UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2003 | |
| or | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _____________________ to _____________________ | |
Commission File Number 0-13396
CNB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
| Pennsylvania | 25-1450605 | |
|---|---|---|
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes x No o
The number of shares outstanding of the issuer’s common stock as of August 6, 2003:
COMMON STOCK: $1.00 PAR VALUE – 3,650,347 SHARES
1
INDEX
PART I.
FINANCIAL INFORMATION
| Sequential Page Number | ||
| ITEM 1. – Financial Statements (unaudited) | ||
| PAGE 3. | ||
| PAGE 4. | Consolidated Statements of Income - Quarter ending June 30, 2003 and 2002 | |
| PAGE 5. | Consolidated Statements of Income - Six months ending June 30, 2003 and 2002 | |
| PAGE 6. | ||
| PAGE 7. | Consolidated Statements of Cash Flows - Six months ending June 30, 2003 and 2002 | |
| PAGE 8. | Notes to Consolidated Financial Statements | |
| ITEM 2 – Management’s Discussion and Analysis | ||
| PAGE 11. | ||
| ITEM 3 – Quantitative and Qualitative Disclosures | ||
| PAGE 16. | Quantitative and Qualitative Disclosures About Market Risk | |
| ITEM 4 – Controls and Procedures | ||
| PAGE 16. | Controls and Procedures | |
PART II.
OTHER INFORMATION
| PAGE 17. | ITEM 1 Legal Proceedings |
| PAGE 17. | ITEM 2 Changes in Securities and Use of Proceeds |
| PAGE 17. | ITEM 3 Defaults Upon Senior Securities |
| PAGE 17. | ITEM 4 Submission of Matters for Security Holders Vote |
| PAGE 17. | ITEM 5 Other Information |
| PAGE 17. | ITEM 6 Exhibits and Reports on Form 8-K |
| PAGE 18. | Signatures |
2
CNB FINANCIAL CORPORATION
(Dollars in thousands)
| June 30, 2003 | Dec. 31, 2002 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Cash and due from banks | $ | 18,585 | $ | 16,748 | ||||
| Interest bearing deposits with other financial institutions | 27,892 | 5,779 | ||||||
| Total cash and cash equivalents | 46,477 | 22,527 | ||||||
| Securities available for sale | 176,956 | 185,025 | ||||||
| Loans held for sale | 3,256 | 3,924 | ||||||
| Loans and leases | 436,560 | 421,507 | ||||||
| Less: unearned discount | 704 | 1,143 | ||||||
| Less: allowance for loan losses | 5,779 | 5,036 | ||||||
| NET LOANS | 430,077 | 415,328 | ||||||
| FHLB and Federal Reserve Stock | 4,699 | 3,388 | ||||||
| Premises and equipment, net | 12,824 | 12,129 | ||||||
| Accrued interest receivable and other assets | 18,886 | 13,603 | ||||||
| Mortgage servicing rights | 480 | 512 | ||||||
| Goodwill | 10,821 | 10,821 | ||||||
| Intangible, net | 1,103 | 1,261 | ||||||
| TOTAL ASSETS | $ | 705,579 | $ | 668,518 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Non-interest bearing | $ | 63,151 | $ | 56,010 | ||||
| Interest bearing deposits | 515,842 | 489,127 | ||||||
| TOTAL DEPOSITS | 578,993 | 545,137 | ||||||
| Short-term borrowings | 2,000 | 2,000 | ||||||
| Federal Home Loan Bank advances | 40,000 | 40,000 | ||||||
| Accrued interest and other liabilities | 9,476 | 9,348 | ||||||
| Trust preferred securities | 10,000 | 10,000 | ||||||
| TOTAL LIABILITIES | 640,469 | 606,485 | ||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock $1.00 par value Authorized 10,000,000 shares Issued 3,693,500 shares | 3,694 | 3,694 | ||||||
| Additional paid in capital | 3,967 | 3,747 | ||||||
| Retained earnings | 54,302 | 52,065 | ||||||
| Treasury stock, at cost | (1,437 | ) | (974 | ) | ||||
| (44,532 shares for June 2003, and 46,245 for December 2002) | ||||||||
| Accumulated other comprehensive income | 4,584 | 3,501 | ||||||
| TOTAL SHAREHOLDERS’ EQUITY | 65,110 | 62,033 | ||||||
| TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY | $ | 705,579 | $ | 668,518 | ||||
3
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION
(Dollars in thousands, except per share data)
| THREE MONTHS ENDED JUNE 30, | |||||||
| 2003 | 2002 | ||||||
| INTEREST INCOME | |||||||
| Loans including fees | $ | 7,646 | $ | 7,529 | |||
| Deposits with other financial institutions | 53 | 96 | |||||
| Securities: | |||||||
| Taxable | 1,147 | 1,692 | |||||
| Tax-exempt | 563 | 551 | |||||
| Dividends | 105 | 99 | |||||
| TOTAL INTEREST AND DIVIDEND INCOME | 9,514 | 9,967 | |||||
| INTEREST EXPENSE | |||||||
| Deposits | 2,766 | 3,411 | |||||
| Borrowed funds | 629 | 516 | |||||
| TOTAL INTEREST EXPENSE | 3,395 | 3,927 | |||||
| Net interest and dividend income | 6,119 | 6,040 | |||||
| Provision for loan losses | 540 | 360 | |||||
| NET INTEREST INCOME AFTER PROVISION | 5,579 | 5,680 | |||||
| OTHER INCOME | |||||||
| Trust & asset management fees | 225 | 217 | |||||
| Service charges on deposit accounts | 866 | 855 | |||||
| Other service charges and fees | 135 | 127 | |||||
| Securities gains | 0 | 12 | |||||
| Gains on sale of loans | 216 | 44 | |||||
| Other income | 367 | 304 | |||||
| TOTAL OTHER INCOME | 1,809 | 1,559 | |||||
| OTHER EXPENSES | |||||||
| Salaries | 1,648 | 1,705 | |||||
| Employee benefits | 681 | 556 | |||||
| Net occupancy expense of premises | 601 | 575 | |||||
| Amortization of intangible | 126 | 108 | |||||
| Other | 1,317 | 1,356 | |||||
| TOTAL OTHER EXPENSES | 4,373 | 4,300 | |||||
| Income before income taxes | 3,015 | 2,939 | |||||
| Applicable income taxes | 731 | 774 | |||||
| NET INCOME | $ | 2,284 | $ | 2,165 | |||
| EARNINGS PER SHARE, BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING | |||||||
| Net income, basic | $ | 0.62 | $ | 0.60 | |||
| Net income, diluted | $ | 0.62 | $ | 0.59 | |||
| DIVIDENDS PER SHARE | |||||||
| Cash dividends per share | $ | 0.2 8 | $ | 0.25 | |||
4
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION
(Dollars in thousands, except per share data)
SIX MONTHS ENDED JUNE 30, | ||||||
2003 | 2002 | |||||
| INTEREST AND DIVIDEND INCOME | ||||||
| Loans including fees | $ | 15,242 | $ | 14,925 | ||
| Deposits with other financial institutions | 106 | 186 | ||||
| Securities: | ||||||
| Taxable | 2,430 | 3,295 | ||||
| Tax-exempt | 1,113 | 1,021 | ||||
| Dividends | 216 | 235 | ||||
| TOTAL INTEREST AND DIVIDEND INCOME | 19,107 | 19,662 | ||||
| INTEREST EXPENSE | ||||||
| Deposits | 5,536 | 6,950 | ||||
| Borrowed funds | 1,251 | 973 | ||||
| TOTAL INTEREST EXPENSE | 6,787 | 7,923 | ||||
| Net interest income | 12,320 | 11,739 | ||||
| Provision for loan losses | 1,080 | 720 | ||||
| NET INTEREST INCOME AFTER PROVISION | 11,240 | 11,019 | ||||
| OTHER INCOME | ||||||
| Trust & asset management fees | 444 | 460 | ||||
| Service charges on deposit accounts | 1,616 | 1,632 | ||||
| Other service charges and fees | 288 | 266 | ||||
| Securities gains | 151 | 12 | ||||
| Gains on sale of loans | 328 | 87 | ||||
| Other | 581 | 538 | ||||
| TOTAL OTHER INCOME | 3,408 | 2,995 | ||||
| OTHER EXPENSES | ||||||
| Salaries | 3,350 | 3,273 | ||||
| Employee benefits | 1,309 | 1,138 | ||||
| Net occupancy expense of premises | 1,214 | 1,185 | ||||
| Amortization of intangible | 250 | 222 | ||||
| Other | 2,807 | 2,759 | ||||
| TOTAL OTHER EXPENSES | 8,930 | 8,577 | ||||
| Income before income taxes | 5,718 | 5,437 | ||||
| Applicable income taxes | 1,426 | 1,414 | ||||
| NET INCOME | $ | 4,292 | $ | 4,023 | ||
| EARNINGS PER SHARE, BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||
| Net income, basic | $ | 1.18 | $ | 1.11 | ||
| Net income, diluted | $ | 1.17 | $ | 1.10 | ||
| DIVIDENDS PER SHARE | ||||||
| Cash dividends per share | $ | 0.56 | $ | 0.50 | ||
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CNB FINANCIAL CORPORATION
Consolidated Statements of Comprehensive Income (unaudited)
(dollars in thousands, except per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||
