-----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, RnovRz3HOR+2QWu8AcxSIaLyTgUgDCXiYOqap05Ek+SF5n5VjpMWU61CSJcsmS2z lId2Cb+GHQvFnNnkN81d/A== 0000950132-99-001004.txt : 19991117 0000950132-99-001004.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950132-99-001004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99754169 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 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 1 0 - Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 Commission File Number 0-13396 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- ---------------- CNB FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 25-1450605 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) County National Bank 1 South Second Street P.O. Box 42 Clearfield, Pennsylvania 16830 (Address of principal executive offices) Registrant's telephone number, including area code, (814) 765-9621 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock: $1.00 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the issuer's common stock as of September 30, 1999: COMMON STOCK: $1.00 PAR VALUE - 3,663,825 SHARESINDEX PART I. FINANCIAL INFORMATION Sequential Page Number - ----------- PAGE 3. Notes to Consolidated Financial Statements PAGE 5. Management's Discussion and Analysis of Financial Condition and Results of Operations PAGE 14. Table 1 - Consolidated Balance Sheets - September 30, 1999 PAGE 15. Table 2Q - Consolidated Statements of Income - Quarter ending September 30, 1999 PAGE 16. Table 2Y - Consolidated Statements of Income for nine months ending September 30, 1999 PAGE 17. Table 3 - Consolidated Statements of Cash Flows - nine months ending September 30, 1999 PAGE 18. Table 4 - Consolidated Yield Comparisons PART II. OTHER INFORMATION PAGE 19. ITEM 4 Submission of Matters for Security Holders Vote PAGE 19. ITEM 5 Other Information PAGE 19. ITEM 6 Exhibits and Reports on Form 8-K PAGE 19. Signatures 2 CNB FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and in compliance with generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The registrant believes that the disclosures made are adequate to make the information presented a fair representation of the Corporation's financial status. During the third quarter of 1999, the Corporation acquired The First National Bank of Spangler. This merger was accounted for as a pooling of interest. All prior period numbers have been restated, unless otherwise indicated, to include The First National Bank of Spangler. The Corporation also purchased five branches throughout the course of 1999 and have accounted for these using the purchase method of accounting. In the opinion of Management of the registrant, the accompanying consolidated financial statements for the quarter and nine month periods ended September 30, 1999 and 1998 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the period. The financial performance reported for the Corporation for the nine month period ended September 30, 1999 is not necessarily indicative of the result to be expected for the full year. This information should be read in conjunction with the Corporation's Annual Report to shareholders and Form 10-K for the period ended December 31, 1998. COMMON STOCK PLAN The Corporation has a common stock plan for key employees and independent directors. The Stock Incentive Plan, which is administered by a disinterested committee of the Board of Directors, provides for 250,000 shares of common stock in the form of qualified options, nonqualified options, stock appreciation rights or restrictive stock. The Corporation applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its common stock plan. Accordingly, no compensation expense has been recognized for the plans. OTHER COMPREHENSIVE INCOME Total other comprehensive income for the quarters ended September 30, 1999 and 1998 were $867,000 and $1,350,000 and through the nine months of 1999 and 1998 were $1,727,000 and $3,636,000. RECENT ACCOUNTING PRONOUNCEMENTS Accounting for Derivative Instruments - ------------------------------------- In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It is effective for fiscal years beginning after June 15, 2000 with earlier adoption permitted. The Corporation does not currently utilize derivative instruments. This statement is not expected to materially affect the financial position or operating results of the Corporation. 3 Accounting for Internal Use Computer Software - --------------------------------------------- The Corporation adopted SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", effective beginning January 1, 1999. SOP 98-1 requires the Corporation to capitalize costs incurred in designing, coding, installing and testing of software. All other costs are expensed as incurred. The implementation of the SOP has not had a material affect on the financial condition, equity or operating results of the Corporation. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management's assessment of financial results. The Corporation's subsidiary County National Bank (the "Bank") provides financial services to individuals and businesses within the Bank's market area made up of the west central Pennsylvania counties of Clearfield, Centre, Elk, Jefferson, and McKean. County National Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency ("OCC"). The health of the economy in the region is mixed with unemployment rates running higher than the state average in most of our market areas except Centre County. Actual ratings (as of August 1999) by county are as follows: Cameron 8.6%; Centre 3.0%; Clearfield 6.2%; Elk 5.1% Jefferson 6.0%; and McKean 7.0%. On February 12, 1999, the Bank acquired a full service office in Punxsutawney, PA from an unaffiliated institution (referred to hereafter as "Punxsy"). The purchase included $10.7 million in loans, $35.5 million in deposits and certain fixed assets associated with the office. The facility continues to operate as a full service branch of the Bank. Expenses incurred to date related to merger costs were $50,000. On September 24, 1999, the Bank acquired four full service offices in north central PA from an unaffiliated institution (referred to hereafter as "four branches"). The offices are located in the communities of Johnsonburg and Ridgway in Elk County and Bradford and Kane in McKean County. The purchase included $21.7 million in loans, $116.2 million in deposits and certain fixed assets associated with the offices. All locations continue to operate as full service branches of the Bank. The acquisition costs incurred to date have been $73,000. ACQUISITION OF THE FIRST NATIONAL BANK OF SPANGLER On August 18, 1999, the Corporation acquired The First National Bank of Spangler ("Spangler") located in Spangler, PA. The merger, which was accounted for as a pooling of interest, was affected by issuing 237,500 shares of CNB Financial Corporation common stock in exchange for 100% of the outstanding shares of Spangler. After consummation of the acquisition, Spangler was merged into County National Bank. The purchase included $23.0 million in loans, $29.0 million in deposits, $4.6 million in capital and other assets and liabilities. The facility will continue to operate as The First National Bank of Spangler until the first quarter of 2000 at which time it will be fully integrated with County National Bank as an operating branch. Merger related expenses incurred as a result of this event have amounted to $164,000 to date. The post merger combined operating results provided in the table below are presented to show the 30 day period from September 1, through September 30, 1999 and 1998 as if the merger were in effect for both periods.
