the nine month period
comparisons, the federal tax expense was $1,101,000 in 1999 and $1,366,000 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 $427,000 (or 30%)
increase in tax free income comparing 1999 with 1998.
10
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.
11
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
September 30, 1999 results of net income showed a decrease over the prior
year's nine months and were below management's expectations. Management's focus
is to fully integrate the acquisitions made during 1999 by turning the dollars
acquired into earning assets. The goal of our recent asset growth is general
increase in shareholder value as well as favorable results in long-term
profitability.
Loan demand improved during the quarter. Loan growth is expected to
continue at a moderate pace throughout the remainder of the year. The
Corporation's loan to deposit ratio has decreased at the end of the third
quarter to 69.0% compared to 78.1% at year-end 1998 as a result of the acquired
deposit liabilities. Management expects the loan to deposit ratio to increase
during the fourth quarter as the funds from the acquisition are utilized to fund
loan demand.
Consumer loan charge-offs in the third quarter continued to comprise the
majority of the Corporation's recent charge-offs. In the third quarter, total
net charge-offs were $243,000 of which consumer net charge-offs totaled
$262,000. 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 nine months ended September 30, 1999, the
Corporation's efficiency ratio before merger related costs and intangible
expense, was 60.21% compared to 60.11% 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 implements a profitability enhancement program
with the expectation of an improved efficiency ratio.
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 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 as interest income grows with the
increased deployment of earning assets in the form of loans rather than
investments.
12
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.
13
TABLE 1
CONSOLIDATED BALANCE SHEETS
CNB FINANCIAL CORPORATION
Consolidated Balance Sheets (unaudited)
(Dollars in thousands)
September 30, Dec. 31
ASSETS 1999 1998
-------------- --------------
Cash and due from banks.................................................... $ 21,051 $ 11,082
Interest bearing deposits with other banks................................. 294 256
Federal funds sold......................................................... 32,940 14,755
Investment securities available for sale................................... 129,009 105,993
Investment securities held to maturity, fair value of $7,905
at September 30, 1999, and $7,867 at December 31, 1998.................... 7,845 7,682
Loans and leases........................................................... 359,187 315,711
Less: unearned discount................................................. 5,081 4,570
Less: allowance for loan losses.......................................... 3,882 3,314
-------------- --------------
NET LOANS................................................................ 350,224 307,827
Premises and equipment..................................................... 11,708 10,670
Accrued interest receivable................................................ 3,295 2,627
Loans held for sale........................................................ 2,286 4,299
Intangible, net............................................................ 16,614 2,522
Other assets............................................................... 2,740 1,204
-------------- --------------
TOTAL ASSETS............................................................. $578,006 $468,917
LIABILITIES
Deposits:
Non-interest bearing deposits............................................ $51,429 $38,970
Interest bearing deposits................................................ 456,458 359,112
-------------- --------------
TOTAL DEPOSITS........................................................... 507,887 398,082
Other borrowings........................................................... 17,547 16,378
Accrued interest and other liabilities..................................... 4,284 5,083
-------------- --------------
TOTAL LIABILITIES........................................................ $529,718 $419,543
SHAREHOLDERS' EQUITY
Common stock $1.00 par value
Authorized 10,000,000 shares
Issued 3,693,500 shares for 1999 and 3,456,000 shares for 1998........... $3,694 $3,506
Additional paid in capital............................................... 3,474 3,756
Retained earnings........................................................ 42,216 40,696
Treasury stock, at cost ................................................. (719) (112)
(30,104 shares for 1999, and 11,106 for December 1998
Accumulated other comprehensive income................................... (377) 1,528
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY............................................... 48,288 49,374
-------------- --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY................................. $578,006 $468,917
14
TABLE 2-Q
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30...
1999 1998
---------------- ----------------
INTEREST INCOME
Loans including fees......................................................... $7,158 $6,240
Deposits with other banks.................................................... 7 5
Federal funds sold........................................................... 35 127
Investment securities:
Taxable................................................................... 1,109 1,099
Tax-exempt................................................................ 465 350
Dividends................................................................. 63 60
---------------- ----------------
TOTAL INTEREST INCOME..................................................... $8,837 $7,881
INTEREST EXPENSE
Deposits..................................................................... $3,627 $3,483
Borrowed funds............................................................... 323 230
---------------- ----------------
TOTAL INTEREST EXPENSE.................................................... $3,950 $3,713
Net interest income....................................................... $4,887 $4,168
Provision for possible loan losses........................................ 153 158
---------------- ----------------
NET INTEREST INCOME AFTER PROVISION.......................................... $4,734 $4,010
OTHER INCOME
Trust & asset management fees................................................ $ 224 $ 212
Service charges on deposit accounts.......................................... 414 331
Other service charges and fees............................................... 135 97
Securities gains............................................................. 31 87
Gains on sale of loans....................................................... 13 1
Other income................................................................. 98 111
---------------- ----------------
TOTAL OTHER INCOME........................................................ $ 915 $ 839
OTHER EXPENSES
Salaries..................................................................... $1,454 $1,297
Employee benefits............................................................ 500 375
Net occupancy expense........................................................ 509 447
Amortization of intangible................................................... 222 79
Other........................................................................ 1,226 1,011
---------------- ----------------
TOTAL OTHER EXPENSES...................................................... $3,911 $3,209
Income before income taxes................................................... $1,738 $1,640
Applicable income taxes...................................................... 445 422
---------------- ----------------
NET INCOME................................................................ $1,293 $1,218
================ ================
Per Share Data
- --------------
Net income, basic............................................................ $0.35 $0.33
Net income, fully diluted.................................................... $0.35 $0.33
Cash dividends per share..................................................... $0.20 $0.18
15
TABLE 2-Y
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
NINE MONTHS ENDED SEPTEMBER 30...