| Net Income | $ | 2,284 | $ | 2,165 | $ | 4,292 | $ | 4,023 | |||||
| Other comprehensive income, net of tax | |||||||||||||
| Unrealized gains/(losses)on securities: | |||||||||||||
| Unrealized gains/(losses) arising during the period | 1,745 | 1,983 | 984 | 1,260 | |||||||||
| Reclassified adjustment for accumulated gains/(losses) included in net income, net of tax | — | 8 | 99 | 8 | |||||||||
| Other comprehensive income | 1,745 | 1,975 | 1,083 | 1,252 | |||||||||
| Comprehensive income | $ | 4,029 | $ | 4,140 | $ | 5,375 | $ | 5,275 | |||||
6
CONSOLIDATED STATEMENTS OF CASHFLOWS
CNB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (unaudited)
(Dollars in thousands)
| Six Months Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Income | $ | 4,292 | $ | 4,023 | ||||
| Adjustments to reconcile net income to net cash provided by operations: | ||||||||
| Provision for loan losses | 1,080 | 720 | ||||||
| Depreciation and amortization | 799 | 813 | ||||||
| Amortization and accretion and deferred loan fees | 235 | (160 | ) | |||||
| Deferred taxes | (74 | ) | (796 | ) | ||||
| Security (gains) losses | (151 | ) | (12 | ) | ||||
| Gain on sale of loans | (328 | ) | (87 | ) | ||||
| Net (gains) on dispositions of acquired property | 0 | (10 | ) | |||||
| Proceeds from sale of loans | 15,542 | 16,804 | ||||||
| Origination of loans for sale | (14,546 | ) | (12,983 | ) | ||||
| Changes in: | ||||||||
| Interest receivable | 466 | (403 | ) | |||||
| Other assets | (7,248 | ) | (2,926 | ) | ||||
| Interest payable | (400 | ) | (167 | ) | ||||
| Other liabilities | 45 | 1,039 | ||||||
| Net cash provided by operating activities | (288 | ) | 5,855 | |||||
| Cash flows from investing activities: | ||||||||
| Proceeds from maturities of: | ||||||||
| Securities available for sale | 39,229 | 21,806 | ||||||
| Proceeds from sales of securities available for sale | 2,438 | 227 | ||||||
| Purchase of securities available for sale | (32,354 | ) | (50,299 | ) | ||||
| Net principal disbursed on loans | (15,517 | ) | (15,087 | ) | ||||
| Purchase of premises and equipment | (1,244 | ) | (272 | ) | ||||
| Proceeds from the sale of foreclosed assets | 128 | 280 | ||||||
| Net cash used in investing activities | (7,320 | ) | (43,345 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net change in: | ||||||||
| Checking, money market and savings accounts | 9,407 | (4,324 | ) | |||||
| Certificates of deposit | 24,449 | 28,093 | ||||||
| Treasury stock purchases and sales, net | (243 | ) | (55 | ) | ||||
| Cash dividends paid | (2,055 | ) | (1,820 | ) | ||||
| Advances from long term borrowings | 0 | 30,000 | ||||||
| Net cash provided by financing activities | 31,558 | 51,894 | ||||||
| Net increase (decrease) in cash and cash equivalents | 23,950 | 14,404 | ||||||
| Cash and cash equivalents at beginning of year | 22,527 | 19,391 | ||||||
| Cash and cash equivalents at end of period | $ | 46,477 | $ | 33,795 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest (including amount credited directly to certificate accounts) | $ | 6,780 | $ | 7,926 | ||||
| Income Taxes | $ | 2,050 | $ | 1,660 | ||||
| Loans transferred to other real estate owned | $ | 150 | $ | 144 | ||||
7
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 accounting principles generally accepted in the United States of America. 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.
In the opinion of Management of the registrant, the accompanying consolidated financial statements for the quarter and six month periods ended June 30, 2003 and 2002 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 three and six-month periods ended June 30, 2003 is not necessarily indicative of the results 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, 2002.
