UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-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
0-24739
Commission File Number
CNY Financial Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 16-1557490
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NORTH MAIN STREET
CORTLAND, NEW YORK 13045
(Address of principal executive offices)
(607) 756-5643
Registrant's telephone number, including area code
COMMON STOCK, $0.01 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act
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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 day. (X) Yes ( ) No.
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant was approximately $58.2 million as of July 27,
1999. As of July 27, 1999, the registrant had 4,874,563 shares of Common Stock
outstanding.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets............................................................ 1
Condensed Consolidated Statements of Income...................................................... 2
Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income............... 3
Condensed Consolidated Statements of Cash Flows.................................................. 4
Footnotes to Unaudited Condensed Consolidated Financial Statement................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 6
Item 3 Quantitative and Qualitative Disclosures about Market Risk....................................... 14
Part II. OTHER INFORMATION
Item 6. (a) Exhibits................................................................................ 14
(b) Reports of Form 8-K..................................................................... 14
None
Form 10-Q Signature Page.................................................................................. 15
CNY Financial Corporation and Subsidiary
Condensed Consolidated Balance Sheet
(In thousands)
June 30, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Cash and due from banks $ 5,614 $ 4,432
Interest-bearing balances at financial institutions and federal funds sold -- 10,104
Securities available-for-sale, at fair value 106,811 88,437
Securities held-to-maturity (fair value of $7,593 at 1999 and $10,404
at 1998) 7,643 10,318
Loans, net of deferred fees 162,279 161,701
Less allowance for loan losses 2,567 2,494
- -----------------------------------------------------------------------------------------------------------
Net loans 159,712 159,207
Premises and equipment, net 2,803 3,243
Federal Home Loan Bank stock, at cost 1,637 1,303
Other assets 5,887 4,142
- -----------------------------------------------------------------------------------------------------------
$ 290,107 $ 281,186
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing demand accounts $ 11,758 $ 10,780
Interest bearing deposits 185,473 185,234
- -----------------------------------------------------------------------------------------------------------
Total deposits 197,231 196,014
Advance payments by borrowers for property taxes and insurance 1,350 1,450
Borrowings 13,000 1,000
Other liabilities 3,154 3,652
- -----------------------------------------------------------------------------------------------------------
Total liabilities 214,735 202,116
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 75,372 79,070
- -----------------------------------------------------------------------------------------------------------
$ 290,107 $ 281,186
===========================================================================================================
See accompanying notes to the unaudited condensed consolidated financial statements.
1
CNY Financial Corporation and Subsidiary
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30,
1999 and 1998 (In thousands,
except share data)
(Unaudited)
Quarter to Date Year to Date
----------------------------- ---------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Interest income
Loans $ 3,242 $ 3,332 $ 6,530 $ 6,709
Securities 1,569 900 3,013 1,748
Other short-term investments 50 105 134 191
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 4,861 4,337 9,677 8,648
Interest expense
Deposits 1,757 2,003 3,532 4,013
Borrowings 65 -- 82 --
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,822 2,003 3,614 4,013
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 3,039 2,334 6,063 4,635
Provision for loan losses 25 75 100 150
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,014 2,259 5,963 4,485
Non-interest income
Service charges 219 218 390 404
Net gain on sale of securities 19 30 19 36
Other 53 30 98 83
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 291 278 507 523
Non-interest expenses
Salaries and employee benefits 822 960 1,750 1,772
Building, occupancy and equipment 176 126 398 340
Other 864 607 1,544 1,226
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 1,862 1,693 3,692 3,338
- ----------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 1,443 844 2,778 1,670
Income tax expense 550 283 1,136 616
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 893 $ 561 $ 1,642 $ 1,054
============================================================================================================================
Basic and diluted earnings per share $ 0.19 N/A $ 0.35 N/A
============================================================================================================================
Weighted average basic shares outstanding 4,579,831 N/A 4,650,741 N/A
============================================================================================================================
See accompanying notes to the unaudited condensed consolidated financial statements.
