-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ENacxs6hvH8zWrLejjl7//f/ADyd/fIWziPLTpXITqyyjmGMl5lVAiPXTeawCLTg FQUzpCqZJC1DEui+DUVIdw== 0000950132-99-000782.txt : 19990817 0000950132-99-000782.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950132-99-000782 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNB FINANCIAL CORP/PA CENTRAL INDEX KEY: 0000736772 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 251450605 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13396 FILM NUMBER: 99692276 BUSINESS ADDRESS: STREET 1: 1 SOUTH SECOND STREET STREET 2: P.O. BOX 42 CITY: CLEARFIELD STATE: PA ZIP: 16830 BUSINESS PHONE: 8147659621 MAIL ADDRESS: STREET 1: 1 SOUTH SECOND STREET STREET 2: P.O. BOX 42 CITY: CLEARFIELD STATE: PA ZIP: 16830 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 1 0 - Q [X]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 Commission File Number 0-13396 or [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _____________________ CNB FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 25-1450605 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) County National Bank 1 South Second Street P.O. Box 42 Clearfield, Pennsylvania 16830 (Address of principal executive offices) Registrant's telephone number, including area code, (814) 765-9621 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock: $1.00 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ --- The number of shares outstanding of the issuer's common stock as of June 30, 1999: COMMON STOCK: $1.00 PAR VALUE - 3,425,896 SHARES 1 INDEX PART I. FINANCIAL INFORMATION Sequential Page Number - ----------- PAGE 3. Notes to Consolidated Financial Statements PAGE 4. Management's Discussion and Analysis of Financial Condition and Results of Operations PAGE 12. Table 1 - Consolidated Balance Sheets - June 30, 1999 PAGE 13. Table 2Q - Consolidated Statements of Income - Quarter ending June 30, 1999 PAGE 14. Table 2Y - Consolidated Statements of Income For Six month period ending June 30, 1999 PAGE 15. Table 3 - Consolidated Statements of Cash Flows - Six month period ending June 30, 1999 PAGE 16. Table 4 - Consolidated Yield Comparisons PART II. OTHER INFORMATION PAGE 17. ITEM 4 Submission of Matters for Security Holders Vote PAGE 17. ITEM 5 Other Information PAGE 17. ITEM 6 Exhibits and Reports on Form 8-K PAGE 17. Signatures 2 CNB FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and in compliance with generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The registrant believes that the disclosures made are adequate to make the information presented a fair representation of the Corporation's financial status. In the opinion of Management of the registrant, the accompanying consolidated financial statements for the quarter and six month periods ended June 30, 1999 and 1998 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the period. The financial performance reported for the Corporation for the six month period ended June 30, 1999 is not necessarily indicative of the result to be expected for the full year. This information should be read in conjunction with the Corporation's Annual Report to shareholders and Form 10-K for the period ended December 31, 1998. COMPREHENSIVE INCOME Total other comprehensive income for the periods ended June 30, 1999 and 1998 were $725,000 and $2,702,000. RECENT ACCOUNTING PRONOUNCEMENTS Accounting for Derivative Instruments - ------------------------------------- In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It is effective for fiscal years beginning after June 15, 2000 with earlier adoption permitted. The Corporation does not currently utilize derivative instruments. This statement is not expected to materially affect the financial position or operating results of the Corporation. Accounting for Internal Use Computer Software - --------------------------------------------- The Corporation adopted SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", effective beginning January 1, 1999. SOP 98-1 requires the Corporation to capitalize costs incurred in designing, coding, installing and testing of software. All other costs are expensed as incurred. The implementation of the SOP has not had a material affect on the financial condition, equity or operating results of the Corporation. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management's assessment of financial results. The Corporation's subsidiary County National Bank (the "Bank") provides financial services to individuals and businesses within the Bank's market area made up of the west central Pennsylvania counties of Clearfield, Centre, Elk, Jefferson, and McKean. County National Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency ("OCC"). The health of the economy in the region is mixed with unemployment rates running high in most of our market areas except Centre County and somewhat lower in Elk County. Actual ratings (as of February 1999) by county are as follows: Cameron 9.6%; Centre 3.2%; Clearfield 9.7%; Elk 6.8% Jefferson 8.3%; and McKean 7.0%. The market area consistently runs higher than the average for all of Pennsylvania. On February 12, 1999, the Bank acquired a full service office in Punxsutawney, PA from an unaffiliated institution (referred to hereafter as the "acquisition"). The purchase included $10.7 million in loans, $35.5 million in deposits and certain fixed assets associated with the office. The facility continues to operate as a full service branch of the Bank. OVERVIEW OF BALANCE SHEET Total assets (shown in Table 1 "Consolidated Balance Sheet") have grown ------- 0.8% since year end 1998 and 12.8% over June 30, 1998 to $440.2 million. Growth for the periods has occurred generally through the acquisition previously mentioned. The following comments will further explain the details of asset growth. CASH AND CASH EQUIVALENTS Cash and cash equivalents totaled $9,409,000 at June 30, 1999 compared to $23,101,000 on December 31, 1998. This decrease was caused equally through funding of the investment and loan portfolios as well as covering the shortfall caused by a decline in the deposit base. Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, and the portion of the investment and loan portfolios that matures within one year. These sources of funds will enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due. INVESTMENT SECURITIES Investment securities increased $272,000 since December 31, 1998. Of the Corporation's total investment portfolio of $108,075,000 as of June 30, 1999, $101,177,000 (or 93.6%) is classified as available for sale with the balance of $6,898,000 classified as held to maturity. The increase is mainly from the Corporation's strategy to utilize favorable funding rates from the Federal Home Loan Bank of Pittsburgh to purchase investment securities. In the first quarter of 1999, this strategy was implemented with a $5 million borrowing utilized to take advantage of pricing differences in borrowings and trust preferred securities against the same pricing index. This increase was offset by a decrease in the fair market value of the portfolio caused by a general rise in market interest rates. Also contributing to the decrease was a sale of $2 million of securities which was used to extinquish short term debt. 4 Management monitors the earnings performance and the effectiveness of the liquidity of the investment portfolio on a regular basis through Asset / Liability Committee ("ALCO') meetings. The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the investment securities portfolio, the Corporation maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers. LOANS The Corporation's internal loan volume was moderate through the six months of 1999. The majority of the loan growth that occurred was a result of the acquisition of $10.7 million in loans. Also, volumes were sufficient to replace loan paydowns and or payoffs. The Corporation's lending is focused in the west central Pennsylvania market and consists principally of retail lending, which includes single family residential mortgages and other consumer lending, and also commercial lending primarily to locally owned small businesses for operations as well as mortgages. At June 30, 1999, the Corporation had $302,660,000 in loans and leases outstanding up $39,444,000 (or 15.0%) since June 30, 1998. The additional growth above the acquisition is the result of our increased penetration into the commercial lending opportunities within our market. Our focus on commercial lending has expanded over the past year with additional staff increases to handle the growth of small business loans. This focus has resulted in an increase in commercial loans of 19.2% or $17.8 million since June 30, 1998. ALLOWANCE FOR LOAN AND LEASE LOSSES The Allowance for Loan and Lease Losses as a percentage of loans decreased from 1.16% at June 30, 1998 and increased from 1.07% at December 31, 1998 to 1.08% at June 30, 1999. The dollar amount of the reserve increased $227,000 since year end 1998. The increase is a result of the net reserve expensed during the six months and an adjustment made to the loans that were acquired during the first quarter. The gross charge-offs for the six months of 1999 were $330,000 while recoveries were $80,000. This level of charge-offs is comparable to the six months of 1998 when charge-offs were $338,000 with recoveries of $62,000. Net charge-offs remain consistent with prior periods. The financial services industry is aware of a general trend towards higher charge offs. It is mainly the result of increased consumer credit problems often resulting in bankruptcies. Management of the Corporation has implemented a proactive loan collection program which has resulted in sustained low levels of loan delinquency. Management continues to closely monitor loan delinquency and loan losses. Non-performing assets, which include loans 90 or more days past due, non-accrual loans and other real estate owned were $1,724,000 or 0.39% of total assets on June 30, 1999 compared to $1,870,000 or 0.42% on December 31, 1998 and $939,000 or 0.24% on June 30, 1998. The adequacy of the allowance for loan and lease losses is subject to a formal analysis by the loan review staff of the Bank and is deemed to be adequate to absorb inherent losses in the portfolio as of June 30, 1999. The Corporation has disclosed in its annual report on Form 10-K the process and methodology supporting the loan loss provision. FUNDING SOURCES The Corporation considers deposits, short-term borrowings, and term debt when evaluating funding sources. Traditional deposits continue to be the most significant source of funds for the Corporation reaching $366,938,000, or 94.1% of all sources of funds, at June 30, 1999. Deposit runoff of 1.0% since year end 1998 primarily resulted from a runoff of a large short-term deposit received in December of 1998. 5 The Corporation utilizes term borrowings from the Federal Home Loan Bank (FHLB) to meet funding needs not accommodated by deposit growth. During the first six months of 1999, the Corporation borrowed $5 million as mentioned on page 4 in the investment securities section. Management plans to maintain access to short and long-term FHLB borrowings as appropriate funding sources for the various needs of the Corporation. SHAREHOLDERS' EQUITY A strong stockholders' equity position provides the Corporation with the capability to meet cash obligations and absorb unforeseen losses, if any. For these reasons capital adequacy has been, and will continue to be, of paramount importance. Total Shareholders' Equity was $43,536,000 at June 30, 1999 compared to $44,781,000 at December 31, 1998 a decrease of $1,245,000 (or 2.8%) and $43,527,000 at June 30, 1998, an increase of $9,000 (or 0.02%). In the first six months of 1999, the Corporation earned $2,145,000 and declared dividends of $1,370,000, a dividend payout ratio of 63.9% of net income. Also, the Corporation increased treasury stock by $612,000. Approximately 94% of the investment securities in the Corporation's portfolio are classified as available-for-sale making this portion of the Corporation's balance sheet more sensitive to the changing market value of investments. Interest rates in the six months of 1999 have increased, causing the Bank's