COMMON STOCK PLAN
The Corporation has a common stock plan for key employees and independent directors. The Stock Incentive Plan, which is administered by the Executive Compensation and Personnel Committee, comprised of independent members of the Board of Directors, provides for the issuance of up to 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. No stock options were granted during the second quarter of 2003 or 2002. Had compensation cost for the plans been determined based on the fair values at the grant dates for awards, consistent with the method of SFAS No. 123, net income and earnings per share for June 30, 2003 and 2002 would have been adjusted to the pro forma amounts indicated below:
| 2003 | 2002 | |||||||
| Net Income | As reported | $ | 4,292 | $ | 4,023 | |||
| Pro forma compensation expense | — | — | ||||||
| Pro forma | $ | 4,292 | $ | 4,023 | ||||
| Earnings Per share-Basic | As reported | $ | 1.18 | $ | 1.11 | |||
| Pro forma | $ | 1.18 | $ | 1.11 | ||||
| Earnings Per Share -Diluted | As reported | $ | 1.17 | $ | 1.10 | |||
| Pro forma | $ | 1.17 | $ | 1.10 | ||||
8
EARNINGS PER SHARE
Earnings-per-share (EPS) is calculated on the weighted average number of common shares outstanding during the year. No granted options are outstanding and non-dilutive. The computation of basic and diluted EPS is shown below (in thousands, except per share data).
Earnings Per Share
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||
| Net income applicable to common stock | $ | 2,284 | $ | 2,165 | $ | 4,292 | $ | 4,023 | |||||
| Weighted-average common shares outstanding | $ | 3,656 | 3,635 | $ | 3,646 | $ | 3,635 | ||||||
| Basic earnings per share | $ | 0.62 | $ | 0.60 | $ | 1.18 | $ | 1.11 | |||||
| Net income applicable to common stock | $ | 2,284 | $ | 2,165 | $ | 4,292 | $ | 4,023 | |||||
| Weighted-average common shares outstanding | $ | 3,656 | 3,635 | $ | 3,646 | $ | 3,635 | ||||||
| Dilutive effects of assumed exercise of stock options | 27 | 8 | 27 | 8 | |||||||||
| Total weighted-average common shares and equivalents | 3,683 | 3,643 | 3,673 | 3,643 | |||||||||
| Diluted earnings per share | $ | 0.62 | $ | 0.59 | $ | 1.17 | $ | 1.10 | |||||
RECENT ACCOUNTING PROUNOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, both of which generally become effective in the quarter beginning July 1, 2003. The Corporation currently does not have these instruments therefore the new accounting standards will not materially affect the Corporation’s operating results or financial condition.
9
CONSOLIDATED YIELD COMPARISONS
| CNB Financial Corporation | |||||
| Average Balances and Net Interest Margin | |||||
| (Dollars in thousands) |
| June 30, 2003 | June 30, 2002 | ||||||||||||||||||
| Average Balance | Annual Rate | Interest Inc./Exp. | Average Balance | Annual Rate | Interest Inc./Exp. | ||||||||||||||
| Assets | |||||||||||||||||||
| Interest-bearing deposits with banks | $ | 1,858 | 1.61 | % | $ | 15 | $ | 4,600 | 2.04 | % | $ | 47 | |||||||
| Federal funds sold and securities purchased under agreements to resell | 16,050 | 1.13 | % | 91 | 13,703 | 2.03 | % | 139 | |||||||||||
| Investment Securities: | — | ||||||||||||||||||
| Taxable | 121,358 | 4.00 | % | 2,430 | 121,925 | 5.40 | % | 3,295 | |||||||||||
| Tax-Exempt (1) | 48,887 | 6.53 | % | 1,596 | 41,860 | 7.39 | % | 1,547 | |||||||||||
| Equity Investments (1) | 12,930 | 3.34 | % | 216 | 12,166 | 4.98 | % | 303 | |||||||||||
| Total Investments | 201,083 | 4.32 | % | 4,348 | 194,254 | 5.49 | % | 5,331 | |||||||||||
| Loans | |||||||||||||||||||
| Commercial (1) | 135,763 | 6.36 | % | 4,314 | 100,457 | 6.90 | % | 3,464 | |||||||||||
| Mortgage (1) | 243,862 | 7.53 | % | 9,180 | 235,771 | 7.90 | % | 9,313 | |||||||||||
| Installment | 35,723 | 8.63 | % | 1,542 | 40,859 | 8.29 | % | 1,693 | |||||||||||
| Leasing | 10,574 | 6.92 | % | 366 | 18,155 | 7.12 | % | 646 | |||||||||||
| Total loans (2) | 425,922 | 7.23 | % | 15,402 | 395,242 | 7.65 | % | 15,116 | |||||||||||
| Total earning assets | 627,005 | 6.30 | % | 19,750 | 589,496 | 6.94 | % | 20,447 | |||||||||||
| Non Interest Bearing Assets | |||||||||||||||||||
| Cash & Due From Banks | 15,117 | — | 13,283 | — | |||||||||||||||