2
CNY Financial Corporation and Subsidiary
Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income
Six Months Ended June 30, 1999
(Unaudited)
(In thousands, except share data)
Accumulated Unearned
Additional Other Unallocated Common
Common Paid-in Retained Comprehensive Treasury ESOP Stock
Stock Capital Earnings Income Stock Shares For PRRP Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 54 $51,289 $ 31,848 $ 1,178 $(1,067) $(4,232) $ -- $ 79,070
Treasury stock purchased (207,196 shares) -- -- -- -- (2,248) -- -- (2,248)
ESOP shares released for allocation -- 16 -- -- -- 107 -- 123
Stock purchased and awarded under
Personal Recognition and Retention Plan
(PRRP) (169,278 shares) -- -- -- -- -- -- (2,031) (2,031)
Expense of PRRP -- -- -- -- -- -- 69 69
Dividend payments -- -- (459) -- -- -- -- (459)
Comprehensive income:
Change in net unrealized gain
(loss) on securities, net of tax -- -- -- (794) -- -- -- (794)
Net income -- -- 1,642 -- -- -- -- 1,642
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 1,642 (794) -- -- -- 848
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ 54 $51,305 $ 33,031 $ 384 $(3,315) $(4,125) $(1,962) $ 75,372
================================================================================================================================
See accompanying notes to the unaudited condensed consolidated financial statements.
3
CNY Financial Corporation and Subsidiary
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998
(In thousands)
(Unaudited)
Year to Date
- ----------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 929 $ 4,252
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principle reductions of available-for-
sale securities 41,219 12,664
Purchase of securities available-for-sale (60,611) (14,697)
Proceeds from maturities and principle reductions of held-to-
maturity securities 2,676 71
Purchase of FHLB stock (334) (12)
Net increase in loans (578) (1,403)
Proceeds from sale of real estate owned 48 850
Premises and equipment expenditures (141) (162)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,721) (2,689)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 1,217 2,181
Decrease in advance payments by borrowers for property taxes and
Insurance (100) (16)
Net increase in Federal Home Loan Bank advances 12,000 --
Cash dividends on common stock (459) --
Treasury stock purchased (2,704) --
Stock purchased for PRRP plan (2,031) --
Repayment of ESOP loan (53) --
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,870 2,165
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,922) 3,728
Cash and cash equivalents at beginning of period 14,536 8,079
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,614 $ 11,807
====================================================================================================
See accompanying notes to the unaudited condensed consolidated financial statements.
4
CNY Financial Corporation and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1: BASIS OF PRESENTATION
The financial information of CNY Financial Corporation and
subsidiary (the Company) included herein is unaudited;
however, such information reflects all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the
interim periods. The results of the interim period ended June
30, 1999 are not necessarily indicative of the results
expected for the year ended December 31, 1999.
The data in the condensed consolidated balance sheet for
December 31, 1998 was derived from the Company's 1998 Annual
Report to Shareholders. That data, along with the other
interim financial information presented in the condensed
consolidated balance sheets, statements of income, and
statements of cash flows should be read in conjunction with
the consolidated financial statements, including the notes
thereto, contained in the 1998 Annual Report to Shareholders.
NOTE 2: EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income
available to common shareholders by the weighted average
number of shares outstanding during the period. Prior to the
conversion to a stock savings bank on October 6, 1998,
earnings per share are not applicable as the mutual savings
bank had no shares outstanding. Unallocated shares held by the
Company's ESOP are not included in the weighted average number
of shares outstanding. The following table summarizes the
computation of earnings per share for the period indicated:
Three months ended Six months ended
June 30, 1999 June 30, 1999
----------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------
(In thousands, except per share amounts)
BASIC EPS
Net income $ 893 4,580 $ 0.19 $ 1,642 4,651 $ 0.35
EFFECT OF DILUTIVE SECURITIES
Options 4 --
Unearned stock grants 1 --
------------------------------ ------------ -------------
DILUTED EPS $ 893 4,585 $ 0.19 $ 1,642 4,651 $ 0.35
=================================================================================
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
CNY Financial Corporation, a Delaware corporation incorporated in 1998
(the "Company") is a bank holding company headquartered in Cortland, New York
with total assets of over $290 million at June 30, 1999. Through its wholly
owned subsidiary, Cortland Savings Bank, which was founded in 1866 (the "Bank"),
the Company engages in full service community banking. The Bank is also
headquartered in Cortland, New York, and has three full service offices in
Cortland County, and a loan production office in Ithaca, Tompkins County.