bond portfolio to experience a decrease in its market value gains. Also, the financial services sector of the equity markets have leveled off in their growth giving the Corporation no or little appreciation in value, during the period, in it's equity holdings. This has caused an overall decline in stockholders' equity of $1,420,000 since December 31, 1998. The Corporation has also complied with the standards of capital adequacy mandated by the banking regulators. Bank regulators have established "risk- based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of either 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets), is assigned to each asset on the balance sheet. The Corporation's total risk-based capital ratio of 12.59% at June 30, 1999 is well above the minimum standard of 8%. The Corporation's Tier 1 capital ratio of 11.46% is above the regulatory minimum of 4%. The leverage ratio at June 30, 1999 was 8.06%, also above the minimum standard of 4%. The Corporation is deemed to be well capitalized under regulatory industry standards. The ratios provide quantitative data demonstrating the strength and future opportunities for use of the Corporation's capital base. Management continues to evaluate risk-based capital ratios and the capital position of the Corporation as part of its strategic decision making process. LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity measures an organizations' ability to meet cash obligations as they come due. The Consolidated Statement of Cash Flows presented on page 15 of the accompanying financial statements provide analysis of the Corporation's cash and cash equivalents. Additionally, management considers that portion of the loan and investment portfolio that matures within one year as part of the Corporation's liquid assets. The Corporation's liquidity is monitored by the ALCO which establishes and monitors ranges of acceptable liquidity. Management feels the Corporation's current liquidity position is acceptable. In the course of conducting business activities, the Corporation is exposed to market risk, principally interest rate risk, through the operation of the Bank. Interest rate risk arises from market driven fluctuations in interest rates which affect cash flows, income, expense and values of all financial instruments. Interest rate risk is monitored by management and the ALCO Committee of the Board. No material changes have occurred during the period in the Bank's market risk strategy, a discussion of which can be found in the SEC Form-10K filed for the period ended December 31, 1998. 6 RESULTS OF OPERATIONS OVERVIEW OF THE INCOME STATEMENT The Corporation earned $1,156,000 and $2,145,000 for the second quarter and first six months of 1999, respectively, which shows decreases of 10.8% and 9.6% from $1,296,000 and $2,372,000 for the same periods last year. Net income has been affected by the acquisition through one time costs associated with the operation of the branch and its customers. In addition, the Bank is absorbing the amortization expense from the premium paid in the form of goodwill. The following discussions provide more details regarding the components of net income. INTEREST INCOME AND EXPENSE Net interest income totaled $4,181,000 in the second quarter, an increase of 6.5% over the second quarter of 1998 and totaled $8,200,000 for the six months of 1999, an increase of 6.6% over the prior year. The bank experienced an increase in earning assets in the past twelve months of 12.9% which came primarily through strong loan growth. Along with the acquisition, this created a resulting increase in overall interest income. However, the net interest margin was hindered from a diminishing loan to deposit ratio as deposit growth exceeded loan growth for the period. Total interest income increased during the quarter by $586,000 or 8.1% while interest expense increased by $328,000 or 9.9% when compared to the second quarter of 1998. The growth of interest income was impaired by the write-off of premiums paid on collaterialized mortgage obligations in the investment portfolio. The rapid write-down of the premium has occurred due to the drop in interest rates since the time of purchase. Interest Income should not be affected by this during the remainder of 1999 as these bonds were sold for liquidity purposes during June and July of 1999. The Corporation recorded a provision for loan and lease losses in the second quarter of $150,000 matching the second quarter of 1998 and $300,000 for the six months of 1999 compared to $375,000 in 1998. NON-INTEREST INCOME Non-interest income increased $157,000 (21.9%) and $205,000 (15.2%) in the second quarter and six months of 1999, respectively, when compared to the same periods in 1998. Increased deposit account service charges have been the primary source of the growth in non-interest income. In the six months, account service charges totaled $683,000 up $153,000 (or 28.9%) over last year. These increases in fee income were the result of the growth in the number of customers and related deposit accounts over the past twelve months. Also, the recognition of income from our mortgage servicing portfolio shows an increase of $157,000. The increases compared with the prior period are adversely affected by a decrease in security gains of $101,000. NON-INTEREST EXPENSE Non-interest expense increased $706,000 or 26.2% during the second quarter of 1999 and $1,327,000 or 24.5% in the six months of 1999 when compared to the same periods in 1998. This increased level of non-interest expense is partly attributable to the acquisition that occurred in February 1999. The associated costs incurred through the first six months of 1999 were $332,000. Also, the Bank has experienced increases in data processing of 28.1% or $53,000. These costs are for upgrades to the Bank's overall technology plan intended to provide more efficiencies in the future. On April 27, 1999 the Corporation signed a definitive merger agreement with the First National Bank of Spangler, headquartered in Spangler, PA. This will provide an increase of assets of $33,000,000 and deposits of $26,644,000, based