UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from _____ to ______
Commission file number: 000-51685
CNB Financial Corp.
(Exact name of registrant as specified in its charter)
Massachusetts | 20-3801620 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
33 Waldo Street, P.O. Box 830, Worcester, MA 01613-0830
(Address of principal executive offices)
(508) 752-4800
(Registrant’s telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] | Smaller Reporting Company [X] |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At May 12, 2008, the registrant had 2,283,208 shares of common stock, $1.00 par value, issued and outstanding.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
PAGE
Item 1- | Financial Statements | |
Unaudited Condensed Consolidated Balance Sheets | ||
Unaudited Condensed Consolidated Statements of Income | ||
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity | ||
Unaudited Condensed Consolidated Statements of Cash Flows | ||
Notes to Unaudited Condensed Consolidated Financial Statements | ||
Item 2- | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3- | Quantitative and Qualitative Disclosures About Market Risk | |
Item 4T- | Controls and Procedures |
PART II – OTHER INFORMATION
Item 1- | Legal Proceedings | |
Item 1A- | Risk Factors | |
Item 2- | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3- | Defaults Upon Senior Securities | |
Item 4- | Submission of Matters to a Vote of Security Holders | |
Item 5- | Other Information | |
Item 6- | Exhibits | |
Signatures |
CNB FINANCIAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 2008 and December 31, 2007
(Unaudited)
ASSETS | March 31, | December 31, | ||||||
2008 | 2007 | |||||||
Cash and Cash Equivalents | $ | 5,360,000 | $ | 8,825,000 | ||||
Investment Securities Available-for-Sale | 44,827,000 | 45,597,000 | ||||||
Investment Securities Held-to-Maturity, (fair value of $11,556,000 as of March 31, 2008 and $11,720,000 as of December 31, 2007) | 11,484,000 | 11,687,000 | ||||||
Federal Reserve Bank Stock | 786,000 | 761,000 | ||||||
Federal Home Loan Bank Stock | 3,052,000 | 3,052,000 | ||||||
Loans | 221,184,000 | 217,321,000 | ||||||
Less: Allowance for Loan Losses | (2,735,000 | ) | (2,844,000 | ) | ||||
Loans, Net | 218,449,000 | 214,477,000 | ||||||
Premises and Equipment, Net | 2,300,000 | 2,378,000 | ||||||
Accrued Interest Receivable | 1,132,000 | 1,100,000 | ||||||
Deferred Tax Asset | 1,100,000 | 1,123,000 | ||||||
Prepaid Expenses and Other Assets | 538,000 | 494,000 | ||||||
$ | 289,028,000 | $ | 289,494,000 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Liabilities: | ||||||||
Deposits | $ | 194,950,000 | $ | 202,238,000 | ||||
Federal Home Loan Bank Advances | 55,250,000 | 48,750,000 | ||||||
Subordinated Debentures | 7,732,000 | 7,732,000 | ||||||
Securities Under Agreement to Repurchase | 7,199,000 | 7,214,000 | ||||||
Accrued Expenses and Other Liabilities | 2,414,000 | 2,407,000 | ||||||
Total Liabilities: | 267,545,000 | 268,341,000 | ||||||
Commitments and Contingencies (Note 8) | ||||||||
Stockholders' Equity: | ||||||||
Common Stock | ||||||||
Par Value: $1.00 | ||||||||
Shares Authorized: 10,000,000 as of March 31, 2008 and December 31, 2007 | ||||||||
Issued and Outstanding: 2,283,000 as of March 31, 2008 and December 31, 2007 | 2,283,000 | 2,283,000 | ||||||
Additional Paid-in Capital | 20,332,000 | 20,291,000 | ||||||
Accumulated Deficit | (1,484,000 | ) | (1,754,000 | ) | ||||
Accumulated Other Comprehensive Income, net of taxes | 352,000 | 333,000 | ||||||
Total Stockholders' Equity | 21,483,000 | 21,153,000 | ||||||
$ | 289,028,000 | $ | 289,494,000 |
See Notes to Consolidated Financial Statements
1
CNB FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Income
For the Three Months Ended March 31, 2008 and 2007
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Interest and Dividend Income: | ||||||||
Interest and Fees on Loans | $ | 3,754,000 | $ | 3,752,000 | ||||
Interest and Dividends on Investments | 844,000 | 864,000 | ||||||
Total Interest and Dividend Income | 4,598,000 | 4,616,000 | ||||||
Interest Expense: | ||||||||
Interest Expense on Deposits | 1,562,000 | 1,686,000 | ||||||
Interest Expense on Borrowings | 722,000 | 896,000 | ||||||
Total Interest Expense | 2,284,000 | 2,582,000 | ||||||
Net Interest Income | 2,314,000 | 2,034,000 | ||||||
Provision for Loan Losses | 100,000 | 30,000 | ||||||
Net Interest Income, After Provision for Loan Losses | 2,214,000 | 2,004,000 | ||||||
Other Income: | ||||||||
Fees on Deposit Accounts | 52,000 | 50,000 | ||||||
Loan Related Fees | 29,000 | 41,000 | ||||||
Other | 26,000 | 28,000 | ||||||
Security Gains (net of losses) | 184,000 | - | ||||||
Total Other Income | 291,000 | 119,000 | ||||||
Operating Expense: | ||||||||
Employee Compensation and Benefits | 1,215,000 | 1,090,000 | ||||||
Occupancy and Equipment | 325,000 | 354,000 | ||||||
Professional Fees | 178,000 | 140,000 | ||||||
Marketing and Public Relations | 78,000 | 92,000 | ||||||
Data Processing Expense | 123,000 | 124,000 | ||||||
Other General and Administrative Expenses | 231,000 | 228,000 | ||||||
Total Operating Expense | 2,150,000 | 2,028,000 | ||||||
Income Before Taxes | 355,000 | 95,000 | ||||||
Provision for Income Taxes | 85,000 | 36,000 | ||||||
Net Income | $ | 270,000 | $ | 59,000 | ||||
Net Income per Basic Share | $ | 0.12 | $ | 0.03 | ||||
Net Income per Diluted Share | $ | 0.12 | $ | 0.03 | ||||
Weighted Average Shares - Basic | 2,283,000 | 2,283,000 | ||||||
Weighted Average Shares - Diluted | 2,283,000 | 2,313,000 |
See Notes to Consolidated Financial Statements
2
CNB FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2008 and 2007
(Unaudited)
Common Stock | ||||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) net of taxes | Total | |||||||||||||||||||
Balance, December 31, 2007 | 2,283,000 | $ | 2,283,000 | $ | 20,291,000 | $ | (1,754,000 | ) | $ | 333,000 | $ | 21,153,000 | ||||||||||||
Net Income | 270,000 | 270,000 | ||||||||||||||||||||||