1999 1998 ------ ------ Net Interest Income $1,642 $1,377 Net Income $ 408 $ 401 Net Income per common share $ 0.11 $ 0.11
5 The following schedule provides a summary of CNB Financial Corporation and Spangler on a consolidated basis for the period ending December 31, 1999:
Total CNB(audited) CNB & Spangler (excluding Spangler) Spangler Combined ---------------------- ---------- ---------------- Assets - ------ Cash and deposits in banks $ 23,101 $ 2,992 $ 26,093 Investment available for sale 100,121 5,872 105,993 Investment held to maturity 7,682 - 7,682 Net loans and leases 285,289 22,538 307,827 Premises and equipment, net 10,257 413 10,670 Intangible, net 2,522 - 2,522 Accrued Interest and other assets 7,880 250 8,130 ---------- ---------- ---------- Total Assets $436,852 $32,065 $468,917 ========== ========== ========== Liabilities - ----------- Deposits $370,814 $27,268 $398,082 Short-term borrowings 359 - 359 Other borrowings 16,019 - 16,019 Accrued expenses and other liab. 4,879 204 5,083 ---------- ---------- ---------- Total Liabilities 392,071 27,472 419,543 Total Shareholder's Equity 44,781 4,593 49,374 ---------- ---------- ---------- Total Liabilities and Shareholder's Equity $436,852 $32,065 $468,917 ========== ========== ==========
OVERVIEW OF BALANCE SHEET Total assets (shown in Table 1 "Consolidated Balance Sheet") have grown ------- 23.3% since year end 1998 to $578.0 million. Growth for the period has occurred generally through the acquisitions previously mentioned. The following comments will further explain the details of the asset fluctuation. CASH AND CASH EQUIVALENTS Cash and cash equivalents totaled $54,285,000 at September 30, 1999 compared to $26,093,000 on December 31, 1998. This increase was caused as a result of the four branches acquired late in the quarter. All excess funds had not yet been deployed and are expected to be invested in bonds or to fund lending in the market area. Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due. INVESTMENT SECURITIES Investment securities increased $23.2 million (or 20.4%) since December 31, 1998. Of the Corporation's total investment portfolio of $136,854,000 as of September 30, 1999, $129,009,000 (or 94.3%) is classified as available for sale with the balance of $7,845,000 classified as held to maturity. The increase is a combination of funds acquired from Punxsy and the four branches. The Bank also utilized favorable funding rates from the Federal Home Loan Bank of Pittsburgh to purchase investment securities in the amount of $5 million. 6 Management monitors the earnings performance and the effectiveness of the liquidity of the investment portfolio on a regular basis through Asset/Liability Committee ("ALCO') meetings. The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the investment securities portfolio, the Corporation maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers. LOANS The Corporation's internal loan growth, exclusive of purchased loans, was $10.1 million or 3.2% through the nine months of 1999. The growth above the acquisition is the result of our increased penetration into the commercial lending opportunities within our market. Our focus on commercial lending has expanded over the past year with additional staff increases to handle the growth of small business loans. At September 30, 1999, the Corporation had $353,887,000 in loans and leases outstanding up $42,746,000 (or 13.7%) since December 31, 1998. The remainder of the loan growth that occurred was a result of the acquisition of $32.9 million in loans. The Corporation's lending is focused in the west central Pennsylvania market and consists principally of retail lending, which includes single family residential mortgages and other consumer lending, and also commercial lending primarily to locally owned small businesses for operations and capital expenditures. ALLOWANCE FOR LOAN AND LEASE LOSSES The Allowance for Loan and Lease Losses as a percentage of loans decreased from 1.07% at December 31, 1998 to 1.04% at September 30, 1999. The dollar amount of the reserve increased $349,000 since year end 1998. The increase is a result of the net reserve of $450,000 expensed during the nine months and an adjustment made to the loans that were acquired in the Punxsy and four branches acquisitions made during the year. The gross charge-offs for the nine months of 1999 were $418,000 while recoveries were $170,000. This level of charge-offs is comparable to the nine months of 1998 when charge-offs were $345,000 with recoveries of $94,000. Net charge-offs remain consistent with prior periods. The financial services industry is aware of a general trend towards higher charge offs. It is mainly the result of increased consumer credit problems often resulting in bankruptcies. Management of the Corporation has implemented a proactive loan collection program which has resulted in sustained low levels of loan delinquency. Management continues to closely monitor loan delinquency and loan losses. Non-performing assets, which include loans 90 or more days past due, non-accrual loans and other real estate owned were $1,641,000 or 0.28% of total assets on September 30, 1999 compared to $1,870,000 or 0.42% on December 31, 1998. The adequacy of the allowance for loan and lease losses is subject to a formal analysis by the loan review staff of the Bank and is deemed to be adequate to absorb inherent losses in the portfolio as of September 30, 1999. The Corporation has disclosed in its annual report on Form 10-K the process and methodology supporting the loan loss provision. FUNDING SOURCES The Corporation considers deposits, short-term borrowings, and term debt when evaluating funding sources. Traditional deposits continue to be the most significant source of funds for the Corporation reaching $507,887,000, or 96.7% of all sources of funds, at September 30, 1999. Deposit growth of 27.6% since year end 1998 resulted from the three acquisitions previously mentioned. The Corporation utilizes term borrowings from the Federal Home Loan Bank (FHLB) to meet funding needs not accommodated by deposit growth. During the first nine months of 1999, the Corporation borrowed $5 million as mentioned on page 5 in the investment securities section. 