The Company provides community banking services, primarily to
individuals and small-to-medium-sized businesses, in Cortland County and the
neighboring counties. These services include traditional checking, NOW, money
market, savings and time deposit accounts. The Company offers home equity, home
mortgage, commercial real estate, commercial and consumer loans, safe deposit
facilities and other services specially tailored to meet the needs of customers
in its target markets.
The Company commenced operations on October 6, 1998, when the Bank
converted from a state chartered mutual savings bank to a state chartered stock
savings bank. References to the business activities, financial condition and
operations of the Company prior to October 6, 1998 refer to the Bank, while
references to the Company on or after that date refer to both the Company and
the Bank as consolidated, unless the context indicates otherwise.
The Bank's result of operations depend principally on its net interest
income, which is the difference between the income earned on its loans and
securities and its cost of funds, principally interest paid on deposits. Net
interest income is dependent on the amounts and yields of interest earning
assets as compared to the amounts of and rates on interest bearing liabilities.
Net interest income is sensitive to changes in market rates of interest and the
Company's asset/liability management procedures in coping with such changes.
Results of operations are also affected by the provision for loan losses, the
volume of non-performing assets and the levels of non-interest income, and
non-interest expense.
Sources of non-interest income include categories such as deposit
account fees and other service charges, gains on the sale of securities and fees
for banking services such as safe deposit boxes. The largest category of
non-interest expense is compensation and benefits expense. Other principal
categories of non-interest expense are occupancy expense and real estate owned
expense, which represents expense in connection with real estate acquired in
foreclosure or in satisfaction of a debt owed to the Company.
FINANCIAL CONDITION
Total assets at June 30, 1999 were $290.1 million compared to $281.2
million at December 31, 1998. The primary cause of the $8.9 million increase was
a $15.7 million increase in securities, which totaled $114.5 million at June 30,
1999.
The Company repositioned a portion of its invested funds in the first
half of 1999 to take advantage of higher rates available by extending the
average maturity of investments and expanded its investment program to enhance
net interest income. The Company concentrated its new securities investments in
mortgage-backed securities which tend to have higher yields than government and
corporate debt securities. The mortgage-backed securities had terms to maturity
of 15 to 30 years, and were funded by a reduction in cash and short-term
investments of $8.9 million and an increase in borrowings. The Company expects
to increase its securities portfolio through further purchases of $10 million to
$15 million of mortgage-backed securities.
Borrowings were $13.0 million and $1.0 million at June 30, 1999 and
December 31, 1998, respectively. This $12.0 million increase was required to
fund the growth in assets, and the stock repurchases discussed in the following
paragraph. Additional borrowings may be required to support the investing
activities discussed above.
Stockholders' equity was $75.4 million at June 30, 1999 compared to
$79.1 million at December 31, 1998. The primary contributor to this $3.7 million
decline was completion of the Company's previously announced share repurchase
programs. 162,208 shares of the Company's common stock were purchased through
the end of January, at an average price of $10.53 per share. Additionally, the
Company repurchased 214,266 shares in May 1999 at a price of $12.00 per share to
be used for grants under the Company's Personnel Recognition and Retention Plan.
As of June 30, 1999, a total of 169,278 shares have been granted to participants
in this plan. One impact of these share repurchases has been a significant
improvement in the Company's book value per share which was $15.46 at June 30,
1999 compared to $15.06 at the end of 1998.
6
OPERATING RESULTS
Net income was $893,000 or $0.19 per common share for the three months
ended June 30, 1999. These results compare with net income of $561,000 for the
second quarter of 1998, and reflect a $332,000, or 59.2%, increase.
For the six months ended June 30, 1999, the Company reported net income
of $1.6 million, or $0.35 per share compared with net income for the same period
in 1998 of $1.1 million.
NET INTEREST INCOME
The major source of earnings for the Company is net interest income.
Net interest income for the three months ended June 30, 1999 and 1998 was $3.0
million and $2.3 million, respectively. This $755,000 improvement is primarily
attributable to the investment of proceeds received from the conversion.
Competitive pressures and overall market interest rates continued to put
downward pressure on the Company's loan rates, however. The Company's annualized
yield on loans was 8.20% for the three months ended June 30, 1999, compared with
8.63% for the second quarter of 1998. This reduction was, however, offset by the
investment of the proceeds received from the conversion, which resulted in
improvement in the Company's net interest margin to 4.54% for the quarter ended
June 30, 1999, compared with 4.22% for the three month period ended June 30,
1998.