Other Comprehensive Income | ||||||||||||||||||||||||
Unrealized Gains on Securities Available-for-Sale, | 19,000 | 19,000 | ||||||||||||||||||||||
net of reclassification for $184,000 realized gain and deferred taxes | ||||||||||||||||||||||||
Total Comprehensive Income | 289,000 | |||||||||||||||||||||||
Share-based Compensation | 41,000 | 41,000 | ||||||||||||||||||||||
Balance, March 31, 2008 | 2,283,000 | $ | 2,283,000 | $ | 20,332,000 | $ | (1,484,000 | ) | $ | 352,000 | $ | 21,483,000 | ||||||||||||
Balance, December 31, 2006 | 2,283,000 | $ | 2,283,000 | $ | 20,154,000 | $ | (2,151,000 | ) | $ | (115,000 | ) | $ | 20,171,000 | |||||||||||
Net Income | 59,000 | 59,000 | ||||||||||||||||||||||
Other Comprehensive Income | ||||||||||||||||||||||||
Unrealized Gains on Securities Available-for-Sale, | ||||||||||||||||||||||||
net of Deferred Taxes | 144,000 | 144,000 | ||||||||||||||||||||||
Total Comprehensive Income | 203,000 | |||||||||||||||||||||||
Share-based Compensation | 39,000 | 39,000 | ||||||||||||||||||||||
Balance, March 31, 2007 | 2,283,000 | $ | 2,283,000 | $ | 20,193,000 | $ | (2,092,000 | ) | $ | 29,000 | $ | 20,413,000 |
See Notes to Consolidated Financial Statements
3
CNB FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2008 and 2007
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Income | $ | 270,000 | $ | 59,000 | ||||
Adjustments to reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||
Share-based Compensation | 41,000 | 39,000 | ||||||
Provision for Loan Losses | 100,000 | 30,000 | ||||||
Gains on sale of securities Available-for-Sale | (184,000 | ) | - | |||||
Decrease (Increase) in Net Deferred Loan Costs | (1,000 | ) | 4,000 | |||||
Depreciation, Amortization of Premiums and Accretion of Discounts on Securities | 58,000 | 80,000 | ||||||
Increase in Accrued Interest Receivable | (32,000 | ) | (123,000 | ) | ||||
Increase in Other Assets | (44,000 | ) | (53,000 | ) | ||||
Increase (Decrease) in Accrued Expenses and Other Liabilities | 7,000 | (237,000 | ) | |||||
Net Cash Provided (Used) in Operating Activities | 215,000 | (201,000 | ) | |||||
Cash Flows from Investing Activities: | ||||||||
Purchase of Investment Securities Available-for-Sale | (7,001,000 | ) | - | |||||
Principal Payments on Mortgage Backed Securities (CMOs) | 1,436,000 | 1,473,000 | ||||||
Proceeds from Maturity of Investment Securities Held-to-Maturity | - | 2,000,000 | ||||||
Proceeds from Maturity (Call) of Investment Securities Available-for-Sale | 6,789,000 | - | ||||||
Purchase of Federal Reserve Stock, FHLBB Stock and other bonds | (25,000 | ) | (18,000 | ) | ||||
Loan Originations, net of Principal Repayments | (4,071,000 | ) | (6,777,000 | ) | ||||
Purchases of Premises and Equipment | (5,000 | ) | (147,000 | ) | ||||
Net Cash Used in Investing Activities | (2,877,000 | ) | (3,469,000 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Decrease in Deposits | (7,288,000 | ) | (5,399,000 | ) | ||||
Advances from FHLBB | 12,000,000 | 46,000,000 | ||||||
Repayment of FHLBB Advances | (5,500,000 | ) | (37,000,000 | ) | ||||
Reduction of Federal Funds Purchased | - | (500,000 | ) | |||||
Increase (Decrease) of Securities Under Agreement to Repurchase | (15,000 | ) | 1,354,000 | |||||
Net Cash (Used) Provided by Financing Activities | (803,000 | ) | 4,455,000 | |||||
Net Change in Cash and Cash Equivalents | (3,465,000 | ) | 785,000 | |||||
Cash and Cash Equivalents, Beginning of the Period | 8,825,000 | 6,736,000 | ||||||
Cash and Cash Equivalents, End of the Period | $ | 5,360,000 | $ | 7,521,000 |
See Notes to Consolidated Financial Statements
4
CNB FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. | ORGANIZATION |
CNB Financial Corp. (the “Company”) is a bank holding company. Its wholly-owned subsidiary Commonwealth National Bank, N.A. (the “Bank”) is a nationally chartered bank operating primarily in Worcester County, Massachusetts. The Bank operates out of its main office at 33 Waldo Street, Worcester, Massachusetts and has branch offices at One West Boylston Street, Worcester, Massachusetts, 564 Main Street, Shrewsbury, Massachusetts, 701 Church Street, Northbridge, Massachusetts, 1393 Grafton Street, Worcester, Massachusetts and 25A West Boylston Street, West Boylston, Massachusetts. The Bank is subject to competition from other financial institutions, including commercial banks, savings banks, credit unions and mortgage banking companies. The Company is subject to the regulations of, and periodic examinations by, the Federal Reserve Board. The Bank is also subject to the regulations of, and periodic examinations by, the Office of the Comptroller of the Currency (“the OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”). The FDIC insures the Bank’s deposits for amounts up to $100,000 and amounts up to $250,000 for deposit retirement accounts.
Company Formation
The Company was formed on December 16, 2005 upon the reorganization of the Bank into a bank holding company structure. The Bank was organized as a national bank under the National Bank Act and received its charter to operate as a national bank from the OCC effective November 19, 2001.
In connection with the reorganization, the holders of common stock of the Bank received one share of common stock of the Company in exchange for each share of common stock of the Bank. Outstanding certificates representing shares of common stock of the Bank now represent shares of the common stock of the Company and such certificates may, but need not, be exchanged by the holders for new certificates for the appropriate number of shares of the Company. The par value of the Company’s common stock is $1 per share, and the par value of the Bank’s common stock is $5 per share. The holders of Bank options and warrants immediately prior to the reorganization received one option or warrant to acquire shares of the common stock of the Company for each Bank option or warrant then held by them on the same terms and conditions.
