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 September 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.
As of October 21, 1999, the registrant had 4,601,373 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 Statements...................................... 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 4. Submission of Matters to a Vote of Security Holders.........14
Item 6. (a) Exhibits...........................................14
(b) Reports of Form 8-K................................15
None
Form 10-Q Signature Page.............................................16
CNY Financial Corporation and Subsidiary
Condensed Consolidated Balance Sheet
(In thousands)
September 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------
ASSETS (unaudited)
Cash and due from banks $ 5,963 $ 4,432
Interest-bearing balances at financial institutions and federal funds sold 134 10,104
Securities available-for-sale, at fair value 108,501 88,437
Securities held-to-maturity (fair value of $7,337 at 1999 and $10,404
at 1998) 7,387 10,318
Loans, net of deferred fees 166,182 161,701
Less allowance for loan losses 2,445 2,494
- ------------------------------------------------------------------------------------------------------
Net loans 163,737 159,207
Premises and equipment, net 2,776 3,243
Federal Home Loan Bank stock, at cost 1,637 1,303
Other assets 6,159 4,142
- ------------------------------------------------------------------------------------------------------
$296,294 $281,186
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing demand accounts $ 13,016 $ 10,780
Interest bearing deposits 183,397 185,234
- ------------------------------------------------------------------------------------------------------
Total deposits 196,413 196,014
Advance payments by borrowers for property taxes and insurance 882 1,450
Borrowings 20,200 1,000
Other liabilities 3,502 3,652
- ------------------------------------------------------------------------------------------------------
Total liabilities 220,997 202,116
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 75,297 79,070
- ------------------------------------------------------------------------------------------------------
$296,294 $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 Nine Months Ended September 30, 1999 and 1998
(In thousands, except share data)
(Unaudited)
Quarter to Date Year to Date
--------------- ------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
Interest income
Loans $ 3,305 $ 3,348 $ 9,835 $ 10,057
Securities 1,752 961 4,765 2,709
Other short-term investments 17 133 151 324
- -------------------------------------------------------------------------------------------------------
Total interest income 5,074 4,442 14,751 13,090
Interest expense
Deposits 1,758 2,053 5,290 6,066
Borrowings 208 11 290 11
- -------------------------------------------------------------------------------------------------------
Total interest expense 1,966 2,064 5,580 6,077
- -------------------------------------------------------------------------------------------------------
Net interest income 3,108 2,378 9,171 7,013
Provision for loan losses -- 100 100 250
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,108 2,278 9,071 6,763
Non-interest income
Service charges 250 157 640 561
Net gain on sale of securities -- -- 19 36
Other 35 660 133 743
- -------------------------------------------------------------------------------------------------------
Total non-interest income 285 817 792 1,340
Non-interest expenses
Salaries and employee benefits 1,065 1,214 2,815 3,013
Building, occupancy and equipment 191 224 589 619
Other 836 515 2,380 1,659
- -------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,092 1,953 5,784 5,291
- -------------------------------------------------------------------------------------------------------
Income before income tax expense 1,301 1,142 4,079 2,812
Income tax expense 561 576 1,697 1,192
- -------------------------------------------------------------------------------------------------------
Net income $ 740 $ 566 $ 2,382 $ 1,620
=======================================================================================================
Basic earnings per share $ 0.17 N/A $ 0.52 N/A
Diluted earnings per share $ 0.16 N/A $ 0.52 N/A
Weighted average diluted shares outstanding 4,535,104 N/A 4,606,462 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
Nine Months Ended September 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 (376,474
shares) -- -- -- -- (4,279) -- -- (4,279)
ESOP shares released for allocation -- 37 -- -- -- 160 -- 197
Stock awarded under Personal Recognition
and Retention Plan (PRRP)
(181,278 shares) -- 30 -- -- 2,175 -- (2,205) --
Expense of PRRP -- -- -- -- -- -- 173 173
Dividend payments -- -- (794) -- -- -- -- (794)
Comprehensive income:
Change in net unrealized gain
(loss) on securities, net of tax -- -- -- (1,452) -- -- -- (1,452)
Net income -- -- 2,382 -- -- -- -- 2,382
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 2,382 (1,452) -- -- -- 930
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $ 54 $ 51,356 $ 33,436 $ (274) $ (3,171) $ (4,072) $ (2,032) $ 75,297
===================================================================================================================================
See accompanying notes to the unaudited condensed consolidated financial statements.