The following tables set forth the average daily balances, net interest
income and expense and average yields and rates for the Company's earning assets
and interest bearing liabilities for the indicated periods. No tax-equivalent
adjustments were made.
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
INTEREST BALANCE COST INTEREST BALANCE COST
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans (1) $ 3,242 $ 158,522 8.20% $ 3,332 $ 154,795 8.63%
Securities (2) 1,569 105,614 5.96 900 58,885 6.13
Other short-term investments 50 4,407 4.55 105 8,019 5.25
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 4,861 268,543 7.26% 4,337 221,699 7.85%
- --------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 15,634 13,070
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 284,177 $ 234,769
==========================================================================================================================
Savings accounts (3) $ 386 $ 64,309 2.41% $ 462 $ 65,376 2.83%
Money market accounts 47 7,413 2.54 57 8,263 2.77
NOW accounts 34 10,831 1.26 44 9,913 1.78
Certificates of deposits 1,290 102,971 5.02 1,440 107,380 5.38
Borrowings 65 4,951 5.27 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 1,822 190,475 3.84% $ 2,003 190,932 4.21%
Non interest-bearing liabilities 17,247 12,594
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 207,722 203,526
Stockholders' equity 76,455 31,243
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 284,177 $ 234,769
==========================================================================================================================
Net interest income/spread $ 3,039 3.42% $ 2,334 3.64%
Net earning assets/net interest margin $ 78,068 4.54% $ 30,767 4.22%
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.41x 1.16x
==========================================================================================================================
(1) Average balances include loans held for sale and non-accrual loans, net of
the allowance for loan losses.
(FOOTNOTES CONTINUED ON NEXT PAGE)
7
(FOOTNOTES CONTINUED)
(2) Securities are included at amortized cost, with net unrealized gains or
losses on securities available-for-sale included as a component of
non-earning assets. Securities include Federal Home Loan Bank stock.
(3) Includes advance payments for taxes and insurance (mortgage escrow
deposits).
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
INTEREST BALANCE COST INTEREST BALANCE COST
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans (1) $ 6,530 $ 159,163 8.27% $ 6,709 $154,919 8.73%
Securities (2) 3,013 101,810 5.97 1,748 56,879 6.20
Other short-term investments 134 5,973 4.52 191 7,336 5.25
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 9,677 266,946 7.31% 8,648 219,134 7.96%
- --------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 13,703 14,350
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 280,649 $233,484
==========================================================================================================================
Savings accounts (3) $ 764 $ 63,635 2.42% $ 936 $ 64,276 2.94%
Money market accounts 94 7,679 2.47 114 8,324 2.76
NOW accounts 66 10,701 1.24 84 9,636 1.76
Certificates of deposits 2,608 103,531 5.08 2,879 107,722 5.39
Borrowings 82 3,041 5.44 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 3,614 188,587 3.86% $ 4,013 189,958 4.26%
Non interest-bearing liabilities 14,895 12,627
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 203,482 202,585
Stockholders' equity 77,167 30,899
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 280,649 $233,484
==========================================================================================================================
Net interest income/spread $ 6,063 3.45% $ 4,635 3.70%
Net earning assets/net interest margin $ 78,359 4.58% $ 29,176 4.27%
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.42x 1.15x
==========================================================================================================================
(1) Average balances include loans held for sale and non-accrual loans, net of
the allowance for loan losses.
(2) Securities are included at amortized cost, with net unrealized gains or
losses on securities available-for-sale included as a component of
non-earning assets. Securities include Federal Home Loan Bank stock.
(3) Includes advance payments for taxes and insurance (mortgage escrow
deposits).
The improvement in net interest income and net interest margin for the
six months ended June 30, 1999 compared with the first six months in 1998, as
well as the reduction in loan rates, are attributed to the factors discussed in
the quarterly results.
CHANGES IN INTEREST INCOME AND EXPENSE
One method of analyzing net interest income is to consider how changes
in average balances and average rates from one period to the next affect net
interest income. The following table shows the dollar amount of changes in
interest income and expense by major categories of interest earning assets and
interest bearing liabilities attributable to changes in volume or rate or both,
for the periods indicated.