on December 31, 1998. The merger will create higher non-interest 7 costs in the future. The merger will occur during the third quarter of 1999. The Corporation anticipates accounting for this transaction as a pooling of interest. The Bank has entered into an agreement to purchase four offices from an unaffiliated bank. The purchase will include approximately $114 million in deposits, $28 million in loans and certain fixed assets associated with the offices. The offices are located in Bradford, Kane, Ridgway and Johnsonburg, all located in north central Pennsylvania. Again, non-interest expenses will rise as a result of this transaction due to normal operations of the branches as well as amortization of the deposit premium. RETURN ON ASSETS For the quarter ended June 30, 1999, the Corporation's return on average assets ("ROA") totaled 1.03% down from the 1.36% recorded in the second quarter of 1998. For the six months ended June 30, 1999, ROA was 0.96% compared to 1.24% in 1998 Decreased ROA can be attributed to the increase in non-interest expenses. Management expects ROA to increase through the third quarter of 1999 resulting from enhanced net interest income, security gains, and operating efficiencies when compared to the first two quarters of 1999. The fourth quarter ROA is expected to be lower as a result of acquisition costs that will be incurred as previously mentioned. RETURN ON EQUITY The Corporation's return on average shareholder's equity ("ROE") in the first six months was 9.96% compared to 10.99% for 1998. The decrease again can be attributed primarily to increased non-interest expenses as discussed above which caused a decline in earnings. Management expects improvement in ROE during 1999 and anticipates further increases with earnings growth and growth in earning assets during the third quarter of 1999. The Corporation is currently well capitalized under regulatory industry standards. FEDERAL INCOME TAX EXPENSE Federal income tax expense was $343,000 in the second quarter of 1999 compared to $496,000 in the second quarter of 1998. For the six month period comparisons, the federal tax expense was $573,000 in 1999 and $882,000 in 1998. The decrease primarily reflects lower pre-tax income in the period when compared to the same period of the prior year, as well as a $323,000 (or 35%) increase in tax free income comparing 1999 with 1998. 8 YEAR 2000 Management is aware of the possibility of exposure by banks to a computer problem known as the "Year 2000 Issue" or the "Millennium Bug" (the inability of some computer programs to distinguish between the year 1900 and the year 2000). Potential impacts to the Corporation may arise from software, computer hardware, and other equipment both within the Corporation's direct control and outside of the Corporation's ownership, which the Corporation electronically interfaces with. The Corporation has developed and implemented a plan for this issue with the following major components: Assessment; Remediation; Testing; and Implementation. The Corporation uses third party vendors for its core processing, item processing and trust processing needs. The following table depicts the status for the Corporation during each phase and for its various exposure types:
Resolution Phases Assessment Remediation Testing Implementation - --------------------------------------------------------------------------------------------------- Information 100% Complete 100% Complete 100% Complete 100% Complete Technology (PC's, Servers, etc.) - --------------------------------------------------------------------------------------------------- Operating 100% Complete 100% Complete 100% Complete 100% Complete Equipment with Embedded chips or software - ----------------------------------------------------------------------------------------------------------- Products The Corporation does not sell or deliver software or hardware items to its customers. - ----------------------------------------------------------------------------------------------------------- Third Party Vendors: Core Processing 100% Complete 100% Complete 100% Complete 100% Complete Item Processing 100% Complete 100% Complete 100% Complete 100% Complete Trust Processing 100% Complete 100% Complete 100% Complete 100% Complete
Other important segments of the Plan for Year 2000 are to identify customers whose possible lack of Year 2000 preparedness might expose the Corporation to financial loss. Our major customers have been reviewed through discussions and questionnaires for their Year 2000 preparedness. This has become a factor in the risk weighting characteristics of our loan portfolio. The Corporation has been in the process of educating and evaluating all customers on the Year 2000 and their own readiness. During this process, a public relations / education plan has been developed for 1999 to inform customers and the general public about the Year 2000 and the Corporation's ability to handle the issue. The Corporation has budgeted total Year 2000 costs not to exceed $100,000. This estimated cost is based upon currently available information and includes expenses for the review and testing by third parties, including government entities. Of the estimated costs of $100,000, $68,000 of capitalized costs and approximately $26,000 expensed costs have been spent to date. The remaining $6,000 is expected to be used for personnel costs associated with training issues. There can be no guarantee, however, that hardware, software, and systems created by third parties will be free of unfavorable Year 2000 issues and therefore not present a material impact upon the Corporation. The cost estimate may change as the Corporation progresses in its Year 2000 plan and further information associated with and concerning third parties is obtained. At this time, no significant projects have been delayed as a result of the Corporation's Year 2000 effort. 