7 Management plans to maintain access to short and long-term FHLB borrowings as appropriate funding sources for the various needs of the Corporation. In addition, the Bank has increased its ability to borrow at the discount window of the Federal Reserve Bank to $15 million. SHAREHOLDERS' EQUITY A strong stockholders' equity position provides the Corporation with the capability to meet cash obligations and absorb unforeseen losses, if any. For these reasons capital adequacy has been, and will continue to be, of paramount importance. Total Shareholders' Equity was $48,288,000 at September 30, 1999 compared to $49,374,000 at December 31, 1998 a decrease of $1,086 (or 2.2%). In the first nine months of 1999, the Corporation earned $3,573,000 and declared dividends of $2,103,000, a dividend payout ratio of 58.9% of net income. Also, the Corporation increased treasury stock by $607,000. Approximately 94% of the investment securities in the Corporation's portfolio are classified as available-for-sale making this portion of the Corporation's balance sheet more sensitive to the changing market value of investments. Interest rates in the nine months of 1999 have increased, causing the Bank's bond portfolio to experience a decrease in its market value gains. Also, the financial services sector of the equity markets have declined in value during 1999 due to general market conditions and the rise in interest rates. This situation has caused a decline in stockholders' equity of $1,905,000 since December 31, 1998. The Corporation has also complied with the standards of capital adequacy mandated by the banking regulators. Bank regulators have established "risk- based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of either 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets), is assigned to each asset on the balance sheet. The Corporation's total risk-based capital ratio of 9.62% at September 30, 1999 is above the minimum standard of 8%. The Corporation's Tier 1 capital ratio of 8.67% is above the regulatory minimum of 4%. The leverage ratio at September 30, 1999 was 6.70%, also above the minimum standard of 4%. The Corporation is deemed to be adequately capitalized under regulatory industry standards. The ratios provide quantitative data demonstrating the strength and future opportunities for use of the Corporation's capital base. Management continues to evaluate risk-based capital ratios and the capital position of the Corporation as part of its strategic decision making process. LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity measures an organizations' ability to meet cash obligations as they come due. The Consolidated Statement of Cash Flows presented on page 17 of the accompanying financial statements provide analysis of the Corporation's cash and cash equivalents. Additionally, management considers that portion of the loan and investment portfolio that matures within one year as part of the Corporation's liquid assets. The Corporation's liquidity is monitored by the ALCO which establishes and monitors ranges of acceptable liquidity. Management feels the Corporation's current liquidity position is acceptable. In the course of conducting business activities, the Corporation is exposed to market risk, principally interest rate risk, through the operation of the Bank. Interest rate risk arises from market driven fluctuations in interest rates which affect cash flows, income, expense and values of all financial instruments. Interest rate risk is monitored by management and the ALCO Committee of the Board. No material changes have occurred during the period in the Bank's market risk strategy, a discussion of which can be found in the SEC Form-10K filed for the period ended December 31, 1998. 8 RESULTS OF OPERATIONS OVERVIEW OF THE INCOME STATEMENT The Corporation had net income, before merger related charges, of $1,483,000 and $3,763,000 for the third quarter and first nine months of 1999, respectively. The earnings per diluted share for the respective periods were $0.40 and $1.03. After merger-related charges, net income was $1,293,000 and $3,573,000 for the third quarter and first nine months of 1999, which equates to earnings per diluted share of $0.35 and $1.01, respectively. The return on assets and the return on equity for the nine months are 0.99% and 9.88%. Operating cash earnings for the quarter and nine months was $1,630,000 and $4,165,000 increases of 28.3% and 7.3%, respectively, over reported earnings of $1,270,000 and $3,881,000 for the same periods in 1998. Operating cash return on assets and return on equity for the nine months of 1999 are 1.15% and 11.52% respectively. Operating cash earnings are earnings before the amortization of goodwill and core deposit intangibles and merger charges. The following discussions provide further details regarding the components of net income. INTEREST INCOME AND EXPENSE Net interest income totaled $4,887,000 in the third quarter, an increase of 17.25% over the third quarter of 1998 and totaled $13,645,000 for the nine months of 1999, an increase of 9.9% over the prior year. The Bank experienced an increase in earning assets in the past twelve months of 40.2% which came primarily through the three acquisitions previously mentioned. Total interest income increased during the quarter by $956,000 or 12.1% while interest expense increased by $237,000 or 6.4% when compared to the third quarter of 1998. The Corporation recorded a provision for loan and lease losses in the third quarter of $153,000 compared to the third quarter of 1998 at $158,000 and $460,000 for the nine months of 1999 compared to $553,000 