8
Volume variances are computed using the change in volume multiplied by
the previous year's rate. Rate variances are computed using the changes in rate
multiplied by the previous year's volume. The change in interest due to both
rate and volume has been allocated between the factors in proportion to the
relationship of the absolute dollar amounts of the change in each.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------
1999 VS. 1998 1999 VS. 1998
----------------------------------------------------------------------------------
INCREASE (DECREASE) DUE TO: INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL VOLUME RATE TOTAL
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
INTEREST-EARNING ASSETS:
Loans $ 79 $ (169) $ (90) $ 181 $ (360) $ (179)
Securities 695 (26) 669 1,332 (67) 1,265
Other short-term investments (42) (13) (55) (33) (24) (57)
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 732 (208) 524 1,480 (451) 1,029
- --------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts (8) (68) (76) (9) (163) (172)
Money market accounts (5) (5) (10) (9) (11) (20)
NOW accounts 4 (14) (10) 8 (26) (18)
Certificate of deposit (57) (93) (150) (110) (161) (271)
Borrowings 65 -- 65 82 -- 82
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (1) (180) (181) (38) (361) (399)
- --------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN NET INTEREST INCOME $ 733 $ (28) $ 705 $ 1,518 $ (90) $ 1,428
==========================================================================================================================
PROVISION FOR LOAN LOSSES. The provision for loan losses was $25,000
for the three months ended June 30, 1999 and was $50,000 less than the amount
recorded in the second quarter of 1998. For the six months ended June 30, 1999
and 1998, the Company recorded a provision for loan losses of $100,000 and
$150,000 respectively. This level of provision was considered adequate given the
Company's level of non-performing loans as shown in the table under "Lending
Activities."
OTHER OPERATING EXPENSE. Non-interest expense was $1.9 million and $1.7
million for the three months ended June 30, 1999 and 1998, respectively. The
primary contributor to this $169,000 increase was an increase in other operating
expenses partially offset by a reduction in personnel expenses.
The $138,000 decline in salaries and employee benefits expense was
primarily attributable to the recognition of a $140,000 benefit related to the
Company's curtailment of its post-retirement health care plan in June. The
modification to the plan was undertaken to eliminate possible future increases
in the cost of this employee benefit.
Other non-interest expenses were $864,000 for the second quarter of
1999, an increase of $257,000 from the $607,000 recorded for the three months
ended June 30, 1998. The primary contributors to this increase were a $209,000
gain on the sale of a piece of other real estate owned in 1998, which reduced
the 1998 expenses, and a $123,000 increase in legal and professional fees due to
a variety of matters, including the establishment of a real estate investment
trust in 1999, the holding of our first annual meeting of shareholders, and
other costs associated with being a publicly-traded company. The $354,000
increase in other operating expenses for the six months ended June 30,1999 when
compared with the first six months of 1998 reflects the impact of the items
discussed under the quarterly results.
INCOME TAXES. Income tax expense for the quarter ended June 30, 1999
was $550,000 compared with $283,000 for the same period in 1998, representing a
$267,000 increase. Income tax expense increased $520,000 for the first six
months of 1999 when compared to the same period in 1998. These increases are
primarily attributed to the improvement in net income before taxes.
BUSINESS OF THE COMPANY
INVESTMENT ACTIVITIES
GENERAL. The investment policy of the Company, which is approved by the
Board of Directors, is based upon its asset/liability management goals and is
designed primarily to provide satisfactory yields, while maintaining adequate
liquidity, a balance of high quality, diversified investments, and minimal risk.
The Company generally classifies its new securities investments as
available-for-sale in order to maintain flexibility in satisfying future
investment and lending requirements.
9
The following table sets forth certain information with respect to the
Company's securities portfolio.