2. | BASIS OF PRESENTATION |
In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2008, the results of operations and cash flows for the three-month periods ended March 31, 2008 and 2007. These statements should be read in conjunction with the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007. The consolidated financial statements include the accounts of the Company and the Bank. All material inter-company transactions have been eliminated in consolidation. The Company, as a separately incorporated bank holding company, has no significant operations other than serving as the sole stockholder of the Bank. Its commitments and debt service requirement, at March 31, 2008, consist of subordinated debentures, including accrued interest amounting to $7.8 million issued to the unconsolidated subsidiary, Commonwealth National Bank Statutory Trust I. Commonwealth National Bank Statutory Trust I is an unconsolidated special purpose subsidiary of the Company that was formed to facilitate the issuance of trust preferred securities to the public. The Company has one reportable operating segment. The results of operations for the three-month period ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year.
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred, through a provision for loan losses charged to earnings. Losses are charged against the allowance when management believes the collectibility of principal is doubtful. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is based on management’s estimate of the amount required to reflect the risks in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date. There are inherent uncertainties with respect to the final outcome of loans and nonperforming loans. Because of these inherent uncertainties, actual losses may differ from the amounts reflected in these consolidated financial statements. Factors considered in evaluating the adequacy of the allowance include previous loss experience, current economic conditions and its effect on borrowers, the performance of individual loans in relation to contract term, industry peer standards and estimated fair values of underlying collateral.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.
Key elements of the above estimates, including assumptions used in independent appraisals, are dependent upon the economic conditions prevailing at the time of the estimates. Accordingly, uncertainty exists as to the final outcome of certain of the valuation judgments as a result of economic conditions in the Company’s lending areas. The inherent uncertainties in the assumptions relative to projected sales prices or rental rates may result in the ultimate realization of amounts on certain loans that are significantly different from the amounts reflected in these consolidated financial statements
5
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. All loans are individually evaluated for impairment, except for smaller balance homogeneous residential and consumer loans. These loans are evaluated in the aggregate, according to the Company’s normal loan review process, which reviews overall credit evaluation, non-accrual status and payment experience. Loans identified as impaired are further evaluated to determine the estimated extent of impairment.
Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral-dependent. For collateral-dependent loans, the extent of impairment is the shortfall, if any, between the collateral value, less costs to dispose of such collateral, and the carrying value of the loan. Loans on non-accrual status and restructured troubled debts are considered to be impaired.
Income Taxes
The Company records income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary difference between the accounting bases and the tax bases of the Company’s assets and liabilities. Deferred taxes are measured using enacted tax rates that are expected to be in effect when the amounts related to such temporary differences are realized or settled. A valuation allowance is established against deferred tax assets when, based upon the available evidence, management believes it is more likely than not that some or all of the deferred tax assets will not be realized. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.
The Company and its subsidiaries file a consolidated federal income tax return in the United States and separate income tax returns in Massachusetts. The Company’s federal and state income tax returns filed for 2003 and prior are no longer subject to examination by the federal or state jurisdictions.
4. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available-for-sale and held-to-maturity, with gross unrealized gains and losses, at March 31, 2008 are as follows:
Amortized cost | Unrealized | Fair Value | ||||||||||||||
Available-for-sale: | Gains | Losses | ||||||||||||||
Government Sponsored Enterprises Due within one year | $ | 3,164,000 | $ | 22,000 | $ | - | $ | 3,186,000 | ||||||||
Due after one year through five years | 3,000,000 | 32,000 | - | 3,032,000 | ||||||||||||
Due after five years through ten years | 944,000 | 60,000 | - | 1,004,000 | ||||||||||||
Due after ten years | 3,879,000 | 145,000 | - | 4,024,000 | ||||||||||||
Mortgage-backed Securities (including CMOs) | ||||||||||||||||
Due within one year | 1,605,000 | 11,000 | (3,000 | ) | 1,613,000 | |||||||||||
Due after five years through ten years | 2,732,000 | 17,000 | - | 2,749,000 | ||||||||||||
Due after ten years | 25,943,000 | 663,000 | (319,000 | ) | 26,287,000 | |||||||||||
Equity Securities | ||||||||||||||||
Due after one year through five years | 3,018,000 | - | (86,000 | ) | 2,932,000 | |||||||||||
$ | 44,285,000 | $ | 950,000 | $ | (408,000 | ) | $ | 44,827,000 | ||||||||
Held-to-maturity: | ||||||||||||||||
Government Sponsored Enterprises | ||||||||||||||||
Due within one year | $ | 2,000,000 | $ | 4,000 | $ | - | $ | 2,004,000 | ||||||||
Mortgage-backed Securities(including CMOs) | ||||||||||||||||
Due after five years through ten years | 2,862,000 | 27,000 | - | 2,889,000 | ||||||||||||
Due after ten years | 1,149,000 | 7,000 | - | 1,156,000 | ||||||||||||
Municipals | ||||||||||||||||
Due after five years through ten years | 330,000 | 5,000 | - | 335,000 | ||||||||||||
Due after ten years | 5,043,000 | 55,000 | (26,000 | ) | 5,072,000 | |||||||||||
Other Bonds Due after one year through five years | 100,000 | - | - | 100,000 | ||||||||||||
$ | 11,484,000 | $ | 98,000 | (26,000 | ) | $ | 11,556,000 | |||||||||
Total Investment Securities | $ | 55,769,000 | $ | 1,048,000 | $ | (434,000 | ) | $ | 56,383,000 |
\
6
The amortized cost and fair value of investment securities available-for-sale and held-to-maturity, with gross unrealized gains and losses, at December 31, 2007 are as follows:
Amortized cost | Unrealized | Fair Value | ||||||||||||||
Available-for-sale: | Gains | Losses | ||||||||||||||
Government Sponsored Enterprises Due within one year | $ | 4,999,000 | $ | - | $ | (9,000 | ) | $ | 4,990,000 | |||||||
Due after one year through five years | 4,164,000 | 18,000 | (7,000 | ) | 4,175,000 | |||||||||||
Due after five years through ten years | 941,000 | 55,000 | - | 996,000 | ||||||||||||
Due after ten years | 3,876,000 | 131,000 | - | 4,007,000 | ||||||||||||
Mortgage-backed Securities (including CMOs) | ||||||||||||||||
Due within one year | 1,729,000 | 12,000 | (3,000 | ) | 1,738,000 | |||||||||||
Due after five years through ten years | 2,911,000 | (45,000 | ) | 2,866,000 | ||||||||||||
Due after ten years | 26,476,000 | 476,000 | (127,000 | ) | 26,825,000 | |||||||||||
$ | 45,096,000 | $ | 692,000 | $ | (191,000 | ) | $ | 45,597,000 | ||||||||
Held-to-maturity: | ||||||||||||||||
Government Sponsored Enterprises | ||||||||||||||||
Due within one year | $ | 2,000,000 | $ | - | $ | (3,000 | ) | $ | 1,997,000 | |||||||
Mortgage-backed Securities(including CMOs) | ||||||||||||||||
Due after five years through ten years | 3,017,000 | 15,000 | (7,000 | ) | 3,025,000 | |||||||||||
Due after ten years | 1,197,000 | - | (7,000 | ) | 1,190,000 | |||||||||||
Municipals | ||||||||||||||||
Due after five years through ten years | 330,000 | 3,000 | - | 333,000 | ||||||||||||
Due after ten years | 5,043,000 | 42,000 | (10,000 | ) | 5,075,000 | |||||||||||
Other Bonds Due after one year through five years | 100,000 | - | - | 100,000 | ||||||||||||
$ | 11,687,000 | $ | 60,000 | (27,000 | ) | $ | 11,720,000 | |||||||||
Total Investment Securities | $ | 56,783,000 | $ | 752,000 | $ | (218,000 | ) | $ | 57,317,000 |
5. | LOANS |
Major classifications of loans at March 31, 2008 and December 31, 2007 follow:
March 31 | December 31, | |||||||
2008 | 2007 | |||||||
Commercial and Industrial | $ | 57,619,000 | $ | 54,987,000 | ||||
Commercial Real Estate | 129,595,000 | 128,283,000 | ||||||
Residential Real Estate | 21,894,000 | 21,610,000 | ||||||
Consumer | 12,076,000 | 12,441,000 | ||||||
Total loans | 221,184,000 | 217,321,000 | ||||||
Less: Allowance for loan losses | (2,735,000 | ) | (2,844,000 | ) | ||||
Total loans, net | $ | 218,449,000 | $ | 214,477,000 |
The Bank’s lending activities are conducted principally in Worcester County, Massachusetts. The Bank originates commercial real estate loans, commercial loans, commercial construction loans, commercial lines of credit, consumer loans and residential real estate loans. At March 31, 2008, no loans accruing interest were past due 90 days or more and $1.7 million of loans were on non-accrual status. Net deferred costs totaled $326,000 and $320,000 at March 31, 2008 and December 31, 2007, respectively.
7
A summary of changes in the allowance for loan losses for the three-month periods ended March 31, 2008 and 2007 follows:
2008 | 2007 | |||||||
Balance as of December 31 | $ | 2,844,000 | $ | 2,807,000 | ||||
Provision for loan losses | 100,000 | 30,000 | ||||||
Recoveries | 1,000 | 6,000 | ||||||
Less: Loans charged-off | 210,000 | - | ||||||
Balance as of March 31, | $ | 2,735,000 | $ | 2,843,000 |
6. | STOCK-BASED PLANS |
Stock Option Plan
On November 6, 2001, the shareholders’ voted to approve the Bank’s 2001 Stock Option Plan (the “Plan”) for employees and directors of the Bank. The Compensation Committee of the Board of Directors administers the Plan (as amended on May 19, 2005 and March 22, 2007), which has authorized 400,000 shares for grant. Both incentive stock options and non-qualified stock options may be granted under the Plan. The authorization of grants, the determination of number of shares to be granted, the exercise date and the option price of each award will be determined by the Compensation Committee of the Board of Directors on the date of grant. The options vest annually at a rate of 25% over a four-year period and will expire on the tenth anniversary of the grant date.
Upon the reorganization of the Bank into a holding company structure, the Plan was assumed and restated by the Company on the same terms and conditions as the Bank’s Plan. All shares of common stock of the Bank under the Plan which remained available on the date of reorganization for issuance of options were converted into the same number of shares of common stock of the Company and are available for future option grants made by the Company. Any options thereafter granted pursuant to the Plan shall be options granted by the Company and shall relate to the common stock of the Company. The following table depicts the average of the assumptions that were used to estimate the fair value of options that remained outstanding at March 31, 2008. There were no stock options, or stock awards, granted during the quarter ended March 31, 2008.
Dividend yield | 2.75% | |
Expected volatility | 35.00% | |
Risk free interest rate | 3.78% | |
Expected lives | 6.0 years |
7. WEIGHTED AVERAGE SHARES – BASIC AND DILUTED
A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations for the three month periods ended March 31, 2008 and 2007 is presented below:
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Weighted-average shares outstanding: | ||||||||
Weighted-average shares outstanding—Basic | 2,283,000 | 2,283,000 | ||||||
Dilutive securities | - | 29,000 | ||||||
Weighted-average shares outstanding—Diluted | 2,283,000 | 2,312,000 | ||||||
Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Options with an exercise price in excess of the average market value of the Company’s common stock during the period have been excluded from the calculation as their effect would be antidilutive. For the three months ended March 31, 2008 and 2007, options and warrants outstanding totaling 380,000 and 226,000 shares, respectively, were excluded from the calculations, as their effect would have been antidilutive.
8
8. LOAN COMMITMENTS
Financial instruments with off-balance-sheet risk at March 31, 2008 follow:
Commitments whose contract amounts represent credit risk–
Commitments to originate loans | $ 4,265,000 |
Unadvanced Loan Proceeds | 14,246,000 |
Unused lines of credit | 15,802,000 |
Secured commercial lines of credit | 28,666,000 |
Letters of Credit | 2,220,000 |
9. | FAIR VALUES OF ASSETS AND LIABILITIES |
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”), Fair Value Measurements, which provides a framework for measuring fair value under generally accepted accounting principles.
The Company also adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company did not elect fair value treatment for any financial assets or liabilities upon adoption.