3
CNY Financial Corporation and Subsidiary
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
(In thousands)
(Unaudited)
Year to Date
- ------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,479 $ 4,781
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principle reductions of
available-for-sale securities 48,518 13,161
Purchase of securities available-for-sale (71,860) (33,944)
Purchase of held-to-maturity securities -- (2,483)
Proceeds from maturities and principle reductions of held-to-
maturity securities 2,914 3,440
Purchase of FHLB stock (334) (12)
Net increase in loans (4,481) (4,183)
Proceeds from sale of real estate owned 80 1,003
Premises and equipment expenditures (155) (158)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,318) (23,176)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 399 42,002
Decrease in advance payments by borrowers for property taxes and
Insurance (568) (576)
Net increase in Federal Home Loan Bank advances 19,200 1,000
Cash dividends on common stock (866) --
Treasury stock purchased (4,765) --
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,400 42,426
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,439) 24,031
Cash and cash equivalents at beginning of period 14,536 8,079
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,097 $ 32,110
======================================================================================================
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 September 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 Nine months ended
September 30, 1999 September 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 $ 740 4,467 $ 0.17 $ 2,382 4,593 $ 0.52
EFFECT OF DILUTIVE SECURITIES
Options 50 10
Unearned stock grants 18 3
---------------------- ---------------------
DILUTED EPS $ 740 4,535 $ 0.16 $ 2,382 4,606 $ 0.52
===============================================================================
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 $295 million at September 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 results 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 September 30, 1999 were $296.3 million compared to
$281.2 million at December 31, 1998. The primary cause of the $15.1 million
increase was a $17.1 million increase in securities, which totaled $115.9
million at September 30, 1999.
The Company repositioned a portion of its invested funds in 1999 to
take advantage of higher rates available by extending the average maturity of
investments. The Company also 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 $8.4 million and an increase in borrowings.
Borrowings were $20.2 million and $1.0 million at September 30, 1999
and December 31, 1998, respectively. This $19.2 million increase was required to
fund the growth in assets, and the stock repurchases discussed in the following
paragraph.
Stockholders' equity was $75.3 million at September 30, 1999 compared
to $79.1 million at December 31, 1998. The primary contributor to this $3.8
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 September 30, 1999, a total of 181,278 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 $15.45 at September 30, 1999 compared to $15.06 at the end of 1998.
OPERATING RESULTS
Net income was $740,000 or $0.16 per diluted common share for the three
months ended September 30, 1999. These results compare with net income of
$566,000 for the third quarter of 1998, and reflect a $174,000, or 30.7%,
increase.
6
For the nine months ended September 30, 1999, the Company reported net
income of $2.4 million, or $0.52 per share compared with net income for the same
period in 1998 of $1.6 million.
NET INTEREST INCOME
The major source of earnings for the Company is net interest income.
Net interest income for the three months ended September 30, 1999 and 1998 was
$3.1 million and $2.4 million, respectively. This $730,000 improvement is
primarily attributable to the investment of proceeds received from the Company's
initial public offering and the investment program discussed previously. The
investment program, which began late in March, has improved the Company's net
interest income, but because the investments earn interest at a rate below those
earned on the Company's loan portfolio, and the borrowings bear interest at
rates above the Company's deposits, the Company's net interest margin has
declined since the first quarter of 1999. Competitive pressures and overall
market interest rates have also continued to put downward pressure on the
Company's loan rates. The Company's annualized yield on loans was 8.13% for the
three months ended September 30, 1999, compared with 8.44% for the third quarter
of 1998. These reductions were, however, offset by the investment of the
proceeds received from the conversion, which resulted in improvement in the
Company's net interest margin to 4.43% for the quarter ended September 30, 1999,
compared with 4.09% for the three month period ended September 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 SEPTEMBER 30,
---------------------------------------------------------------
1999 1998
---------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
INTEREST BALANCE COST INTEREST BALANCE COST
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans (1) $ 3,305 $161,208 8.13% $ 3,348 $157,381 8.44%
Securities (2) 1,752 115,540 6.02 961 63,247 6.03
Other short-term investments 17 1,412 4.78 133 10,241 5.15
- --------------------------------------------------------------------------------------------------------------
Total interest-earning assets 5,074 278,160 7.24% 4,442 230,869 7.63%
- --------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 12,448 13,943
- --------------------------------------------------------------------------------------------------------------
Total assets $290,608 $244,812
==============================================================================================================
Savings accounts (3) $ 382 $ 64,759 2.34% $ 500 $ 72,674 2.73%
Money market accounts 70 9,794 2.84 57 8,255 2.74
NOW accounts 34 10,751 1.25 46 10,518 1.74
Certificates of deposits 1,272 101,593 4.97 1,450 107,102 5.37
Borrowings 208 13,203 6.25 11 706 6.18%
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 1,966 200,100 3.90% $ 2,064 199,255 4.11%
Non interest-bearing liabilities 15,413 13,696
- --------------------------------------------------------------------------------------------------------------
Total liabilities 215,513 212,951
Stockholders' equity 75,095 31,861
- --------------------------------------------------------------------------------------------------------------
Total liabilities and equity $290,608 $244,812
==============================================================================================================
Net interest income/spread $ 3,108 3.34% $ 2,378 3.52%
Net earning assets/net interest margin $ 78,060 4.43% $ 31,614 4.09%
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.39x 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).