1999 1998
---------------- ----------------
INTEREST AND DIVIDEND INCOME
Loans including fees......................................................... $20,546 $18,660
Deposits with other banks.................................................... 16 9
Federal funds sold........................................................... 243 295
Investment securities:
Taxable................................................................... 3,076 3,110
Tax-exempt................................................................ 1,417 1,023
Dividends................................................................. 178 170
---------------- ----------------
TOTAL INTEREST AND DIVIDEND INCOME........................................ $25,476 $23,267
---------------- ----------------
INTEREST EXPENSE
Deposits..................................................................... $10,973 $10,196
Borrowed funds............................................................... 858 653
---------------- ----------------
TOTAL INTEREST EXPENSE.................................................... $11,831 $10,849
Net interest income....................................................... $13,645 $12,418
Provision for possible loan losses........................................ 460 553
---------------- ----------------
NET INTEREST INCOME AFTER PROVISION.......................................... $13,185 $11,865
---------------- ----------------
OTHER INCOME
Trust & asset management fees................................................ $ 607 $ 560
Service charges on deposit accounts.......................................... 1,119 879
Other service charges and fees............................................... 321 309
Realized securities gains.................................................... 60 217
Gains on sale of loans....................................................... 65 22
Other........................................................................ 336 235
---------------- ----------------
TOTAL OTHER INCOME........................................................ $ 2,508 $ 2,222
---------------- ----------------
OTHER EXPENSES
Salaries..................................................................... $ 4,187 $ 3,788
Employee benefits............................................................ 1,470 1,141
Net occupancy expense of premises............................................ 1,458 1,353
Amortization of intangible................................................... 609 244
Other........................................................................ 3,295 2,475
---------------- ----------------
TOTAL OTHER EXPENSES...................................................... $11,019 $ 9,001
---------------- ----------------
Income before income taxes................................................... $ 4,674 $ 5,086
Applicable income taxes...................................................... 1,101 1,366
---------------- ----------------
NET INCOME................................................................ $ 3,573 $ 3,720
================ ================
EARNINGS PER SHARE, BASED ON WEIGHTED
AVERAGE SHARES OUTSTANDING
Net income, basic............................................................ $0.97 $1.01
Net income, fully diluted.................................................... $0.97 $1.01
Cash dividends per share..................................................... $0.60 $0.54
16
TABLE 3
CONSOLIDATED STATEMENTS OF CASHFLOWS
CNB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (unaudited)
(Dollars in thousands)
Nine Months Ended September 30...