In accordance with SFAS 157, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For example, Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments or mortgage loans held for sale, for which the fair value is based on what the securitization market is currently offering for mortgage loans with similar characteristics.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, residential mortgage servicing rights, and long-term derivative contracts.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Asset/Liabilities | ||||||||||||||||
Level 1 | Level 2 | Level 3 | at Fair Value | |||||||||||||
Assets | ||||||||||||||||
Securities available for sale | $ | 2,932,000 | $ | 41,895,000 | $ | - | $ | 44,827,000 | ||||||||
Total Assets | $ | 2,932,000 | $ | 41,895,000 | $ | - | $ | 44,827,000 |
Also, the Company may be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of March 31, 2008.
Quarter ended March 31, 2008 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total Gains/(Losses) | |||||||||||||
Assets | ||||||||||||||||
Impaired Loans | $ | - | $ | - | $ | 271,000 | $ | 44,000 | ||||||||
Total Assets | $ | - | $ | - | $ | 271,000 | $ | 44,000 |
9
The amount of loans represents the carrying value and related write-downs of impaired loans for which adjustments are based on the estimated value of the collateral. Determination of the fair value of level 3 items in the above table included management’s consideration of the value of loan collateral such as accounts receivable (discounted for the probability of collection), and equipment, (estimating the equipment value at the time of a potential sale) plus the value of underlying personal guarantees of principals of the borrowing entities. During the quarter ended March 31, 2008, $481,000 in loans carried at fair value on a nonrecurring basis were written-down by a $210,000 charge to the allowance for loan losses to bring their fair value to $271,000.
10. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for Prompt Corrective Action (“PCA”), the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of March 31, 2008, the Company and the Bank met all capital adequacy requirements to which they are subject.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). The minimum ratios necessary for the Bank to be categorized as “Well Capitalized” are also reflected in the table below. At March 31, 2008, the Bank was categorized as “Well Capitalized” as defined by federal regulations. There are no conditions or events since the last filing with the FDIC that management believes have changed the Bank’s category.
(Dollars in Thousands) | Company | Bank | Minimum Capital Requirements | For Bank to be “Well Capitalized” under PCA provisions | |||||
Amount | Ratio | Amount | Ratio | ||||||
Leverage Ratio | $27,655 | 9.59% | $25,491 | 8.85% | 4.00% | 5.00% | |||
Tier 1 risk-based ratio | 27,655 | 11.54% | 25,491 | 10.65% | 4.00% | 6.00% | |||
Total risk-based ratio | 30,451 | 12.70% | 28,287 | 11.82% | 8.00% | 10.00% |
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ITEM 2- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CNB Financial Corp. (the “Company”) is the parent of Commonwealth National Bank, N.A. (the “Bank”), a national bank with six full-service branches located in the greater Worcester, Massachusetts area. The Company reports its financial results on a consolidated basis with the Bank.
The following analysis of financial condition and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto appearing in Part I, Item 1 of this report and in the Annual Report on Form 10-KSB for the year ended December 31, 2007.
General
The operating results of the Company depend primarily upon net interest income, which is the difference between interest income on interest-earning assets, primarily loans and investment securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. Net earnings are also affected by other income and operating expense, such as employee compensation and benefits, occupancy and equipment expense, and other operating expenses.
Forward-looking Statements Safe Harbor Statement
This report may contain forward-looking statements that are subject to numerous assumptions, risks and uncertainties. These forward looking statements are generally identified by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Statements pertaining to future periods are subject to numerous uncertainties because of the possibility of changes in underlying factors and assumptions. Actual results could differ materially from those contained in or implied by such forward-looking statements for a variety of factors including: changes in interest rates; changes in the economic scenario from the current anticipated scenario which could materially change anticipated credit quality trends and the ability to generate loans; significant delay in or inability to execute strategic initiatives designed to grow revenues and/or control expenses; competition; and changes in accounting, tax or regulatory practices or requirements. The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this report, in its Form 10-KSB for the year ended December 31, 2007, including in the Risk Factors section of that report or in its other filings with the SEC. Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by the Company or on its behalf. The Company assumes no obligation to update any forward-looking statements.
Significant Accounting Policies
Disclosure of the Company's significant accounting policies is included in Note 2 to the consolidated financial statements of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007 and Note 3 to the consolidated financial statements of this Form 10-Q. Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses. Additional information is contained on pages 14 and 15 of this Form 10-Q regarding the provision and allowance for loan losses.
Comparison of Operating Results for the Three Months Ended March 31, 2008 and 2007
Overview
The Company recorded net income of $270,000 for the three-month period ended March 31, 2008 compared to $59,000 for the same quarter of 2007. Diluted earnings per diluted share were $0.12 and $0.03 for the first quarters of 2008 and 2007, respectively. The increase in net income was predominantly due to an increase in net interest income (14%, or $280,000, year-over-year increase for the quarterly period) primarily caused by the change in the interest rate environment in the 2008 period. The Company also recorded a gain on the sale of available-for-sale investments during the 2008 quarter which amounted to $184,000 on a pre-tax basis ($119,000 after-tax), compared to zero gains during the 2007 period. Partially offsetting these increases were a $12,000, or 10%, reduction of fee related income, a $70,000 increase in the provision for loan losses and a $122,000, or 6%, increase in operating expenses.
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Analysis of Net Interest Income
Net interest income is the difference between the income the Company earns on interest-earning assets such as loans and investments and the interest the Company pays for its deposits and borrowed funds. As the Company’s primary source of earnings, net interest income will fluctuate with interest rate movements. To lessen the impact of changes in interest rates, the Company endeavors to structure the balance sheet so that there will be regular opportunities to change the interest rates on (or “reprice”) many of the interest-earning assets in order to match the variability of interest rates paid on the Company’s deposits and other interest-bearing liabilities. Imbalance among interest-earning assets and interest-bearing liabilities at any point in time constitutes interest rate risk.
Net interest income equaled $2,314,000 for the three-month period ended March 31, 2008 compared to $2,034,000 for the three-month period ended March 31, 2007, an increase of $280,000 or 14%. The following table provides the average balances of the major balance sheet categories that generate interest income or interest expense and the resulting asset yields or rate paid for the three-month period ended March 31, 2008 compared to the three months ended March 31, 2007. The difference between asset yields and the rate paid equals the net interest spread. The difference between interest income and interest expense equals net interest income, which is divided into the average balance of interest-earning assets to arrive at the net interest margin. The total dollar amount of interest income from assets and the subsequent yields are calculated on a taxable equivalent basis, using a federal tax rate of 34%.