in 1998. NON-INTEREST INCOME Non-interest income increased $76,000 (9.1%) and $286,000 (12.9%) in the third quarter and nine months of 1999, respectively, when compared to the same periods in 1998. Increased deposit account service charges have been the primary source of the growth in non-interest income. In the nine months, account service charges totaled $1,119,000 up $240,000 (or 27.3%) over last year. These increases in fee income were the result of the growth in the number of customers and related deposit accounts over the past twelve months. The increases compared with the prior period are adversely affected by a decrease in security gains of $157,000. NON-INTEREST EXPENSE Non-interest expense increased $702,000 or 21.9% during the third quarter of 1999 and $2,018,000 or 22.4% in the nine months of 1999 when compared to the same periods in 1998. This increased level of non-interest expense is partly attributable to the acquisitions that occurred during 1999. The associated costs incurred through the first nine months of 1999 were $288,000 for merger costs and $365,000 for amortization of intangible assets. Also, the Bank has experienced increases in data processing of 34.5% or $198,000. These costs are for upgrades to the Bank's overall technology plan intended to provide more efficiencies in the future and for new reporting software. 9 FEDERAL INCOME TAX EXPENSE Federal income tax expense was $528,000 in the third quarter of 1999 compared to $484,000 in the third quarter of 1998. For the nine month period comparisons, the federal tax expense was $1,101,000 in 1999 and $1,366,000 in 1998. The decrease primarily reflects lower pre-tax income in the period when compared to the same period of the prior year, as well as a $427,000 (or 30%) increase in tax free income comparing 1999 with 1998. 10 YEAR 2000 Management is aware of the possibility of exposure by banks to a computer problem known as the "Year 2000 Issue" or the "Millennium Bug" (the inability of some computer programs to distinguish between the year 1900 and the year 2000). Potential impacts to the Corporation may arise from software, computer hardware, and other equipment both within the Corporation's direct control and outside of the Corporation's ownership, which the Corporation electronically interfaces with. The Corporation has developed and implemented a plan for this issue with the following major components: Assessment; Remediation; Testing; and Implementation. The Corporation uses third party vendors for its core processing, item processing and trust processing needs. The following table depicts the status for the Corporation during each phase and for its various exposure types:
Resolution Phases Assessment Remediation Testing Implementation - ----------------------------------------------------------------------------------------------------------- Information 100% Complete 100% Complete 100% Complete 100% Complete Technology (PC's, Servers, etc.) - ----------------------------------------------------------------------------------------------------------- Operating 100% Complete 100% Complete 100% Complete 100% Complete Equipment with Embedded chips or software - ----------------------------------------------------------------------------------------------------------- Products The Corporation does not sell or deliver software or hardware items to its customers. - ----------------------------------------------------------------------------------------------------------- Third Party Vendors: Core Processing 100% Complete 100% Complete 100% Complete 100% Complete Item Processing 100% Complete 100% Complete 100% Complete 100% Complete Trust Processing 100% Complete 100% Complete 100% Complete 100% Complete
Other important segments of the Plan for Year 2000 are to identify customers whose possible lack of Year 2000 preparedness might expose the Corporation to financial loss. Our major customers have been reviewed through discussions and questionnaires for their Year 2000 preparedness. This has become a factor in the risk weighting characteristics of our loan portfolio. The Corporation has been in the process of educating and evaluating all customers on the Year 2000 and their own readiness. During this process, a public relations / education plan has been developed for 1999 to inform customers and the general public about the Year 2000 and the Corporation's ability to handle the issue. The Corporation has budgeted total Year 2000 costs not to exceed $100,000. This estimated cost is based upon currently available information and includes expenses for the review and testing by third parties, including government entities. Of the estimated costs of $100,000, $68,000 of capitalized costs and approximately $26,000 expensed costs have been spent to date. The remaining $6,000 is expected to be used for personnel costs associated with training issues. There can be no guarantee, however, that hardware, software, and systems created by third parties will be free of unfavorable Year 2000 issues and therefore not present a material impact upon the Corporation. The cost estimate may change as the Corporation progresses in its Year 2000 plan and further information associated with and concerning third parties is obtained. At this time, no significant projects have been delayed as a result of the Corporation's Year 2000 effort. 