9 As a precautionary measure, the Corporation has developed a Year 2000 contingency plan. This plan was created to provide for operating procedures in the event that a failure would occur even after the above five phases were performed positively. This document while currently complete will be continually updated as 1999 progresses and more information is provided by third parties as well as through in house testing. The federal banking agencies have been conducting Year 2000 compliance examinations for several months. The failure to implement an adequate Year 2000 program can be identified as an unsafe and unsound banking practice. The Corporation and the Bank are subject to supervision by the Office of the Comptroller of the Currency (OCC). Failure to adequately prepare for Year 2000 issues could negatively impact the Corporation's banking operations, including the imposition of restriction upon its operations by the OCC. Despite the Corporation's activities as detailed above, pertaining to the Year 2000, there can be no assurance that partial or total systems interruptions or the costs necessary to update hardware and software would not have a material adverse effect upon the Corporation's business, financial condition, results of operations, and business prospects. Forward looking statements about the Year 2000 should be read in conjunction with the Corporation's disclosures under the heading: "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995. FUTURE OUTLOOK June 30, 1999 results of net income showed a decrease over the prior year's six months and were below management's expectations. Management continues to focus on asset growth from general growth via increased market share as well as external opportunities through acquisition as previously mentioned on pages 7 and 8. The goal of asset growth is general increase in shareholder value as well as favorable results in long-term profitability. Loan demand was moderate during the quarter as per management's expectations. Loan growth is expected to continue at a moderate pace throughout the remainder of the year. The Corporation's loan to deposit ratio has increased at the end of the second quarter to 81.6% compared to 78.1% at year- end 1998 as the large deposit made in December of 1998 left the Bank. Management expects the loan to deposit ratio to decrease during the third and fourth quarter as the acquisition of the branch offices being acquired from a nonaffiliated institution brings only a 25% loan to deposit ratio. Consumer loan charge-offs in the second quarter continued to comprise the majority of the Corporation's recent charge-offs. In the second quarter, total net charge-offs were $151,000 of which consumer net charge-offs totaled $151,000. The level of net charge-offs has been stable over the past twelve months. Management believes that the increased efforts of loan review and collections and our quality underwriting standards will give the Bank continued good charge-off experience when compared to peer institutions. Enhanced non-interest income and controlled non-interest expense are important factors in the success of the Corporation and is measured in the financial services industry by the efficiency ratio, calculated according to the following: non-interest expense (less amortization of intangibles) as a percentage of fully taxable net interest income and non-interest income (less non-recurring income). For the three months ended June 30, 1999, the Corporation's efficiency ratio was 60.40% compared to 58.41% for the same period last year. The efficiency ratio has increased as the level of non-interest expense has increased during 1999 more rapidly than non-interest income has increased. Management believes controlling the operating costs of the Corporation is imperative to the future increased profitability derived from core earnings. A strong focus by management will be placed on noninterest expenses during the remainder of 1999 as the Bank will undergo a profitability enhancement program with expectations that swings will begin during the third quarter. The interest rate environment will continue to play an important role in the future earnings of the Corporation. The net interest margin has tightened as the interest rate cycle we are in causes competitive pressures in the form of reduced lending rates coupled with higher cost of funds in the financial services 10 industry. Overall net interest income continues to increase due to growth in interest earning assets. Management expects further growth in net interest income for the remainder of 1999. Management concentrates on return on average equity and earnings per share evaluations, plus other methods, to measure and direct the performance of the Corporation. While past results are not an indication of future earnings, management feels the Corporation is positioned to enhance performance of normal operations through the remainder of 1999. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in this Form 10-Q which are not historical fact are forward looking statements that involve risks and uncertainties, including, but not limited to, the interest rate environment, the effect of federal and state banking and tax regulations, the effect of economic conditions, the impact of competitive products and pricing, and other risks detailed in the Corporation's Securities and Exchange Commission filings. 11 TABLE 1 CONSOLIDATED BALANCE SHEETS CNB FINANCIAL CORPORATION Consolidated Balance Sheets (Unaudited) (Dollars in thousands)