12
Distribution of Assets, Liabilities and Stockholders’ Equity Yields and Rates
For the Three Months Ended March 31, 2008 and 2007
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
(Dollars in Thousands) | March 31, 2008 | March 31, 2007 | ||||||||||||||||||||||
(Fully Taxable Equivalent) | Average Balance | Interest Income and Expense (Taxable Equivalent) | Average Yield/Rate | Average Balance | Interest Income and Expense (Taxable Equivalent) | Average Yield/Rate | ||||||||||||||||||
INTEREST EARNING ASSETS | ||||||||||||||||||||||||
Total Loans | $ | 219,749 | $ | 3,754 | 6.87 | % | $ | 203,918 | $ | 3,753 | 7.46 | % | ||||||||||||
Investments, Fed Funds and Int. Bearing Balances | 62,143 | 879 | 5.69 | % | 70,170 | 882 | 5.10 | % | ||||||||||||||||
Total Interest Earning Assets | 281,892 | 4,633 | 6.61 | % | 274,088 | 4,635 | 6.86 | % | ||||||||||||||||
Allowance for Loan Losses | (2,836 | ) | (2,814 | ) | ||||||||||||||||||||
Cash and Due from Banks | 4,412 | 4,995 | ||||||||||||||||||||||
Premises and Equipment | 2,350 | 2,544 | ||||||||||||||||||||||
Other Assets | 2,643 | 3,310 | ||||||||||||||||||||||
Total Assets | $ | 288,461 | $ | 282,123 | ||||||||||||||||||||
INTEREST BEARING LIABILITIES | ||||||||||||||||||||||||
Savings, NOW and Money Market Deposits | $ | 57,146 | $ | 278 | 1.96 | % | $ | 41,694 | $ | 191 | 1.86 | % | ||||||||||||
Time Deposits | 112,771 | 1,284 | 4.58 | % | 120,020 | 1,495 | 5.05 | % | ||||||||||||||||
Borrowed Funds | 59,762 | 599 | 4.03 | % | 64,841 | 761 | 4.76 | % | ||||||||||||||||
Subordinated Debentures | 7,500 | 123 | 6.49 | % | 7,500 | 135 | 7.20 | % | ||||||||||||||||
Total Interest Bearing Liabilities | 237,179 | 2,284 | 3.87 | % | 234,055 | 2,582 | 4.47 | % | ||||||||||||||||
Demand Deposits | 27,748 | 25,204 | ||||||||||||||||||||||
Total Deposits and Borrowed Funds | 264,927 | 2,284 | 3.47 | % | 259,259 | 2,582 | 4.04 | % | ||||||||||||||||
Other Liabilities | 2,233 | 2,647 | ||||||||||||||||||||||
Stockholders' Equity | 21,301 | 20,217 | ||||||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 288,461 | $ | 282,123 | ||||||||||||||||||||
Interest Rate Spread | 3.14 | % | 2.82 | % | ||||||||||||||||||||
Net Interest Income (tax equivalent basis) | $ | 2,349 | $ | 2,053 | ||||||||||||||||||||
Net Interest Margin | 3.35 | % | 3.04 | % | ||||||||||||||||||||
Less: adjustment of tax exempt income | (35 | ) | (19 | ) | ||||||||||||||||||||
Net Interest Income | $ | 2,314 | $ | 2,034 | ||||||||||||||||||||
Earning assets averaged $281.9 million during the three-month period March 31, 2008, a 3% increase compared to the same period of 2007. Total deposits and borrowed funds averaged $264.9 million during the three-month period ended March 31, 2008, a 2% increase since the same period of 2007. Asset yields decreased by 25 basis points and the cost of deposits and borrowed funds declined by 57 basis points causing a 32 basis point improvement in the net interest spread. The Company’s net interest margin climbed to 3.35% for the three months ended March 31, 2008, from the year earlier period’s 3.04%, as a result of the lower and more normally sloped interest rate environment in the 2008 period versus the environment during the 2007 period, which was mostly characterized by a flat or inverted yield curve and higher market rates.
The average balance of loans grew by 8% compared to the first quarter of 2007. A portion of this growth was funded by reducing the level of the lower-yielding investment securities portfolio. The yield on the loan portfolio declined by 59 basis points from period to period as the portfolio reacted to the lower interest rate environment (the prime rate ended the first quarter of 2008 300 basis points lower than its level during the first quarter of 2007). The growth in the average balance of loans of $15.8 million, or 8%, was concentrated primarily in commercial and residential real estate loans (growth of 11%, or $13.2 million, and 42%, or $6.5 million, respectively). The average balance of commercial loans declined $4.9 million, or 8%, period to period, averaging $55.3 million during the quarter. The average balance of consumer loans declined by $474,000, or 4%, and averaged $12.2 million.
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The total cost of deposits and borrowed funds declined by 57 basis points comparing the three-month period of 2008 to the same period of 2007 as a result of lower market interest rates and a change in the composition of the Company’s deposit and borrowed funds portfolio. The rate on time deposits decreased by 47 basis points as maturing certificates of deposit, originally written at higher interest rates, were replaced at lower market rates. Not all maturing time deposits were replaced, causing the average balance to decline by $7.2 million, or 6%, compared to the first quarter of 2007. After the first quarter of 2007, the Company introduced a new high rate savings account designed to attract funds at a lower rate than that paid on time deposits. The growth of this new product caused the average balance of savings, NOW and money market accounts to increase by $15.5 million, or 37%, compared to the first quarter of 2007. The average cost of these categories increased by 10 basis points. The increased balance carried in the new product offset the balance declines in the certificates of deposit category and allowed for the reduction in the average cost of deposits and in the level of borrowed funds. The cost of borrowed funds declined by 73 basis points and the average balance declined by $5 million, or 8%, from the 2007 period to the 2008 period. The average balance of subordinated debentures remained unchanged at $7.5 million and carried an average rate of 6.49% during the first quarter of 2008 compared to a rate of 7.20% during the corresponding quarter of 2007. While events of the past six months have caused the yield curve to return to a more normal upward slope, we expect management of the net interest margin to remain a challenge.
Provision for Loan Losses
The Bank’s provision for loan losses was $100,000 for the first three months of 2008 compared to a $30,000 provision for the same period of 2007. Management, based upon known circumstances and conditions on individual loans, industry trends, regional and national economic conditions and estimates of the potential for losses, determines the necessary level of the allowance for loan losses. At March 31, 2008, consideration of these factors and the reduction in the allowance for loan losses caused by the $210,000 loan charge-off caused management to determine the allowance should be increased by $100,000.