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------
1999 1998
-----------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
INTEREST BALANCE COST INTEREST BALANCE COST
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans (1) $ 9,835 $160,463 8.19% $ 10,057 $155,748 8.63%
Securities (2) 4,765 106,860 5.96 2,709 59,085 6.13
Other short-term investments 151 4,441 4.55 324 8,315 5.21
- ----------------------------------------------------------------------------------------------------------
Total interest-earning assets 14,751 271,764 7.26% 13,090 223,148 7.84%
- ----------------------------------------------------------------------------------------------------------
Non-interest-earning assets 12,294 14,160
- ----------------------------------------------------------------------------------------------------------
Total assets $284,688 $237,308
==========================================================================================================
Savings accounts (3) $ 1,146 $ 64,253 2.38% $ 1,436 $ 67,248 2.85%
Money market accounts 164 8,458 2.59 171 8,300 2.75
NOW accounts 100 10,757 1.24 130 9,933 1.75
Certificates of deposits 3,880 103,250 5.02 4,329 107,513 5.38
Borrowings 290 6,514 5.95 11 238 6.18
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 5,580 193,232 3.86% $ 6,077 193,232 4.20%
Non interest-bearing liabilities 14,694 12,851
- ----------------------------------------------------------------------------------------------------------
Total liabilities 207,926 206,083
Stockholders' equity 76,762 31,225
- ----------------------------------------------------------------------------------------------------------
Total liabilities and equity $284,688 $237,308
==========================================================================================================
Net interest income/spread $ 9,171 3.40% $ 7,013 3.64%
Net earning assets/net interest margin $ 78,532 4.51% $ 29,916 4.20%
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.41x 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
nine months ended September 30, 1999 compared with the first nine 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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 $ 80 $ (123) $ (43) $ 298 $ (520) $ (222)
Securities 793 (2) 791 2,132 (76) 2,056
Other short-term investments (107) (9) (116) (136) (37) (173)
- ----------------------------------------------------------------------------------------------------
Total interest-earning assets 766 (134) 632 2,294 (633) 1,661
- ----------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts (51) (67) (118) (62) (228) (290)
Money market accounts 11 2 13 3 (10) (7)
NOW accounts 1 (13) (12) 10 (40) (30)
Certificate of deposit (73) (105) (178) (168) (281) (449)
Borrowings 197 -- 197 279 -- 279
- ----------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 85 (183) (98) 62 (559) (497)
- ----------------------------------------------------------------------------------------------------
NET CHANGE IN NET INTEREST INCOME $ 681 $ (49) $ 730 $ 2,232 $ (74) $ 2,158
====================================================================================================
PROVISION FOR LOAN LOSSES. No provision for loan losses was recorded
for the three months ended September 30, 1999 which was $100,000 less than the
amount recorded in the third quarter of 1998. For the nine months ended
September 30, 1999 and 1998, the Company recorded a provision for loan losses of
$100,000 and $250,000 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."
NON-INTEREST EXPENSES. Non-interest expenses were $2.1 million and $2.0
million for the three months ended September 30, 1999 and 1998, respectively.
The primary contributor to this $139,000 increase was an increase in other
operating expenses partially offset by a reduction in personnel expenses.
Salaries and employee benefits expense was $1.1 million for the quarter
ended September 30, 1999, compared with $1.2 million in the same period in 1998.