11 As a precautionary measure, the Corporation has developed a Year 2000 contingency plan. This plan was created to provide for operating procedures in the event that a failure would occur even after the above five phases were performed positively. This document while currently complete will be continually updated as 1999 progresses and more information is provided by third parties as well as through in house testing. The federal banking agencies have been conducting Year 2000 compliance examinations for several months. The failure to implement an adequate Year 2000 program can be identified as an unsafe and unsound banking practice. The Corporation and the Bank are subject to supervision by the Office of the Comptroller of the Currency (OCC). Failure to adequately prepare for Year 2000 issues could negatively impact the Corporation's banking operations, including the imposition of restriction upon its operations by the OCC. Despite the Corporation's activities as detailed above, pertaining to the Year 2000, there can be no assurance that partial or total systems interruptions or the costs necessary to update hardware and software would not have a material adverse effect upon the Corporation's business, financial condition, results of operations, and business prospects. Forward looking statements about the Year 2000 should be read in conjunction with the Corporation's disclosures under the heading: "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995. FUTURE OUTLOOK September 30, 1999 results of net income showed a decrease over the prior year's nine months and were below management's expectations. Management's focus is to fully integrate the acquisitions made during 1999 by turning the dollars acquired into earning assets. The goal of our recent asset growth is general increase in shareholder value as well as favorable results in long-term profitability. Loan demand improved during the quarter. Loan growth is expected to continue at a moderate pace throughout the remainder of the year. The Corporation's loan to deposit ratio has decreased at the end of the third quarter to 69.0% compared to 78.1% at year-end 1998 as a result of the acquired deposit liabilities. Management expects the loan to deposit ratio to increase during the fourth quarter as the funds from the acquisition are utilized to fund loan demand. Consumer loan charge-offs in the third quarter continued to comprise the majority of the Corporation's recent charge-offs. In the third quarter, total net charge-offs were $243,000 of which consumer net charge-offs totaled $262,000. The level of net charge-offs has been stable over the past twelve months. Management believes that the increased efforts of loan review and collections and our quality underwriting standards will give the Bank continued good charge-off experience when compared to peer institutions. Enhanced non-interest income and controlled non-interest expense are important factors in the success of the Corporation and is measured in the financial services industry by the efficiency ratio, calculated according to the following: non-interest expense (less amortization of intangibles) as a percentage of fully taxable net interest income and non-interest income (less non-recurring income). For the nine months ended September 30, 1999, the Corporation's efficiency ratio before merger related costs and intangible expense, was 60.21% compared to 60.11% for the same period last year. The efficiency ratio has increased as the level of non-interest expense has increased during 1999 more rapidly than non-interest income has increased. Management believes controlling the operating costs of the Corporation is imperative to the future increased profitability derived from core earnings. A strong focus by management will be placed on noninterest expenses during the remainder of 1999 as the Bank implements a profitability enhancement program with the expectation of an improved efficiency ratio. The interest rate environment will continue to play an important role in the future earnings of the Corporation. The net interest margin has tightened as the interest rate cycle we are in causes competitive pressures in the form of reduced lending rates coupled with higher cost of funds in the financial services industry. Overall net interest income continues to increase due to growth in interest earning assets. Management expects further growth in net interest income for the remainder of 1999 as interest income grows with the increased deployment of earning assets in the form of loans rather than investments. 12 Management concentrates on return on average equity and earnings per share evaluations, plus other methods, to measure and direct the performance of the Corporation. While past results are not an indication of future earnings, management feels the Corporation is positioned to enhance performance of normal operations through the remainder of 1999. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in this Form 10-Q which are not historical fact are forward looking statements that involve risks and uncertainties, including, but not limited to, the interest rate environment, the effect of federal and state banking and tax regulations, the effect of economic conditions, the impact of competitive products and pricing, and other risks detailed in the Corporation's Securities and Exchange Commission filings. 13 TABLE 1 CONSOLIDATED BALANCE SHEETS CNB FINANCIAL CORPORATION Consolidated Balance Sheets (unaudited) (Dollars in thousands)
September 30, Dec. 31 ASSETS 1999 1998 -------------- -------------- Cash and due from banks.................................................... $ 21,051 $ 11,082 Interest bearing deposits with other banks................................. 294 256 Federal funds sold......................................................... 32,940 14,755 Investment securities available for sale................................... 129,009 105,993 Investment securities held to maturity, fair value of $7,905 at September 30, 1999, and $7,867 at December 31, 1998.................... 7,845 7,682 Loans and leases........................................................... 359,187 315,711 Less: unearned discount................................................. 5,081 4,570 Less: allowance for loan losses.......................................... 3,882 3,314 -------------- -------------- NET LOANS................................................................ 350,224 307,827 Premises and equipment..................................................... 