Other Income
Other income (non-interest income) consists of service charges on deposits and other fee based services, including loan document preparation fees and mortgage referral fees. For the first three months of 2008, other income (excluding security gains) decreased to $107,000, compared to $119,000 for the same period of 2007. Service charges on deposits for the three-month period of 2008 increased by 4%, or $2,000, compared to the same period of 2007 as a result of growth in fee generating deposit accounts. Loan referral fees declined for the three months ended March 31, 2008 as a result of significantly reduced activity in mortgage lending.
Additionally, during the first quarter of 2008 the Company recorded a $184,000 pre-tax gain on the sale of available-for-sale investments. No investment sales were recorded during the corresponding period of 2007. The gain recorded during the 2008 period was the result of the sale of $3.8 million of mortgage-backed securities which were sold to facilitate the repositioning of the balance sheet in response to the recent declines in the interest rate environment.
Operating Expense
Operating expense, alternatively known as non-interest expense, totaled $2.2 million for the first three months of 2008, an increase of 6%, or $122,000, compared to the same period of 2007. Employee compensation and benefits expense comprised 57% of non-interest expense. This category increased by $125,000, or 11%, to equal $1.2 million due to merit increases, accruals for incentive payments (which were not accrued in the first quarter of 2007) and increases in the cost of employee benefit programs. Occupancy and equipment expenses equaled $325,000 for the period, a decrease of 8% compared to the 2007 period as the Company recorded lower costs for weather related expenses and depreciation. Professional fees totaled $178,000, a $38,000, or 27%, increase since the same period of 2007. Included in professional fees were higher costs for consulting regarding compensation and benefit matters, Sarbanes-Oxley compliance and legal fees. Marketing and public relations fees declined by $14,000, or 15%, compared to the prior year period to $78,000 as a result of fewer advertising placements in the local print, radio and outdoor media and a greater reliance upon more effective direct marketing.
14
Income Taxes
For the three month period ended March 31, 2008, the Company recorded income tax expense of $85,000, equivalent to an effective rate of 24%. During the same period of 2007, the Company recorded income tax expense of $36,000, equivalent to an effective rate of 38%. The improvement in the effective tax rate was attributable to an increased level of tax advantaged income (primarily generated by municipal securities and preferred corporate stock) as a percentage of taxable income.
Comparison of Financial Condition at March 31, 2008 and December 31, 2007
Overview
Total assets were $289.0 million at March 31, 2008, compared to $289.5 million at December 31, 2007, a decrease of $466,000 or approximately 0.2%. Although total assets are essentially unchanged since year-end 2007, the Company converted cash equivalent balances into loan portfolio growth during the first quarter of 2008.
Loans
The loan portfolio's increase of $3.9 million (or 2%) since December 31, 2007 was primarily due to a 5% or $2.6 million growth in commercial and industrial (C+I) loans, a $1.3 million, or 1%, growth in commercial real estate and a $284,000, or 1%, increase in residential real estate loans. The growth in commercial and industrial loans, commercial real estate and residential real estate loans was primarily the result of new customer relationships acquired through ongoing business development efforts. Consumer loans declined by $365000, or 3%, as the outstanding balances of home equity loans reduced.
The allowance for loan losses declined by $109,000 during the quarter and equaled $2.7 million at March 31, 2008 Net charge-offs of $210,000, offset by a $100,000 provision for loan losses, were recorded during the quarter. The $210,000 of net charge-offs consisted of the write-down of one loan. During the same period of 2007, no loans were charged-off, $6,000 in recoveries were recorded and $30,000 was provided to the reserve. At March 31, 2008, the allowance for loan losses equaled 1.24% of total loans versus 1.31% at December 31, 2007. Increased non-accrual loans caused non-performing loans at March 31, 2008 to equal $1.7 million (0.8% of loans) compared to $1.5 million (0.7% of loans) at December 31, 2007. Management, based upon known circumstances and conditions, determines the level of the allowance for loan losses. In addition to assessing risk on individual loans, the Company considers industry trends and regional and national economic conditions. In addition to the allowance for loan losses, the Company maintains a separate liability account as a reserve for probable losses on currently unfunded loan commitments. At March 31, 2008, this reserve equaled $61,000.
Investment Securities
Investment securities available-for-sale are carried at estimated fair value and totaled $44.8 million at March 31, 2008, a decrease of $770,000, or 2%, from December 31, 2007 due to the sale of two mortgage-backed securities investments, subsequent reinvestment of the proceeds, normal amortization and the call of one investment prior to its scheduled maturity. Investment securities classified as held-to-maturity were $11.5 million at March 31, 2008, a decrease of $203,000, or 2%, from December 31, 2007 as a result of normal amortization. The net positive cash flows generated by the investment portfolio were redeployed to support the growth of the higher-yielding loan portfolio and to fund the net reduction in the balance of deposits and borrowed funds.
Short-term Investments
Cash and cash equivalents declined by $3.5 million since December 31, 2007 and equaled $5.4 million at March 31, 2008. The decline was primarily the result of reductions in overnight federal funds sold, which equaled $125,000 at March 31, 2008 compared to $4.7 million at December 31, 2007. The reduction in cash and cash equivalents was also used to fund loan growth.
15
Deposits
Deposits, in conjunction with borrowed funds, are the Bank’s primary source of funds. Total deposits declined to $195.0 million at March 31, 2008, a $7.3 million (or 4%) decrease since December 31, 2007. The Company increased borrowed funds by $6.5 million during the quarter to offset this deposit outflow. The majority of the deposit decreases occurred in the interest-bearing transaction account category (a decrease of $4.2 million or 15%) and was concentrated primarily in the accounts of one particular corporate customer whose balances had been maintained at unusually high levels during the fourth quarter of 2007. Demand deposits followed a normal historical trend of first quarter reductions by decreasing 6% or $1.8 million from the year-end level. Certificates of deposit declined by $742,000, 0.7%, and savings accounts declined by $487,000, or 1%. A portion of the deposit decline is attributable to the re-pricing of all deposit categories in response to the significant change in the interest rate environment which occurred during the first quarter of 2008. By responding aggressively to this lower interest rate environment, the Company was able to significantly reduce the total cost of funds while suffering minimal loss of core deposit balances. To attract new core depositors, the Bank periodically conducts deposit promotion campaigns that are comprised of newspaper, radio and outdoor advertisements, competitive pricing and in-branch promotions. These programs continue to generate increases in customer relationships. Management believes that the new relationships that result from these marketing efforts provide valuable opportunities to cross sell other deposit and loan products and services, as well as build a solid base of core deposits.