| Premises & Equipment | 12,639 | — | 12,359 | — | |||||||||||||||
| Other Assets | 37,388 | — | 17,102 | — | |||||||||||||||
| Allowance for Possible Loan Losses | (5,543 | ) | — | (4,191 | ) | — | |||||||||||||
| Total Non-interest earning assets | 59,601 | — | — | 38,553 | — | — | |||||||||||||
| Total Assets | $ | 686,606 | $ | 19,750 | $ | 628,049 | $ | 20,447 | |||||||||||
| Liabilities and Shareholders’ Equity | |||||||||||||||||||
| Interest-Bearing Deposits | |||||||||||||||||||
| Demand - interest-bearing | $ | 128,583 | 0.55 | % | $ | 351 | $ | 133,176 | 0.97 | % | $ | 648 | |||||||
| Savings | 77,546 | 1.02 | % | 395 | 78,689 | 1.64 | % | 647 | |||||||||||
| Time | 297,582 | 3.22 | % | 4,790 | 256,278 | 4.41 | % | 5,654 | |||||||||||
| Total interest-bearing deposits | 503,711 | 2.20 | % | 5,536 | 468,143 | 2.97 | % | 6,949 | |||||||||||
| Short-term borrowings | 1,568 | 0.64 | % | 5 | 2,282 | 2.28 | % | 26 | |||||||||||
| Long-term borrowings | 40,000 | 5.06 | % | 1,012 | 37,459 | 5.06 | % | 948 | |||||||||||
| Trust Preferred Securities | 10,000 | 4.68 | % | 234 | — | — | |||||||||||||
| Total interest-bearing liabilities | 555,279 | 2.44 | % | 6,787 | 507,884 | 3.12 | % | 7,923 | |||||||||||
| Demand - non-interest-bearing | 58,434 | — | 55,456 | — | — | ||||||||||||||
| Other liabilities | 8,681 | — | 9,221 | — | — | ||||||||||||||
| Total Liabilities | 622,394 | 6,787 | 572,561 | 2.77 | % | 7,923 | |||||||||||||
| Shareholders’ equity | 64,212 | — | 55,488 | — | — | ||||||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 686,606 | 6,787 | $ | 628,049 | 7,923 | |||||||||||||
| Interest income/earning assets | 6.30 | % | 19,750 | 6.94 | % | 20,447 | |||||||||||||
| Interest expense/interest bearing liabilities | 2.44 | % | 6,787 | 3.12 | % | 7,923 | |||||||||||||
| Net Interest Spread | 3.86 | % | $ | 12,963 | 3.82 | % | $ | 12,524 | |||||||||||
| Interest Income/Interest Earning Assets | 6.30 | % | $ | 19,750 | 6.94 | % | $ | 20,447 | |||||||||||
| Interest expense/Interest Earning Assets | 2.16 | % | 6,787 | 2.69 | % | 7,923 | |||||||||||||
| Net Interest Margin | 4.13 | % | $ | 12,963 | 4.25 | % | $ | 12,524 | |||||||||||
| (1) The amounts are reflected on a fully tax equity basis using the federal statutory rate of 34% in 2003 and 2002, adjusted for certain tax preferences |
| (2) Average outstanding includes the average balance outstanding of all non-accrual loans. Loans consist of the average of total loans less average unearned income. The amount of loan fees included in the interest income on loans in not material. |
10
ITEM 2
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 primary 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, Cambria, 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 market area that County National Bank operates in is rural in nature. The customer makeup consists of small business and individuals. The health of the economy in the region is mixed with unemployment rates running high in most of our market areas except Centre County.
OVERVIEW OF BALANCE SHEET
Total assets have grown 5.5% since year-end 2002 to $705.6 million. The following comments will further explain the details of the asset fluctuation.
CASH AND CASH EQUIVALENTS
�� Cash and cash equivalents totaled $46,477,000 at June 30, 2003 compared to $22,527,000 on December 31, 2002. This increase resulted from an increase in customer deposits as well as pay downs and maturities in our securities portfolio. The Corporation will maintain higher balances until such time that loan demand increase and or the securities market offers an appropriate return for the risk taken.
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.
SECURITIES
Securities decreased $8.0 million or 4.4% since December 31, 2002. The decrease resulted primarily from payments of principal received from our mortgage-backed securities without reinvesting back into the market. The prepayment of mortgage-backed securities continues to be rapid with the wave of consumer mortgage refinancing that has occurred with the decline in interest rates. As previously stated, the Corporation is not investing routinely in this current market as it believes the risk, reward situation we are in does not currently favor us.