1999 1998
----------------- -----------------
Cash flows from operating activities:
Net Income...................................................... $ 3,573 $ 3,506
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses................................... 460 525
Depreciation and amortization............................... 1,275 845
Amortization and accretion and deferred loan fees........... 153 (230)
Deferred Taxes.............................................. (649) 1,054
Security Gains.............................................. (60) (217)
Gain on sale of loans....................................... (65) (22)
Net (gains) losses on dispositions of acquired property..... 21 (98)
Changes in:
Proceeds from sale of loans.................................. 12,497 11,288
Origination of loans for sale................................ (10,420) (11,546)
Interest receivable......................................... (747) (216)
Other assets and intangibles................................ (16,405) (11,979)
Interest payable............................................ 510 (16)
Other liabilities........................................... 495 470
----------------- ------------------
Net cash provided by operating activities....................... (9,362) (6,636)
Cash flows from investing activities:
Proceeds from maturities of:
Securities held to maturity............................... 1,100 6,067
Securities available for sale............................. 20,208 16,897
Proceeds from sales of securities available for sale.......... 17,236 3,988
Purchase of:
Securities available for sale............................. (69,701) (49,659)
Net principal disbursed on loans.............................. (64,912) 5,134
(Purchase) of Federal Reserve Bank Stock...................... (11) 0
Purchase of Federal Home Loan Bank Stock...................... (1,258) (499)
Purchase of premises and equipment............................ (2,117) (1,784)
Proceeds from the sale of foreclosed assets................... (21) 142
----------------- ------------------
Net cash used in investing activities........................... (99,476) (19,714)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts............... 22,300 13,515
Certificates of deposit................................... 114,773 (49)
Acquisition of treasury stock............................. (607) 0
Sale of treasury stock.................................... 18 0
Cash dividends paid....................................... (2,103) (1,861)
Issuance of common stock.................................. 4,472 0
Net advances from other borrowings............................ 1,169 8,920
----------------- ------------------
Net cash provided by financing activities....................... 140,022 20,525
Net increase (decrease) in cash and cash equivalents........... 31,184 (5,825)
Cash and cash equivalents at beginning of year.................. 23,101 18,436
----------------- ------------------
Cash and cash equivalents at end of period...................... $ 54,285 $ 12,611
================= ==================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to
certificate accounts)..................................... $ 12,341 $ 9,988
Income Taxes............................................... $ 1,425 $ 360
Noncash Investing Activities:
Inc. (Dec.) in net unrealized gain on securities
available for sale....................................... ($1,092) $ 273
17
TABLE 4
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation
Average Balances and Net Interest Margin
(Dollars in thousands)
September 30, 1999 September 30, 1998
- -----------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest
Balance Rate Inc./Exp. Balance Rate Inc./Exp.
- -----------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits with banks $ 425 5.02% 16 270 4.44% 9
Federal funds sold and securities
purchased under agreements to resell 6,720 4.82% 243 7,071 4.32% 229
Investment Securities:
Taxable 75,093 5.57% 3,136 66,866 6.19% 3,102
Tax-Exempt (1) 37,891 7.00% 1,989 26,066 7.22% 1,412
Equity Investments (1) 5,444 5.12% 209 5,657 4.76% 202
- -----------------------------------------------------------------------------------------------------------------------
Total Investments 125,573 5.94% 5,593 105,930 6.24% 4,954
Loans
Commercial (1) 64,055 8.67% 4,167 56,202 8.44% 3,559
Mortgage (1) 191,256 8.47% 12,150 170,905 8.75% 11,215
Installment 41,324 9.03% 2,798 41,980 9.33% 2,938
Leasing 28,228 7.46% 1,580 18,462 7.77% 1,076
- -----------------------------------------------------------------------------------------------------------------------
Total loans (2) 324,863 8.49% 20,695 287,549 8.71% 18,788
Total earning assets 450,436 7.78% 26,288 393,479 8.05% 23,742
Non Interest Bearing Assets
Cash & Due From Banks 11,199 - 9,812 -
Premises & Equipment 10,649 - 10,003 -
Other Assets 12,217 - 8,417 -
Allowance for Possible Loan Losses (3,492) - (3,212) -
- -----------------------------------------------------------------------------------------------------------------------
Total Non-interest earning assets 30,573 -- - 25,020 -- -
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $481,009 $26,288 $418,499 $23,742
=========================================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing 102,859 2.54% 1,956 86,972 2.90% 1,894
Savings 66,020 3.26% 1,616 61,781 3.31% 1,533
Time 193,299 5.11% 7,401 166,380 5.43% 6,770
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 362,178 4.04% 10,973 315,133 4.31% 10,197
Short-term borrowings 5,673 4.98% 212 1,196 5.46% 49
Long-term borrowings 17,067 5.05% 646 14,763 5.45% 603
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 384,918 4.10% 11,831 331,092 4.37% 10,849
Demand - non-interest-bearing 40,408 - 34,944 -
Other liabilities 6,606 - 4,518 -
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities 431,932 3.65% 11,831 370,554 3.90% 10,849
Shareholders' equity 49,077 -- - 47,945 -- -
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity 481,009 11,831 418,499 10,849
=========================================================================
Interest income/earning assets 7.78% 26,288 8.05% $23,742
Interest expense/interest bearing liabilities 4.10% 11,831 4.37% 10,849
- -----------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.68% $14,457 3.68% $12,893
------------------ -------------------
Interest Income/Interest Earning Assets 7.78% $26,288 8.05% $23,742
Interest expense/Interest Earning Assets 3.50% 11,831 3.68% 10,849
- -----------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.28% $14,457 4.37% $12,893
------------------ -------------------
- -----------------------------------------------------------------------------------------------------------------------
(1) The amounts are reflected on a fully tax equivalent 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 is not material.
18
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 September 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: November 15, 1999 /s/ James P. Moore
------------------- ------------------------------------
James P. Moore
President and Director
(Principal Executive Officer)
DATE: November 15, 1999 /s/ Joseph B. Bower, Jr.
------------------- ------------------------------------
Joseph B. Bower, Jr.
Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)
19