JUNE 30, 1999 DECEMBER 31, 1998
---------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 6,524 $ 6,562 $ 8,041 $ 8,136
U.S. Government agencies 11,986 11,889 4,996 5,028
Corporate debt obligations 25,073 24,989 27,649 27,822
State and municipal sub-divisions 1,363 1,331 917 927
Mortgage-backed securities 58,433 57,655 42,801 43,041
- ------------------------------------------------------------------------------------------------------------------------
Total debt securities 103,379 102,426 84,404 84,954
Equity securities 2,795 4,385 2,072 3,483
- ------------------------------------------------------------------------------------------------------------------------
Total available-for-sale 106,174 106,811 86,476 88,437
- ------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD-TO-MATURITY:
U.S. Government agencies 1,005 996 1,505 1,507
Corporate debt obligations 1,854 1,857 2,858 2,878
State and municipal sub-divisions 744 745 747 764
Mortgage-backed securities 4,040 3,995 5,208 5,255
- ------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 7,643 7,593 10,318 10,404
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES $ 113,817 $ 114,404 $ 96,794 $ 98,841
========================================================================================================================
LENDING ACTIVITIES
The loan portfolio is the largest category of the Company's interest
earning assets.
Loan Portfolio Composition. The following table sets forth the
composition of the Company's loan portfolio in dollar amounts and in percentages
at the dates indicated.
JUNE 30, 1999 DECEMBER 31, 1998
------------------------------------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate loans:
Residential $ 102,663 63.21% $101,885 62.96%
Construction 489 0.30 145 0.09
Home equity 6,572 4.05 6,804 4.20
Commercial mortgages 29,192 17.97 29,224 18.06
- ---------------------------------------------------------------------------------------------------------------------
Total real estate loans 138,916 85.53 138,058 85.31
- ---------------------------------------------------------------------------------------------------------------------
Other loans:
Guaranteed student loans 1,190 0.73 1,016 0.63
Property improvement loans 664 0.41 709 0.44
Automobile loans 10,742 6.61 10,854 6.71
Other consumer loans 4,124 2.54 4,597 2.84
Commercial loans 6,785 4.18 6,588 4.07
- ---------------------------------------------------------------------------------------------------------------------
Total other loans 23,505 14.47 23,764 14.69
- ---------------------------------------------------------------------------------------------------------------------
Total loans 162,421 100.00% 161,822 100.00%
Less:
Deferred loan fees, net 142 121
Allowance for loan losses 2,567 2,494
- ---------------------------------------------------------------------------------------------------------------------
Total loans, net $ 159,712 $159,207
=====================================================================================================================
10
ASSET QUALITY
NON-PERFORMING LOANS. Non-performing loans include: (1) loans accounted
for on a non-accrual basis; (2) accruing loans contractually past due ninety
days or more as to interest or principal payments; (3) loans whose terms have
been renegotiated to provide a reduction or deferral of interest or principal
because of a deterioration in the financial position of the borrower.
The following table provides certain information on the Company's
non-performing loans at the dates indicated.
JUNE 30, DECEMBER 31,
1999 1998
----------------------------------------------------------------------------------------
(Dollars in thousands)
Non-accrual loans:
Residential mortgages $ 840 $ 667
Commercial mortgages 164 167
--------------------------------------------------------------------------------------
Total real estate loans 1,004 834
Commercial loans 62 71
Other loans 72 15
--------------------------------------------------------------------------------------
Total non-accrual loans 1,138 920
Accruing loans past due 90 days or more: --
Residential mortgages -- --
Commercial mortgages -- --
--------------------------------------------------------------------------------------
Total real estate loans -- --
Commercial loans -- 11
Other loans 6 4
--------------------------------------------------------------------------------------
Total loans past due 90 days or more and still
accruing 6 15
--------------------------------------------------------------------------------------
Total non-performing loans 1,144 935
Real estate owned 315 260
--------------------------------------------------------------------------------------
Total non-performing assets $ 1,459 $ 1,195
======================================================================================
Non-performing loans as a percent of total loans 0.70% 0.58%
Non-performing assets as a percent of total assets 0.50% 0.42%
======================================================================================
At June 30, 1999 there were no loans other than those included in the
table with regard to which management had information about possible credit
problems of the borrower that caused management to seriously doubt the ability
of the borrower to comply with present loan repayment terms.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained
at a level considered adequate to provide for the inherent risk of loss in the
current loan portfolio. The level of the allowance is based upon management's
periodic and comprehensive evaluation of the loan portfolio, as well as current
economic conditions. Reports of examination furnished by state and federal
banking authorities are also considered by management in this regard. These
evaluations by management in assessing the adequacy of the allowance include
consideration of past loan loss experience, changes in the composition of the
loan portfolio, the volume and condition of loans outstanding and current market
and economic conditions.