Management monitors the earnings performance and the effectiveness of the liquidity of the securities 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 securities portfolio, the Corporation maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers.
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 commercial lending primarily to locally, owned small businesses. The Corporation’s loan demand was strong during the first six months of 2003. At June 30, 2003, the Corporation had $435,856,000 in loans and leases outstanding, net of unearned discount, up $15,492,000 (or 3.7%) since December 31, 2002. The increase was caused by demand in commercial loans including mortgages. While we remain dedicated to the success of commercial lending, as we see this as our competitive advantage, a more aggressive marketing approach has been adopted toward secured consumer loans mainly in the form of home equity loans and lines of credit. This strategy is part of an overall initiative to increase our market
11
share of households in loans and deposits. The Corporation has continued to use direct marketing to aggressively grow the households in our market.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established by provisions for losses in the loan and lease portfolio. These provisions are charged against current income. Loans deemed not collectible are charged-off against the allowance while any subsequent collections are recorded as recoveries and increase the allowance.
The table below shows activity within the allowance account:
| ($’s in thousands) | Periods Ending | |||||||
| June 30, 2003 | Dec. 31, 2002 | |||||||
| Balance at beginning of Period | $ | 5,036 | $ | 4,095 | ||||
| Charge-offs: | ||||||||
| Commercial and financial | 4 | 152 | ||||||
| Commercial mortgages | 69 | 82 | ||||||
| Residential mortgages | 12 | 127 | ||||||
| Installment | 267 | 468 | ||||||
| Lease receivables | 50 | 235 | ||||||
| 402 | 1,064 | |||||||
| Recoveries: | ||||||||
| Commercial and financial | — | 1 | ||||||
| Commercial mortgages | 1 | 52 | ||||||
| Residential mortgages | — | — | ||||||
| Installment | 49 | 87 | ||||||
| Lease receivables | 15 | 65 | ||||||
| 65 | 205 | |||||||
| Net charge-offs: | (337 | ) | (859 | ) | ||||
| Provision for possible loan losses | 1,080 | 1,800 | ||||||
| Balance at end-of-period | $ | 5,779 | $ | 5,036 | ||||
| Loans, net of unearned | $ | 435,856 | $ | 420,364 | ||||
| Allowance to net loans | 1.33 | % | 1.20 | % | ||||
The adequacy of the allowance for loan and lease losses is subject to a formal analysis by the credit administrator of the Bank. As part of the formal analysis, delinquencies and losses are monitored monthly. The loan portfolio is divided into several categories in order to better analyze the entire pool. First is a selection of criticized loans that is given a specific reserve. The remaining loans are pooled, by category, into these segments:
Reviewed
| • | Commercial and financial |
| • | Commercial mortgages |
Homogeneous
| • | Residential real estate |
| • | Installment |
| • | Lease receivables |
The reviewed loan pools are further segregated into three categories: substandard, doubtful and unclassified. Historical loss factors are calculated for each pool based on the previous eight quarters of experience. The homogeneous pools are evaluated by analyzing the historical loss factors from the most previous quarter end and the two most recent year ends. The historical loss factors for both the reviewed and homogeneous pools are adjusted based on these six qualitative factors:
| • | Levels of and trends in delinquencies and non-accruals |
| • | Trends in volume and terms of loans |
| • | Effects of any changes in lending policies and procedures |
| • | Experience, ability and depth of management |
| • | National and local economic trends and conditions |
| • | Concentrations of credit |
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The methodology described above was created using the experience of our credit administrator, guidance from the regulatory agencies, expertise of our loan review partner, and discussions with our peers. The resulting factors are applied to the pool balances in order to estimate the inherent risk of loss within each pool.
�� The increase in the allowance is deemed necessary to cover the increases in loans mainly in the commercial loan area, which increased $26,477,000 in the first six months of 2003 and the increasing trend of criticized assets. The adequacy of the allowance for loan and lease losses is subject to a formal analysis by an independent loan review analyst, as well as our internal credit administrator, and is deemed to be adequate to absorb probable losses in the portfolio as of June 30, 2003.
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 $3,174,000 or 0.45% of total assets on June 30, 2003 compared to $3,148,000 or 0.47% on December 31, 2002.