11,708 10,670 Accrued interest receivable................................................ 3,295 2,627 Loans held for sale........................................................ 2,286 4,299 Intangible, net............................................................ 16,614 2,522 Other assets............................................................... 2,740 1,204 -------------- -------------- TOTAL ASSETS............................................................. $578,006 $468,917 LIABILITIES Deposits: Non-interest bearing deposits............................................ $51,429 $38,970 Interest bearing deposits................................................ 456,458 359,112 -------------- -------------- TOTAL DEPOSITS........................................................... 507,887 398,082 Other borrowings........................................................... 17,547 16,378 Accrued interest and other liabilities..................................... 4,284 5,083 -------------- -------------- TOTAL LIABILITIES........................................................ $529,718 $419,543 SHAREHOLDERS' EQUITY Common stock $1.00 par value Authorized 10,000,000 shares Issued 3,693,500 shares for 1999 and 3,456,000 shares for 1998........... $3,694 $3,506 Additional paid in capital............................................... 3,474 3,756 Retained earnings........................................................ 42,216 40,696 Treasury stock, at cost ................................................. (719) (112) (30,104 shares for 1999, and 11,106 for December 1998 Accumulated other comprehensive income................................... (377) 1,528 -------------- -------------- TOTAL SHAREHOLDERS' EQUITY............................................... 48,288 49,374 -------------- -------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY................................. $578,006 $468,917
14 TABLE 2-Q CONSOLIDATED STATEMENTS OF INCOME CNB FINANCIAL CORPORATION Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30... 1999 1998 ---------------- ---------------- INTEREST INCOME Loans including fees......................................................... $7,158 $6,240 Deposits with other banks.................................................... 7 5 Federal funds sold........................................................... 35 127 Investment securities: Taxable................................................................... 1,109 1,099 Tax-exempt................................................................ 465 350 Dividends................................................................. 63 60 ---------------- ---------------- TOTAL INTEREST INCOME..................................................... $8,837 $7,881 INTEREST EXPENSE Deposits..................................................................... $3,627 $3,483 Borrowed funds............................................................... 323 230 ---------------- ---------------- TOTAL INTEREST EXPENSE.................................................... $3,950 $3,713 Net interest income....................................................... $4,887 $4,168 Provision for possible loan losses........................................ 153 158 ---------------- ---------------- NET INTEREST INCOME AFTER PROVISION.......................................... $4,734 $4,010 OTHER INCOME Trust & asset management fees................................................ $ 224 $ 212 Service charges on deposit accounts.......................................... 414 331 Other service charges and fees............................................... 135 97 Securities gains............................................................. 31 87 Gains on sale of loans....................................................... 13 1 Other income................................................................. 98 111 ---------------- ---------------- TOTAL OTHER INCOME........................................................ $ 915 $ 839 OTHER EXPENSES Salaries..................................................................... $1,454 $1,297 Employee benefits............................................................ 500 375 Net occupancy expense........................................................ 509 447 Amortization of intangible................................................... 222 79 Other........................................................................ 1,226 1,011 ---------------- ---------------- TOTAL OTHER EXPENSES...................................................... $3,911 $3,209 Income before income taxes................................................... $1,738 $1,640 Applicable income taxes...................................................... 445 422 ---------------- ---------------- NET INCOME................................................................ $1,293 $1,218 ================ ================ Per Share Data - -------------- Net income, basic............................................................ $0.35 $0.33 Net income, fully diluted.................................................... $0.35 $0.33 Cash dividends per share..................................................... $0.20 $0.18
15 TABLE 2-Y CONSOLIDATED STATEMENTS OF INCOME CNB FINANCIAL CORPORATION Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data)