The analysis of the adequacy of the allowance is reported to and
reviewed by the Loan Committee of the Board of Directors of the Bank monthly.
Management believes it uses a reasonable and prudent methodology to estimate
probable losses in the loan portfolio, and hence assess the adequacy of the
allowance for loan losses. However, any such assessment is speculative and
future adjustments may be necessary if economic conditions or the Company's
actual experience differ substantially from the assumptions upon which the
evaluation of the allowance was based. Moreover, future additions to the
allowance may be necessary based on changes in economic and real estate market
conditions, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of
management's control.
Loans are charged to the allowance for loan losses when deemed
uncollectible by management, unless sufficient collateral exists to repay the
loan.
11
Set forth in the following table is an analysis of the allowance for
loan losses.
THREE MONTH ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Allowance for loan losses, beginning of period $ 2,569 $ 2,230 $ 2,494 $ 2,143
Provision for loan losses 25 75 100 150
- --------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate 29 15 29 15
Commercial -- 23 -- 46
Other 33 26 54 42
- --------------------------------------------------------------------------------------------------------------------------
Total charge-offs 62 64 83 103
Recoveries:
Real estate -- 28 1 51
Commercial 3 8 6 17
Other 32 48 49 67
- --------------------------------------------------------------------------------------------------------------------------
Total recoveries 35 84 56 135
- --------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 27 (20) 27 (32)
- --------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, end of period $ 2,567 $ 2,325 $ 2,567 $ 2,325
==========================================================================================================================
Allowance for loan losses as a percent of total loans 1.58% 1.46 % 1.58% 1.46 %
Allowance for loan losses as a percent of non-performing loans 224.39% 186.90 % 224.39% 186.90 %
Ratio of net charge-offs (recoveries) to average loans outstanding 0.02% (0.01)% 0.02% (0.02)%
==========================================================================================================================
SOURCES OF FUNDS
Deposits. The Company's primary source of funds is deposits. The
Company offers several types of deposit programs to its customers, including
passbook and statement savings accounts, NOW accounts, money market deposit
accounts, checking accounts and certificates of deposit. The Company's deposits
are obtained predominantly from its Cortland County market area.
The following table sets forth deposits at the dates indicated.
JUNE 30, 1999 DECEMBER 31, 1998
- -------------------------------------------------------------------------------
(In thousands)
Non-interest bearing demand accounts $ 11,758 $ 10,780
Savings accounts 63,117 61,820
Certificates of deposit 103,848 104,317
Money market accounts 7,991 7,975
NOW accounts 10,517 11,122
- -----------------------------------------------------------------------------
Total deposits $ 197,231 $ 196,014
=============================================================================
BORROWINGS. The Company maintains an available overnight line of credit
with the Federal Home Loan Bank of New York (FHLB) for use in the event of
unanticipated funding needs which cannot be satisfied from other sources.
Additionally, the Company may borrow term advances for the FHLB. The Company had
$13 million of borrowings from the FHLB at June 30, 1999.
LIQUIDITY AND CAPITAL
SHAREHOLDERS' EQUITY AND CAPITAL STANDARDS. The Company and the Bank
are subject to capital adequacy requirements established by the federal banking
agencies.
At June 30, 1999, the Company and Bank met all capital adequacy
requirements to which they were subject.
12
The following is a summary of the Company's and Bank's actual capital
amounts and ratios compared to the regulatory minimum capital adequacy
requirements and the FDIC requirements for classification of the Bank as a "well
capitalized" institution under prompt corrective action provisions (dollars in
thousands):
To be classified as
Minimum capital well capitalized under
adequacy prompt corrective
Actual requirements action provisions
-----------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------
At June 30, 1999:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Company $ 77,601 47.76% $ 12,999 => 8.00% N/A
Bank 62,355 39.71 12,563 => 8.00% $ 15,704 =>10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
Company 74,905 46.15 6,500 => 4.00% N/A
Bank 59,632 37.97 6,282 => 4.00% 9,423 => 6.00%
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Company 74,905 26.69 11,226 => 4.00% N/A
Bank $ 59,632 22.21% $ 10,740 => 4.00% $ 13,424 => 5.00%
=============================================================================================================================
OPERATING INVESTING AND FINANCING ACTIVITIES. The Company's cash flows
are composed of three classifications: cash flows from operating activities,
cash flows from investing activities, and cash flows from financing activities.