FUNDING SOURCES
The Corporation considers deposits, short-term borrowings, and term debt when evaluating funding sources. Traditional deposits continue to be the main focus for source of funds in the Corporation, reaching $578,993,000 at June 30, 2003. Deposits increased 6.2% since year-end 2002 primarily resulting from a major marketing strategy focusing on retail consumer customers as well as a general lack of consumer confidence in the economy. This strategy includes direct mailing offering consumers a free checking product and the offering of several new certificate of deposit products.
The Corporation utilizes term borrowings from the Federal Home Loan Bank (FHLB) to meet funding needs not accommodated by deposit growth. Management plans to maintain access to short and long-term FHLB borrowings as an appropriate funding source
SHAREHOLDERS’ EQUITY
The Corporation’s capital continues to provide a base for profitable growth. Total shareholders’ equity was $65,110,000 at June 30, 2003 compared to $62,033,000 at December 31, 2002 an increase of $3,077,000 or 5.0%. In the first six months of 2003, the Corporation earned $4,292,000 and declared dividends of $2,055,000, a dividend payout ratio of 47.9% of net income.
The securities in the Corporation’s portfolio are classified as available for sale making the Corporation’s balance sheet more sensitive to the changing market value of investments. Interest rates in the first six months of 2003 have continued to decline. This situation has caused a fairly significant increase in accumulated other comprehensive income, included in stockholders’ equity of $1,083,000 since December 31, 2002.
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 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets), is assigned to each asset on the balance sheet. The Corporation’s total risk-based capital ratio of 12.62% at June 30, 2003 is above the well-capitalized standard of 10%. The Corporation’s Tier 1 capital ratio of 11.48% is above the well-capitalized minimum of 6%. The leverage ratio at June 30, 2003 was 8.57%, also above the well-capitalized standard of 5%. The Corporation is well capitalized as measured by the federal regulatory agencies. 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 7 of the accompanying financial statements provides 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
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assets. The Corporation’s liquidity is monitored by the ALCO Committee, which establishes and monitors ranges of acceptable liquidity. Management feels the Corporation’s current liquidity position is acceptable.
RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
The Corporation had net income of $2,284,000 and $4,292,000 for the second quarter and first six months of 2003, respectively. The earnings per diluted share for the respective periods were $0.62 and $1.17. Net income was $2,165,000 and $4,023,000 for the second quarter and first six months of 2002, which equates to earnings per diluted share of $0.59 and $1.10, respectively. The return on assets and the return on equity for the six months of 2003 are 1.27% and 14.67%.
INTEREST INCOME AND EXPENSE
Net interest income totaled $6,119,000 in the second quarter, an increase of 1.3% over the second quarter of 2002 and totaled $12,320,000 for the six months of 2003, an increase of 4.9% compared to the prior year. Total interest income decreased during the quarter by $555,000 or 2.8% while interest expense decreased by $1,136,000 or 14.3% when compared to the second quarter of 2002. The decrease in interest income is a result of lower yields on earning assets caused by an overall decline in interest rates in the United States since June of 2001. As mentioned earlier, the rapid growth in deposits has not all been placed into higher yielding assets. Thus much of these funds are in lower yielding federal funds. Interest expense has declined significantly since the Corporation has adjusted deposit pricing to reflect the declining market rates.
PROVISION FOR LOAN LOSSES
The Corporation recorded a provision for loan and lease losses in the second quarter of $540,000 compared to the second quarter of 2002 of $360,000 and $1,080,000 for the six months of 2003 compared to $720,000 in 2002. Based on managements’ evaluation of problem loans, criticized assets and charge-offs in the loan portfolio and the overall effects of the economy, management’s analysis indicates that the allowance provision appears to be adequate.
NON-INTEREST INCOME
Non-interest income increased $250,000 (16.04%) and $413,000 (13.8%) in the second quarter and six months of 2002, respectively, when compared to the same periods in 2002. During 2003, income derived from the sale of mortgages was higher due to continued low mortgage rates. This increase was $241,000 or 277.01% over the first six months of 2002. There was also a $139,000 increase in the gain on sale of securities over 2002. The sale occurred as a result of the security being downgraded by the rating agencies.
NON-INTEREST EXPENSE
Non-interest expense increased $73,000 or 1.7% during the second quarter of 2003 and $353,000 or 4.1% in the six months of 2003 when compared to the same periods in 2002. The increase can be attributed to rising salary and benefit costs of $248,000 and increased PA shares tax expense of $121,000 over the first six months compared to 2002.
RETURN ON ASSETS
For the six months ended June 30, 2003, the Corporation’s return on average assets (“ROA”) totaled 1.27% compared to 1.27% recorded in 2002.
RETURN ON EQUITY
The Corporation’s return on average shareholder’s equity (“ROE”) in the first six months was 14.67% compared to 14.84% for 2002.