NINE MONTHS ENDED SEPTEMBER 30... 1999 1998 ---------------- ---------------- INTEREST AND DIVIDEND INCOME Loans including fees......................................................... $20,546 $18,660 Deposits with other banks.................................................... 16 9 Federal funds sold........................................................... 243 295 Investment securities: Taxable................................................................... 3,076 3,110 Tax-exempt................................................................ 1,417 1,023 Dividends................................................................. 178 170 ---------------- ---------------- TOTAL INTEREST AND DIVIDEND INCOME........................................ $25,476 $23,267 ---------------- ---------------- INTEREST EXPENSE Deposits..................................................................... $10,973 $10,196 Borrowed funds............................................................... 858 653 ---------------- ---------------- TOTAL INTEREST EXPENSE.................................................... $11,831 $10,849 Net interest income....................................................... $13,645 $12,418 Provision for possible loan losses........................................ 460 553 ---------------- ---------------- NET INTEREST INCOME AFTER PROVISION.......................................... $13,185 $11,865 ---------------- ---------------- OTHER INCOME Trust & asset management fees................................................ $ 607 $ 560 Service charges on deposit accounts.......................................... 1,119 879 Other service charges and fees............................................... 321 309 Realized securities gains.................................................... 60 217 Gains on sale of loans....................................................... 65 22 Other........................................................................ 336 235 ---------------- ---------------- TOTAL OTHER INCOME........................................................ $ 2,508 $ 2,222 ---------------- ---------------- OTHER EXPENSES Salaries..................................................................... $ 4,187 $ 3,788 Employee benefits............................................................ 1,470 1,141 Net occupancy expense of premises............................................ 1,458 1,353 Amortization of intangible................................................... 609 244 Other........................................................................ 3,295 2,475 ---------------- ---------------- TOTAL OTHER EXPENSES...................................................... $11,019 $ 9,001 ---------------- ---------------- Income before income taxes................................................... $ 4,674 $ 5,086 Applicable income taxes...................................................... 1,101 1,366 ---------------- ---------------- NET INCOME................................................................ $ 3,573 $ 3,720 ================ ================ EARNINGS PER SHARE, BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING Net income, basic............................................................ $0.97 $1.01 Net income, fully diluted.................................................... $0.97 $1.01 Cash dividends per share..................................................... $0.60 $0.54
16 TABLE 3 CONSOLIDATED STATEMENTS OF CASHFLOWS CNB FINANCIAL CORPORATION Consolidated Statements of Cash Flows (unaudited) (Dollars in thousands)
Nine Months Ended September 30... 1999 1998 ----------------- ----------------- Cash flows from operating activities: Net Income...................................................... $ 3,573 $ 3,506 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses................................... 460 525 Depreciation and amortization............................... 1,275 845 Amortization and accretion and deferred loan fees........... 153 (230) Deferred Taxes.............................................. (649) 1,054 Security Gains.............................................. (60) (217) Gain on sale of loans....................................... (65) (22) Net (gains) losses on dispositions of acquired property..... 21 (98) Changes in: Proceeds from sale of loans.................................. 12,497 11,288 Origination of loans for sale................................ (10,420) (11,546) Interest receivable......................................... (747) (216) Other assets and intangibles................................ (16,405) (11,979) Interest payable............................................ 510 (16) Other liabilities........................................... 495 470 ----------------- ------------------ Net cash provided by operating activities....................... (9,362) (6,636) Cash flows from investing activities: Proceeds from maturities of: Securities held to maturity............................... 1,100 6,067 Securities available for sale............................. 20,208 16,897 Proceeds from sales of securities available for sale.......... 17,236 3,988 Purchase of: Securities available for sale............................. (69,701) (49,659) Net principal disbursed on loans.............................. (64,912) 5,134 (Purchase) of Federal Reserve Bank Stock...................... (11) 0 Purchase of Federal Home Loan Bank Stock...................... (1,258) (499) Purchase of premises and equipment............................ (2,117) (1,784) Proceeds from the sale of foreclosed assets................... (21) 142 ----------------- ------------------ Net cash used in investing activities........................... (99,476) (19,714) Cash flows from financing activities: Net change in: Checking, money market and savings accounts............... 22,300 13,515 Certificates of deposit................................... 114,773 (49) Acquisition of treasury stock............................. (607) 0 Sale of treasury stock.................................... 18 0 Cash dividends paid....................................... (2,103) (1,861) Issuance of common stock.................................. 4,472 0 Net advances from other borrowings............................ 1,169 8,920 ----------------- ------------------ Net cash provided by financing activities....................... 140,022 20,525 Net increase (decrease) in cash and cash equivalents........... 31,184 (5,825) Cash and cash equivalents at beginning of year.................. 23,101 18,436 ----------------- ------------------ Cash and cash equivalents at end of period...................... $ 54,285 $ 12,611 ================= ================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (including amount credited directly to certificate accounts)..................................... $ 12,341 $ 9,988 Income Taxes............................................... $ 1,425 $ 360 Noncash Investing Activities: Inc. (Dec.) in net unrealized gain on securities available for sale....................................... ($1,092) $ 273