June 30, Dec. 31 June 30, ASSETS 1999 1998 1998 -------- -------- -------- Cash and Due from Banks................................................ $ 9,313 $ 10,370 $ 10,557 Interest bearing deposits with other banks............................. 190 256 265 Federal Funds Sold..................................................... 0 12,475 5,200 Investment Securities Available for sale............................... 101,177 100,121 88,600 Investment Securities Held to Maturity, fair value of $6,984 at June 30, 1999, $7,867 at December 31, 1998 and $9,105 at June 30, 1998................................................ 6,898 7,682 8,941 Loans and Leases....................................................... 307,535 292,959 267,142 Less: Unearned Discount............................................. 4,875 4,570 3,926 Less: Allowance for Loan Losses..................................... 3,268 3,100 3,041 -------- -------- -------- NET LOANS............................................................ 299,392 285,289 260,175 Premises and Equipment................................................. 10,037 10,257 9,661 Accrued Interest Receivable............................................ 2,507 2,454 2,165 Loans held for sale.................................................... 1,737 4,299 924 Intangible, net........................................................ 7,043 2,522 2,679 Other Assets........................................................... 1,911 1,127 1,103 -------- -------- -------- TOTAL ASSETS......................................................... $440,205 $436,852 $390,270 LIABILITIES Deposits: Non-interest bearing deposits........................................ $ 36,926 $ 36,612 $ 34,080 Interest bearing deposits............................................ 330,012 334,202 290,537 -------- -------- -------- TOTAL DEPOSITS....................................................... 366,938 370,814 324,617 Other Borrowings....................................................... 22,804 16,378 18,033 Accrued Interest and Other Liabilities................................. 6,927 4,879 4,093 -------- -------- -------- TOTAL LIABILITIES.................................................... $396,669 $392,071 $346,743 SHAREHOLDERS' EQUITY Common Stock $1.00 Par Value Authorized 10,000,000 Shares Issued 3,456,000 Shares.............................................. $ 3,456 $ 3,456 $ 3,456 Additional paid in Capital........................................... 3,468 3,456 3,456 Retained Earnings.................................................... 37,287 36,512 35,378 Treasury Stock, At Cost.............................................. (724) (112) (100) (30,104 Shares for 1999, 11,106 for December 1998, and 10,332 shares for June 30, 1998) Accumulated other comprehensive income............................... 49 1,469 1,337 -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY........................................... 43,536 44,781 43,527 -------- -------- -------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............................. $440,205 $436,852 $390,270
12 TABLE 2-Q CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION: June 30, 1999 Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data) THREE MONTHS ENDED JUNE 30... INTEREST INCOME 1999 1998 --------- --------- Loans including Fees........................................................... $ 6,351 $ 5,781 Deposits with Other Banks...................................................... 6 1 Federal Funds Sold............................................................. 19 44 Investment Securities: Taxable..................................................................... 914 1,014 Tax-Exempt.................................................................. 474 338 Dividends................................................................... 54 54 --------- --------- TOTAL INTEREST INCOME....................................................... $ 7,818 $ 7,232 INTEREST EXPENSE Deposits....................................................................... $ 3,373 $ 3,063 Borrowed Funds................................................................. 264 244 --------- --------- TOTAL INTEREST EXPENSE...................................................... $ 3,637 $ 3,307 Net Interest Income......................................................... $ 4,181 $ 3,925 Provision for possible loan losses.......................................... 150 150 --------- --------- NET INTEREST INCOME AFTER PROVISION............................................ $ 4,031 $ 3,775 OTHER INCOME Trust & Asset Management Fees.................................................. $ 198 $ 194 Service charges on deposit accounts............................................ 375 288 Other service charges and fees................................................. 94 100 Securities gains............................................................... 29 78 Gains on Sale of Loans......................................................... 26 17 Other income................................................................... 151 39 --------- --------- TOTAL OTHER INCOME.......................................................... $ 873 $ 716 OTHER EXPENSES Salaries....................................................................... $ 1,320 $ 1,217 Employee benefits.............................................................. 499 381 Net occupancy expense.......................................................... 438 415 Amortization of Intangible..................................................... 216 79 Other.......................................................................... 932 607 --------- --------- TOTAL OTHER EXPENSES........................................................ $ 3,405 $ 2,699 Income Before Income Taxes..................................................... $ 1,499 $ 1,792 Applicable Income Taxes........................................................ 343 496 --------- --------- NET INCOME.................................................................. $ 1,156 $ 1,296 ========= ========= Per Share Data - -------------- Net Income..................................................................... 0.34 0.38 Cash Dividends Per Share....................................................... 0.20 0.18