Net cash provided by operating activities consists primarily of earnings. Net
cash provided by operating activities was $929,000 and $4.3 million for the six
months ended June 30, 1999 and 1998, respectively. The primary contributor to
this $3.3 million decline was the $3.1 million of proceeds received from the
sale of problem loans in the first quarter of 1998. There was no such
transaction in 1999. Net cash used in investing activities consists principally
of securities and loan transactions. Net cash used in investing activities was
$17.7 million and $2.7 million for the six months ended June 30, 1999 and 1998,
respectively. The primary contributor to this $15.0 million increase was the
investing activity as discussed in "Financial Condition." Cash flows from
financing activities consist principally of deposit flows and borrowing
transactions. Net cash of $7.9 million was provided by financing transactions in
the first six months of 1999 compared to cash provided by financing activities
of $2.2 million for the six months ended June 30, 1998. This $5.7 million change
is primarily attributed to the $12.0 million borrowing partially offset by
treasury stock and stock grant plan purchases of $3.7 million, all as previously
discussed.
YEAR 2000 CONSEQUENCES
The information contained in this section represents a Year 2000
Readiness Disclosure under the Year 2000 Information and Readiness Disclosure
Act.
The operations of the Company are substantially dependent upon computer
data processing for its deposit accounts, loans, and financial records and other
matters. Many computer systems and other equipment containing microchips will
not operate accurately after January 1, 2000. The Company has undertaken a
comprehensive review of all systems believed to create potential risks in order
to eliminate any Year 2000 operating difficulties.
Since the end of 1998, the Company has continued the testing of its
computer chip reliant systems and has not identified any major or costly
performance deficiencies. Testing will continue through 1999.
FORWARD-LOOKING STATEMENTS
In this Form 10-Q, the Company, when discussing the future, may use
words like "will probably result", "are expected to", "may cause", "is
anticipated", "estimate", "project", or similar words. These words represent
forward-looking statements. In addition, any analysis of the adequacy of the
allowance for loan losses or the interest rate sensitivity of the Company's
assets and liabilities, represent attempts to predict future events and
circumstances and also represent forward-looking statements.
Many factors could cause future results to differ from what is
anticipated in the forward-looking statements. For example, future financial
results could be affected by (i) deterioration in local, regional, national or
global economic conditions which could cause an increase in loan delinquencies,
a decrease in property values, or a change in the housing turnover rate; (ii)
13
changes in market interest rates or changes in the speed at which market
interest rates change; (iii) changes in laws and regulations affecting the
financial service industry; (iv) unforeseen business risks related to Year 2000
computer systems issues; (v) changes in competition and (vi) changes in consumer
preferences.
Please do not place unjustified or excessive reliance on any
forward-looking statements. They speak only as of the date made and are not
guarantees, promises or assurances of what will happen in the future. Remember
that various factors, including those described above, could affect the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to be materially different from what has been
anticipated or projected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information concerning CNY Financial Corporation's quantitative and
qualitative disclosures about market risk, refer to Item 7A of the CNY Financial
Corporation Annual Report on Form 10-K for the year ended December 31, 1998 as
filed with the Securities and Exchange Commission on March 26, 1999 and the
sections of the Annual Report to Stockholders referenced therein and included in
such report on form 10-K, particularly the discussion at pages 9 and 10 of the
Annual Report to Stockholders under the caption "Asset/Liability Management and
Market Risk." There have been no material changes since December 31, 1998.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
3.0 Exhibits
--------
3.1 Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 of the Company's Form S-1
Registration Statement (No. 333-57259) filed with the
Securities and Exchange Commission on June 19, 1998).
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 of the Company's Form S-1 Registration
Statement (No. 333-57259) filed with the Securities and
Exchange Commission on June 19, 1998).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CNY FINANCIAL CORP.
By: Wesley D. Stisser /s/ WESLEY D. STISSER August 6, 1999
--------------------------------------- ------------------
President & Chief Executive Officer (Dated)
Steven A. Covert /s/ STEVEN A. COVERT August 6, 1999
--------------------------------------- ------------------
Executive Vice President (Dated)
& Chief Financial Officer
15
Index To Exhibits
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
27.1 Financial Data Schedule
*Previously filed.