17 TABLE 4 CONSOLIDATED YIELD COMPARISONS CNB Financial Corporation Average Balances and Net Interest Margin (Dollars in thousands)
September 30, 1999 September 30, 1998 - ----------------------------------------------------------------------------------------------------------------------- Average Annual Interest Average Annual Interest Balance Rate Inc./Exp. Balance Rate Inc./Exp. - ----------------------------------------------------------------------------------------------------------------------- Assets Interest-bearing deposits with banks $ 425 5.02% 16 270 4.44% 9 Federal funds sold and securities purchased under agreements to resell 6,720 4.82% 243 7,071 4.32% 229 Investment Securities: Taxable 75,093 5.57% 3,136 66,866 6.19% 3,102 Tax-Exempt (1) 37,891 7.00% 1,989 26,066 7.22% 1,412 Equity Investments (1) 5,444 5.12% 209 5,657 4.76% 202 - ----------------------------------------------------------------------------------------------------------------------- Total Investments 125,573 5.94% 5,593 105,930 6.24% 4,954 Loans Commercial (1) 64,055 8.67% 4,167 56,202 8.44% 3,559 Mortgage (1) 191,256 8.47% 12,150 170,905 8.75% 11,215 Installment 41,324 9.03% 2,798 41,980 9.33% 2,938 Leasing 28,228 7.46% 1,580 18,462 7.77% 1,076 - ----------------------------------------------------------------------------------------------------------------------- Total loans (2) 324,863 8.49% 20,695 287,549 8.71% 18,788 Total earning assets 450,436 7.78% 26,288 393,479 8.05% 23,742 Non Interest Bearing Assets Cash & Due From Banks 11,199 - 9,812 - Premises & Equipment 10,649 - 10,003 - Other Assets 12,217 - 8,417 - Allowance for Possible Loan Losses (3,492) - (3,212) - - ----------------------------------------------------------------------------------------------------------------------- Total Non-interest earning assets 30,573 -- - 25,020 -- - - ----------------------------------------------------------------------------------------------------------------------- Total Assets $481,009 $26,288 $418,499 $23,742 ========================================================================= Liabilities and Shareholders' Equity Interest-Bearing Deposits Demand - interest-bearing 102,859 2.54% 1,956 86,972 2.90% 1,894 Savings 66,020 3.26% 1,616 61,781 3.31% 1,533 Time 193,299 5.11% 7,401 166,380 5.43% 6,770 - ----------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 362,178 4.04% 10,973 315,133 4.31% 10,197 Short-term borrowings 5,673 4.98% 212 1,196 5.46% 49 Long-term borrowings 17,067 5.05% 646 14,763 5.45% 603 - ----------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 384,918 4.10% 11,831 331,092 4.37% 10,849 Demand - non-interest-bearing 40,408 - 34,944 - Other liabilities 6,606 - 4,518 - - ----------------------------------------------------------------------------------------------------------------------- Total Liabilities 431,932 3.65% 11,831 370,554 3.90% 10,849 Shareholders' equity 49,077 -- - 47,945 -- - - ----------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity 481,009 11,831 418,499 10,849 ========================================================================= Interest income/earning assets 7.78% 26,288 8.05% $23,742 Interest expense/interest bearing liabilities 4.10% 11,831 4.37% 10,849 - ----------------------------------------------------------------------------------------------------------------------- Net Interest Spread 3.68% $14,457 3.68% $12,893 ------------------ ------------------- Interest Income/Interest Earning Assets 7.78% $26,288 8.05% $23,742 Interest expense/Interest Earning Assets 3.50% 11,831 3.68% 10,849 - ----------------------------------------------------------------------------------------------------------------------- Net Interest Margin 4.28% $14,457 4.37% $12,893 ------------------ ------------------- - -----------------------------------------------------------------------------------------------------------------------
(1) The amounts are reflected on a fully tax equivalent basis using the federal statutory rate of 34% in 1999 and 1998, adjusted for certain tax preferences. (2) Average outstanding includes the average balance outstanding of all non- accrual loans. Loans consist of the average of total loans less average unearned income. The amount of loan fees included in the interest income on loans is not material. 18 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDERS VOTE None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K There were no reports for the period ended September 30, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CNB FINANCIAL CORPORATION (Registrant) DATE: November 15, 1999 /s/ James P. Moore ------------------- ------------------------------------ James P. Moore President and Director (Principal Executive Officer) DATE: November 15, 1999 /s/ Joseph B. Bower, Jr. ------------------- ------------------------------------ Joseph B. Bower, Jr. Treasurer (Principal Financial Officer) (Principal Accounting Officer) 19 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 21,051 294 32,940 0 129,009 7,845 7,905 354,106 3,882 578,006 507,887 17,547 4,284 0 0 0 3,694 0 578,006 20,546 4,671 259 25,476 10,973 858 13,645 460 60 11,019 4,674 4,674 0 0 3,573 0.97 0.97 7.78 629 843 791 0 3,100 417 170 3,882 3,882 0 0
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