The primary contributor to this $149,000 decline was $406,000 of expense in 1998
related to the estimate of the cost of the termination of the Company's defined
benefit plan, partially offset by $178,000 of expenses related to the Company's
ESOP and stock compensation plan and increased staffing in 1999, primarily in
the lending area.
Other non-interest expenses were $836,000 for the third quarter of
1999, an increase of $321,000 from the $515,000 recorded for the three months
ended September 30, 1998. The primary contributors to this increase were a
$135,000 increase in legal and professional fees due to a variety of matters,
including the establishment of a real estate investment trust in 1999, and other
costs associated with being a publicly-traded company.
Other non-interest expenses were $2.4 million and $1.7 million for the
nine months ended September 30, 1999 and 1998, respectively. The primary
contributors to this $721,000 increase were the legal and professional fees and
other costs discussed above, and the absence of a $208,000 gain on the sale of
one ORE property recognized in 1998.
INCOME TAXES. Income tax expense for the quarter ended September 30,
1999 was $561,000 compared with $576,000 for the same period in 1998. Income tax
expense increased $505,000 for the first nine months of 1999 when compared to
the same period in 1998. This increase is 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
9
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.
The following table sets forth certain information with respect to the
Company's securities portfolio.
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
- ------------------------------------------------------------------------------------
(In thousands)
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 5,519 $ 5,535 $ 8,041 $ 8,136
U.S. Government agencies 13,448 13,311 4,996 5,028
Corporate debt obligations 24,568 24,458 27,649 27,822
State and municipal sub-divisions 1,865 1,822 917 927
Mortgage-backed securities 60,462 58,765 42,801 43,041
- ------------------------------------------------------------------------------------
Total debt securities 105,862 103,891 84,404 84,954
Equity securities 3,094 4,610 2,072 3,483
- ------------------------------------------------------------------------------------
Total available-for-sale 108,956 108,501 86,476 88,437
- ------------------------------------------------------------------------------------
SECURITIES HELD-TO-MATURITY:
U.S. Government agencies 1,000 992 1,505 1,507
Corporate debt obligations 1,854 1,856 2,858 2,878
State and municipal sub-divisions 743 743 747 764
Mortgage-backed securities 3,790 3,746 5,208 5,255
- ------------------------------------------------------------------------------------
Total held-to-maturity 7,387 7,337 10,318 10,404
- ------------------------------------------------------------------------------------
TOTAL SECURITIES $116,343 $115,838 $ 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.
SEPTEMBER 30, 1999 DECEMBER 31, 1998
--------------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
- -------------------------------------------------------------------------------
(Dollars in thousands)
Real estate loans:
Residential $105,518 63.44% $101,885 62.96%
Construction 487 0.29 145 0.09
Home equity 6,593 3.96 6,804 4.20
Commercial mortgages 30,303 18.22 29,224 18.06
- ------------------------------------------------------------------------------
Total real estate loans 142,901 85.91 138,058 85.31
- ------------------------------------------------------------------------------
Other loans:
Guaranteed student loans 655 0.39 1,016 0.63
Property improvement loans 699 0.42 709 0.44
Automobile loans 11,228 6.75 10,854 6.71
Other consumer loans 4,139 2.49 4,597 2.84
Commercial loans 6,709 4.03 6,588 4.07
- ------------------------------------------------------------------------------
Total other loans 23,430 14.09 23,764 14.69
- ------------------------------------------------------------------------------
Total loans 166,331 100.00% 161,822 100.00%
Less:
Deferred loan fees, net 149 121
Allowance for loan losses 2,445 2,494
- ------------------------------------------------------------------------------
Total loans, net $163,737 $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.