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FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $731,000 in the second quarter of 2003 compared to $774,000 in the second quarter of 2002. For the six-month period comparisons, the federal tax expense was $1,426,000 in 2003 and $1,414,000 in 2002. Tax-exempt income for the six months of 2003 is up $98,000 over 2002, which accounts for $33,000 of the decrease in the tax expense.
FUTURE OUTLOOK
With interest rates at historically low levels, the Corporation is experiencing pressure on earnings resulting from a lower net interest margin when compared to 2002. Net interest income could show little or no growth in the remainder of 2003 if interest rates remain at present levels or move lower. Management continues to focus on growth from increased market share utilizing checking accounts and mortgage lending as core banking services augmented by the sale of other income producing products and services. The Bank has introduced fixed annuities to its product mix and through their sale, additional non-interest income will be generated over the remainder of the year. Management also continues to focus on loan growth with the generation of commercial loans throughout its market. It is anticipated that the loan production office opened last year in Johnstown will continue to produce growth in the Johnstown and Altoona markets.
Loan demand was strong during the first six months. Management expects loan growth for the year to be between 5 and 6 percent. The Corporation’s loan to deposit ratio has decreased through the first six months to 74.28% compared to 76.19% at year-end 2002 as deposit growth has been very good and is expected to remain favorable throughout 2003. Overall, deposits are expected to grow approximately 5% for the year.
Enhancing non-interest income and controlling 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 tax equivalent net interest income and non-interest income (less non-recurring income). For the six months ended June 30, 2003, the Corporation’s efficiency ratio was 52.56% compared to 54.38% for the same period last year.
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 continues to be placed on controlling non-interest expenses. Through the use of technology and more efficient processes, our non-interest costs have shown modest increases throughout 2003 and are expected to keep non-interest cost increases to a minimum.
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 maintain the performance of normal operations through the remainder of 2003.
“SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in the report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” “estimate” or “projected” and similar expressions as they relate to CNB Financial Corporation or its management are intended to identify such forward looking statements. CNB Financial Corporation’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.
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QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. Management and the ALCO Committee of the Board monitor the Corporation’s interest rate risk position. No material changes have occurred during the period in the Bank’s market risk strategy or position, a discussion of which can be found in the SEC Form-10K filed for the period ended December 31, 2002.
CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an evaluation was carried out under the supervision and with the participation of the Corporation’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in the Corporation’s internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II OTHER INFORMATION
| ITEM | 1. LEGAL PROCEEDINGS - None | |
| ITEM | 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None | |
| ITEM | 3. DEFAULTS UPON SENIOR SECURITIES - None | |
| ITEM | 4. SUBMISSION OF MATTERS FOR SECURITY HOLDERS VOTE |
| CNB Financial Corporation held its Annual Meeting of Shareholders on April 15, 2003, for the purpose of electing four directors and to transact such other business as would properly come before the meeting. Results of shareholder voting on these individuals were as follows: |
Election of Directors
| Robert E. Brown | James P. Moore | Robert C. Penoyer | Joseph L. Waroquier, Sr. | |
| For | 2,617,410 | 2,613,954 | 2,617,842 | 2,617,218 |
The total shares voted at the annual meeting were 2,808,478.
The following directors’ terms of office as director continued after the meeting:
| William F. Falger, William A. Franson, James J. Leitzinger, Dennis L. Merrey, William R. Owens, Jeffrey S. Powell, James B. Ryan, and Peter F. Smith |
| ITEM 5. | OTHER INFORMATION - None |
| ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K – |
| A Form 8-K was filed on May 13, 2003 announcing the declaration of a 28 cent per share quarterly dividend payable on June 16, 2003 to shareholders of record on June 6, 2003. |
| A Form 8-K was filed on June 30, 2003 announcing the appointment of Deborah Dick Pontzer of Ridgway, PA to the Board of Directors of the Corporation and County National Bank. |
| EXHIBIT 31.1 | CEO Certification | ||
| EXHIBIT 31.2 | CFO Certification | ||
| EXHIBIT 32 | Certifications |
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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 CORPORATION | |
| (Registrant) |
| DATE: August 7, 2003 | /s/ WILLIAM F. FALGER | |
| William F. Falger | ||
| President and Director | ||
| (Principal Executive Officer) |
| DATE: August 7, 2003 | /s/ JOSEPH B. BOWER, Jr. | |
| Joseph B. Bower, Jr. | ||
| Treasurer | ||
| (Principal Financial Officer) | ||
| (Principal Accounting Officer) |
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