Borrowed Funds
Borrowed funds include Federal Home Loan Bank advances, federal funds purchased, subordinated debentures and securities under agreement to repurchase. During the first three months of 2008, the aggregate of these items increased by $6.5 million or 10%. Advances from the Federal Home Loan Bank of Boston increased by $6.5 million as the Company was able to procure long-term funding at relatively low and advantageous interest rates.
Stockholders’ Equity
Stockholders’ equity at March 31, 2008 was $21.5 million, an increase of $330,000 from December 31, 2007. The increase was due to year-to-date earnings of $270,000, the $41,000 impact of the accounting treatment for share-based compensation and the $19,000 (net of taxes) increase in the market value of available-for sale investment securities that resulted from movements in market interest rates. The current level of net unrealized gains on available-for-sale investment securities is $352,000, net of taxes. Book value per basic and diluted share at March 31, 2008 was $9.41, compared to the $9.26 at December 31, 2007.
Liquidity and Capital Resources
Liquidity represents the Bank’s ability to generate adequate amounts of funds to meet its needs for cash. Specifically, liquidity ensures that adequate funds are available to fund loan demand, meet deposit withdrawals, maintain reserve requirements, pay operating expenses and satisfy other commitments. The Bank’s ability to maintain and increase deposits will serve as its primary source of liquidity. Secondary sources of liquidity are principal and interest payments on loans and scheduled maturities of the investment portfolio. In addition, the liquidity is supplemented through the use of borrowings. The Company maintains cash balances that are available to pay the interest expense associated with the subordinated debentures and to pay normal operating expenses. These cash balances are considered sufficient to provide adequate liquidity for the payment of these expenses until such time that the Bank is permitted to pay dividends to the Company.
The Company’s most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2008, cash and cash equivalents totaled $5.4 million, including overnight federal funds sold of $125,000. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $44.8 million at March 31, 2008. In addition, at March 31, 2008, the Company had the ability to borrow an additional $10.8 million from a combination of Federal Home Loan Bank of Boston advances and federal funds purchased.
At March 31, 2008, the Company had $18.5 million in loan commitments and unadvanced loan proceeds outstanding. In addition to commitments to originate loans, the Company had $44.5 million in unused and secured lines of credit. Certificates of deposit due within one year of March 31, 2008 totaled $101.8 million, or 52% of total deposits. If these deposits do not remain with the Company, the Company will be required to seek other sources of funds, including other certificates of deposit or other borrowed funds. Depending on market conditions, the Company may be required to pay higher rates on such deposits or other borrowings than the Company currently pays on its certificates of deposit. The Company believes, however, based on past experience that a significant portion of our certificates of deposit will remain with the Company. The Company has the ability to attract and retain deposits by adjusting the offered interest rates.
The primary investing activity of the Bank is the origination of loans to businesses and individuals. The primary financing activity of the Bank is accepting demand, savings and time deposits from businesses and individuals. Other sources of funds for the Bank are overnight borrowings from customers in the form of repurchase agreements, federal funds purchases and advances (borrowings) from the Federal Home Loan Bank of Boston.
The Bank anticipates that it will have sufficient funds available to meet commitments outstanding and to meet loan demand. In estimating uses of funds, cash requirements for expected loan originations and initial funding amounts of those loans for the forward looking 90-day period are constantly developed, reviewed and evaluated. Estimating the expected deposit trends for the ensuing 90-day period projects the primary source of funds. Expected changes in the interest rate environment are considered when estimating loan originations and pay-downs, as well as deposit flows. Mismatches between expected uses and sources of funds identify the need to adjust the level of the Bank’s investment portfolio or the level of borrowed funds.
16
Under applicable provisions of federal law, the Company and the Bank must meet specific quantitative capital requirements. As of March 31, 2008, the Company’s and the Bank’s Tier 1 Leverage Capital ratios were 9.59% and 8.85%, respectively. The Company’s Tier 1 and Total Risk Based Capital ratios were 11.54% and 12.70%, respectively. The Bank’s Tier 1 and Total Risk Based Capital ratios were 10.65% and 11.82%, respectively. These levels of capital place the Company and the Bank above the regulatory guidelines and requirements, which provides the opportunity to take advantage of business opportunities while ensuring that it has the resources to protect against risk inherent in its business. At March 31, 2008, the Company and the Bank were “well capitalized” as defined by federal regulations.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the three months ended March 31, 2008, the Company engaged in no off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.
ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk
This item is not applicable as the Company is a smaller reporting company.
ITEM 4T - Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as such term is defined in Rule 13a-15(c) promulgated under the Security Exchange Act of 1934, as amended(the “Exchange Act”). Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the fiscal quarter covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There have not been any changes in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that have materially affected, or which are reasonably likely to materially affect, the Company’s internal control over financial reporting.
17
PART II
Item 1 – Legal Proceedings
The Company is not involved in any pending legal proceedings. The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to its financial condition and results of operations.
Item 1A – Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-KSB for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. As of March 31, 2008, the risk factors of the Company have not changed materially from those reported in the Company’s Annual Report on Form 10-KSB. However, the risks described in our Annual Report on Form 10-KSB are not the only risks that we face. Additional risks and uncertainties are not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 – Defaults Upon Senior Securities
None
Item 4 – Submission of Matters to Vote of Security Holders
None
Item 5 – Other Information
None
Item 6 – Exhibits
Exhibit No. | Description |
3.1 | Articles of Association(1) |
3.2 | Bylaws(1) |
4.1 | Common Stock Certificate(2) |
(1) | Incorporated by reference in this document to the Form 8-K filed with the Securities and Exchange Commission on December 19, 2006. |
(2) | Incorporated by reference in this document to the Annual Report on Form 10-KSB for the year ended December 31, 2005. |
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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 CORP. | |
Date: May 13, 2008 | By: /s/ Charles R. Valade |
Charles R. Valade | |
President and Chief Executive Officer | |
Date: May 13, 2008 | By: /s/ William M. Mahoney |
William M. Mahoney | |
Treasurer & Chief Financial Officer |
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