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------------------------------------------------------------------------
(Dollars in thousands)
Non-accrual loans:
Residential mortgages $ 701 $ 667
Commercial mortgages 31 167
------------------------------------------------------------------------------
Total real estate loans 732 834
Commercial loans 58 71
Other loans 15 15
------------------------------------------------------------------------------
Total non-accrual loans 805 920
Accruing loans past due 90 days or more: --
Residential mortgages -- --
Commercial mortgages -- --
------------------------------------------------------------------------------
Total real estate loans -- --
Commercial loans -- 11
Other loans 10 4
------------------------------------------------------------------------------
Total loans past due 90 days or more and still
accruing 10 15
------------------------------------------------------------------------------
Total non-performing loans 815 935
Real estate owned 305 260
------------------------------------------------------------------------------
Total non-performing assets $ 1,120 $ 1,195
==============================================================================
Non-performing loans as a percent of total loans 0.50% 0.58%
Non-performing assets as a percent of total assets 0.38% 0.42%
==============================================================================
At September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Allowance for loan losses, beginning of period $ 2,567 $ 2,325 $ 2,494 $ 2,143
Provision for loan losses -- 100 100 250
- ---------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate 90 -- 119 15
Commercial -- -- -- 46
Other 60 42 114 58
- ---------------------------------------------------------------------------------------------------------------
Total charge-offs 150 42 233 119
Recoveries:
Real estate 3 3 4 54
Commercial 9 4 15 21
Other 16 17 65 58
- ---------------------------------------------------------------------------------------------------------------
Total recoveries 28 24 84 133
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 122 18 149 (14)
- ---------------------------------------------------------------------------------------------------------------
Allowance for loan losses, end of period $ 2,445 $ 2,407 $ 2,445 $ 2,407
===============================================================================================================
Allowance for loan losses as a percent of total loans 1.47% 1.49% 1.47% 1.49%
Allowance for loan losses as a percent of non-performing loans 300.00% 209.85% 300.00% 209.85%
Ratio of net charge-offs (recoveries) to average loans outstanding 0.07% 0.01% 0.09% (0.01)%
===============================================================================================================
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.
SEPTEMBER 30, 1999 DECEMBER 31, 1998
- ----------------------------------------------------------------------------
(In thousands)
Non-interest bearing demand accounts $ 13,016 $ 10,780
Savings accounts 62,094 61,820
Certificates of deposit 100,569 104,317
Money market accounts 10,284 7,975
NOW accounts 10,450 11,122
- ---------------------------------------------------------------------------
Total deposits $ 196,413 $ 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
$20.2 million of borrowings from the FHLB at September 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 September 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 September 30, 1999: TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Company $ 78,349 46.54% $ 13,469 => 8.00% N/A
Bank 63,191 38.92 12,988 => 8.00% $ 16,235 => 10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
Company 75,558 44.88 6,734 => 4.00% N/A
Bank 60,468 37.24 6,494 => 4.00% 9,741 => 6.00%
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Company 75,558 26.54 11,388 => 4.00% N/A
Bank $ 60,468 22.22% $ 10,885 => 4.00% $ 13,607 => 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 $3.5 million and $4.8 million for the
nine months ended September 30, 1999 and 1998, respectively. The primary
contributor to this $1.3 million decline was the $3.1 million of proceeds
received from the sale of problem loans in the first quarter of 1998 partially
offset by costs associated with the Company's initial public offering in 1998.
There were no such transactions in 1999. Net cash used in investing activities
consists principally of securities and loan transactions. Net cash used in
investing activities was $25.3 million and $23.2 million for the nine months
ended September 30, 1999 and 1998, respectively. The primary contributor to this
$2.1 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 $13.4 million was provided by
financing transactions in the first nine months of 1999 compared to cash
provided by financing activities of $42.4 million for the nine months ended
September 30, 1998. This $29.0 million reduction is primarily attributed to the
deposits received as orders for the Company's initial public offering in October
1998, partially offset by the $18.2 million increase in borrowings.
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 has been substantially completed.
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
13
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)
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
CNY Financial Corporation had a special meeting of stockholders on
October 18, 1999. At the meeting, stockholders voted upon (i) the approval of an
amendment to our Stock Option Plan to provide for accelerated vesting of awards
in the event of a change in control or retirement; and (ii) the approval of an
amendment to our Personnel Recognition and Retention Plan to provide for
accelerated vesting of awards in the event of a change in control or retirement.
The votes cast on these matters were as follows:
The stock option plan amendment:
For 3,108,936
Against 428,675
Abstain 36,188
Broker non-votes None
The Personnel Recognition and Retention Plan amendment:
For 3,073,501
Against 461,615
Abstain 38,683
Broker non-votes None
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).
14
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.
15
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 October 28, 1999
------------------------------------ --------------------
President & Chief Executive Officer (Dated)
Steven A. Covert /s/ STEVEN A. COVERT October 28, 1999
------------------------------------ --------------------
Executive Vice President (Dated)
& Chief Financial Officer
16
Index To Exhibits
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
27.1 Financial Data Schedule
*Previously filed.