13 TABLE 2-Y CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION: June 30, 1999 Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data) SIX MONTHS ENDED JUNE 30 INTEREST AND DIVIDEND INCOME 1999 1998 ---------------- ----------------- Loans including Fees............................................................ $12,537 $11,526 Deposits with Other Banks....................................................... 9 4 Federal Funds Sold.............................................................. 140 140 Investment Securities: Taxable...................................................................... 1,790 1,810 Tax-Exempt................................................................... 947 670 Dividends.................................................................... 110 104 ---------------- ----------------- TOTAL INTEREST AND DIVIDEND INCOME........................................... $15,533 $14,254 ---------------- ----------------- INTEREST EXPENSE Deposits........................................................................ $ 6,798 $ 6,142 Borrowed Funds.................................................................. 535 423 ---------------- ----------------- TOTAL INTEREST EXPENSE....................................................... $ 7,333 $ 6,565 Net Interest Income.......................................................... $ 8,200 $ 7,689 Provision for possible loan losses........................................... 300 375 ---------------- ----------------- NET INTEREST INCOME AFTER PROVISION............................................. $ 7,900 $ 7,314 ---------------- ----------------- OTHER INCOME Trust & Asset Management Fees................................................... $ 383 $ 348 Service charges on deposit accounts............................................. 683 530 Other service charges and fees.................................................. 179 205 Realized Securities gains (losses).............................................. 29 130 Gains on Sale of Loans.......................................................... 52 21 Other........................................................................... 232 119 ---------------- ----------------- TOTAL OTHER INCOME........................................................... $ 1,558 $ 1,353 ---------------- ----------------- OTHER EXPENSES Salaries........................................................................ $ 2,643 $ 2,408 Employee benefits............................................................... 946 745 Net occupancy expense of premises............................................... 888 846 Amortization of Intangible...................................................... 387 158 Other........................................................................... 1,876 1,256 ---------------- ----------------- TOTAL OTHER EXPENSES......................................................... $ 6,740 $ 5,413 ---------------- ----------------- Income Before Income Taxes...................................................... $ 2,718 $ 3,254 Applicable Income Taxes......................................................... 573 882 ---------------- ----------------- NET INCOME................................................................... $ 2,145 $ 2,372 ================ ================= EARNINGS PER SHARE, BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING Net Income...................................................................... $ 0.63 $ 0.69 Cash Dividends Per Share........................................................ $ 0.40 $ 0.36
14 TABLE 3 CONSOLIDATED STATEMENTS OF CASHFLOWS
CNB FINANCIAL CORPORATION Consolidated Statements of Cash Flows (unaudited) (Dollars in thousands) Six months ended June 30, Cash flows from operating activities: 1999 1998 -------------- -------------- Net Income......................................................................... $ 2,145 $ 2,372 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses...................................................... 300 375 Depreciation and amortization.................................................. 823 559 Amortization and accretion and deferred loan fees.............................. 223 (207) Deferred Taxes................................................................. (411) 568 Security ( Gains) Losses....................................................... (29) (130) Gain on sale of loans.......................................................... (52) (21) Net (Gains) losses on dispositions of acquired property........................ 22 (98) Changes in: Proceeds from sale of loans..................................................... 12,355 8,597 Origination of loans for sale................................................... (9,741) 0 Interest receivable............................................................ (112) 34 Other assets and intangibles................................................... (5,635) (8,136) Interest payable............................................................... 168 (12) Other liabilities.............................................................. 3,024 325 -------------- -------------- Net cash provided by operating activities.......................................... 3,080 4,226 Cash flows from investing activities: Proceeds from maturities of: Securities held to maturity.................................................. 800 5,067 Securities available for sale................................................ 13,755 11,902 Proceeds from sales of securities available for sale............................. 4,329 3589 Purchase of: Securities available for sale................................................ (21,837) (40,350) Net principal disbursed on loans................................................. (14,069) 925 (Purchase) of Federal Home Loan Bank Stock....................................... 0 (499) Purchase of premises and equipment............................................... (214) (1,267) Proceeds from the sale of foreclosed assets...................................... (22) 142 -------------- -------------- Net cash used in investing activities.............................................. (17,258) (20,491) Cash flows from financing activities: Net change in: Checking, money market and savings accounts.................................. (31,018) 7,171 Certificates of deposit...................................................... 27,142 (2,027) Acquisition of treasury stock................................................. (612) 0 Sale of treasury stock....................................................... 12 0 Cash dividends paid.......................................................... (1,370) (1,240) Net advances (repayments) from other borrowings.................................. 6,426 9,962 -------------- -------------- Net cash provided by financing activities.......................................... 580 13,866 Net increase (decrease) in cash and cash equivalents.............................. (13,598) (2,399) Cash and cash equivalents at beginning of year..................................... 23,101 18,436 -------------- -------------- Cash and cash equivalents at end of period......................................... $ 9,503 $ 16,037 ============== ============== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (including amount credited directly to............................... $ 7,501 $ 6,553 certificate accounts). Income Taxes.................................................................. $ 525 $ 360 Noncash Investing Activities: Inc.(Dec.) in net unrealized gain on securities available for sale........... ($ 1,420) $ 187
15 TABLE 4 CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation Average Balances and Net Interest Margin (Dollars in thousands) June 30, 1999 June 30, 1998 - -------------------------------------------------------------------------------------------------------------------------- Average Annual Interest Average Annual Interest Balance Rate Balance Rate Inc./Exp. - -------------------------------------------------------------------------------------------------------------------------- Assets Interest-bearing deposits with banks $ 325 5.54% $ 9 $ 264 3.03% $ 4 Federal funds sold and securities purchased under agreements to resell 5,758 4.86% 140 5,004 5.60% 140 Investment Securities: Taxable 68,643 5.25% 1,803 58,639 6.17% 1,810 Tax-Exempt (1) 37,769 6.98% 1,319 25,544 7.23% 924 Equity Investments 5,361 4.96% 133 5,218 4.79% 125 - -------------------------------------------------------------------------------------------------------------------------- Total Investments 117,856 5.78% 3,404 94,669 6.34% 3,003 Loans Commercial (1) 62,250 8.16% 2,541 54,427 8.41% 2,290 Mortgage (1) 172,333 8.55% 7,363 152,961 8.87% 6,780 Installment 38,041 8.96% 1,705 39,117 9.55% 1,868 Leasing 27,478 7.50% 1,030 17,300 7.73% 669 - -------------------------------------------------------------------------------------------------------------------------- Total loans (2) 300,102 8.42% 12,639 263,805 8.80% 11,607 Total earning assets 417,958 7.68% 16,043 358,474 8.15% 14,610 Non Interest Bearing Assets Cash & Due From Banks 10,274 0 9,236 0 Premises & Equipment 10,182 0 9,407 0 Other Assets 11,977 0 8,099 0 Allowance for Possible Loan Losses (3,224) 0 (2,953) 0 - -------------------------------------------------------------------------------------------------------------------------- Total Non-interest earning assets 29,209 0 23,789 0 - -------------------------------------------------------------------------------------------------------------------------- Total Assets $447,167 $16,043 $382,263 $14,610 ============================================================================ Liabilities and Shareholders' Equity Interest-Bearing Deposits Demand - interest-bearing $106,037 2.64% $ 1,402 $ 82,279 2.75% $ 1,133 Savings 60,641 3.28% 993 56,636 3.36% 951 Time 171,737 5.13% 4,403 148,460 5.47% 4,058 - -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 338,415 4.02% 6,798 287,375 4.27% 6,142 Short-term borrowings 3,558 4.72% 84 1,447 5.39% 39 Long-term borrowings 17,839 5.06% 451 14,135 5.43% 384 - -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 359,812 4.08% 7,333 302,957 4.33% 6,565 Demand - non-interest-bearing 37,383 32,067 0 Other liabilities 5,648 4,059 0 - -------------------------------------------------------------------------------------------------------------------------- Total Liabilities 402,843 7,333 339,083 6,565 Shareholders' equity 44,324 0 43,180 0 - -------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $447,167 $ 7,333 $382,263 $ 6,565 ============================================================================ Interest income/earning assets 7.68% 16,043 8.15% 14,610 Interest expense/interest bearing liabilities 4.08% 7,333 4.33% 6,565 - -------------------------------------------------------------------------------------------------------------------------- Net Interest Spread 3.60% $ 8,710 3.82% $ 8,045 ============================ ===================== Interest Income/Interest Earning Assets 7.68% $16,043 8.15% $14,610 Interest expense/Interest Earning Assets 3.51% 7,333 3.66% 6,565 - -------------------------------------------------------------------------------------------------------------------------- Net Interest Margin 4.17% $ 8,710 4.49% $ 8,045 ============================ ===================== - --------------------------------------------------------------------------------------------------------------------------
(1) The amounts are reflected on a fully tax equity basis using the federal statutory rate of 34% in 1999 and 1998, adjusted for certain tax preferences (2) Average outstanding includes the average balance outstanding of all non- accrual loans. Loans consist of the average of total loans less average unearned income. The amount of loan fees included in the interest income on loans in not material. 16 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDERS VOTE None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K There were no reports for the period ended June 30, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CNB FINANCIAL CORPORATION (Registrant) DATE: August 16, 1999 /s/ James P. Moore ----------------------- ----------------------------- James P. Moore President and Director (Principal Executive Officer) DATE: August 16, 1999 /s/ Joseph B. Bower, Jr. ----------------------- ----------------------------- Joseph B. Bower, Jr. Treasurer (Principal Financial Officer) (Principal Accounting Officer) 17 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 9,313 190 0 0 101,177 6,898 6,984 302,660 3,268 440,205 366,938 22,804 6,927 0 0 0 3,456 0 440,205 12,537 2,847 149 15,533 6,798 535 8,200 300 29 6,740 2,718 2,718 0 0 2,145 0.63 0.63 7.68 200 1,164 506 0 3,100 330 81 3,268 3,268 0 0
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