UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996 Commission File Number 0-13396
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
CNB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1450605
------------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
County National Bank
Market and Second Streets
P.O. Box 42
Clearfield, Pennsylvania 16830
(Address of principal executive offices)
Registrant's telephone number, including area code, (814) 765-9621
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock: $4.00 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _________
----------
The number of shares outstanding of the issuer's common stock as of March
31, 1996:
COMMON STOCK: $4.00 PAR VALUE - 1,722,834 SHARES
1
INDEX
PART I.
FINANCIAL INFORMATION
Sequential
Page Number
- -----------
PAGE 3. Notes to Consolidated Financial Statements
PAGE 4. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PAGE 7. Table 1 - Consolidated Balance Sheets - March 31, 1996
PAGE 9. Table 2 - Consolidated Statement of Cash Flows - March 31, 1996
PAGE 13. Table 3 - Consolidated Statement of Income - March 31, 1996
PAGE 14. Table 4 - Consolidated Yield Comparisons
PART II.
OTHER INFORMATION
PAGE 15. ITEM 5 Other Information
PAGE 16. ITEM 6 Exhibits and Reports on Form 8K
PAGE 16. Signatures
2
CNB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SCOPE
In the opinion of Management of the registrant, the accompanying
consolidated financial statements for the three month period ended March 31,
1996 and 1995 include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair statement of the results for the period. This
information should be read in conjunction with the Corporation's Annual Report
and Form 10-K for the period ended December 31, 1995.
The financial results reported for the Corporation's first fiscal quarter
of 1996 are not necessarily the results to be expected for the full year. The
results contain no extraordinary income (loss) for changes in accounting or
other events.
Tax provisions for interim financial statements are based on the estimated
tax rates for the full fiscal year. The estimated effective tax rate differs
from the statutory tax rate principally due to tax-free interest income on
certain loans and investments which qualify for such treatment.
ACCOUNTING GUIDELINES
SFAS No. 106: Post Retirement Benefits
- ---------------------------------------
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standard (SFAS) No. 106 "Employers Accounting for Postretirement
Benefits Other Than Pension", which requires the accrual of expected costs of
providing for certain postretirement benefits during the years the employee
provided services. The Corporation's cash flows were not affected by
implementation of this standard but the Corporation is accruing $40,256 for this
year's service and interest cost and amortizing $7,566 of its transition
obligation.
The average annual assumed rates of increases in the per capita cost of
covered benefits range from 10% in 1996 to 8% in 1998 and beyond. The
healthcare cost trend rate assumption has a significant effect on the amounts
reported. These rates have been determined to be in line with industry practice
by both management and Ernst and Young, LLP, the company's external accountants.
The discount rate used in determining the accumulated postretirement benefit was
6.50 percent.
SFAS No. 109: Accounting for Income Taxes
- ------------------------------------------
The Corporation adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" in 1993. This statement requires the use of
the liability method to account for deferred income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities. These are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
3
SFAS No. 114 & SFAS No. 118: Accounting for the Impairment of a Loan
- ---------------------------------------------------------------------
In May, 1993 the Financial Accounting Standards (FASB) issue Statement No.
114 "Accounting by Creditors for the Impairment of a Loan" which is effective
for the fiscal years beginning after December 15, 1994. This guideline was
subsequently amended by a second Statement of Financial Accounting Standard No.
118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". The statement provides guidelines on how to determine if the loan
is impaired, how to measure the impairment based on the type of loan and how to
recognize interest based on the stream of cash flows which are expected to be
received.
The Corporation's accounting policy for loans is to quarterly examine non-
accruing loans on a case-by-case basis to determine if there is the possibility
that the Bank has little or no chance of recovering its principal. In a case
where there is a collateral shortfall and no foreseeable repayment stream, the
loan is charged-off. If a borrower has some ability to meet part of its
obligation, but total repayment is in serious question, Management may decide to
restructure the terms of repayment. In such an instance, pro forma financials
are performed on the borrower and if the financial strength of the borrower
warrants it, Management will restructure the loan using SFAS No. 114 and SFAS
No. 118 guidelines.
The Corporation adopted these accounting standards in the first quarter of
1995. One loan which had been on non-accrual status since early 1994 had emerged
from a Chapter 11 filing with a court approved restructuring plan. Bank
Management waited seven months to determine if the new terms would be met. In
August of last year, after sufficient payment history had been established,
management applied the standards of No. 114 and No. 118 to this borrowing. The
balance then was $784,330. Management discounted the cash flows at the original
note rate of 12% and charged-off $59,400. The Bank then began recognizing
interest income at the new rate of 8.0% as allowed under Generally Accepted
Accounting Practices.
SFAS No. 115: Accounting for Certain Debt and Equity Securities
- -----------------------------------------------------------------
At the time of acquisition, management classifies debt securities as either
held to maturity, available for sale or trading securities in compliance with
SFAS No. 115. Debt securities are classified as held to maturity when the
Corporation has the positive intent and ability to hold the securities to
maturity. Held to maturity securities are stated at amortized cost. Debt
securities that the Corporation does not have the positive intent and ability to
hold to maturity, and all marketable equity securities, are classified as
available for sale or trading and carried at fair value. Unrealized gains and
losses, net of tax, on securities classified as available for sale will be
carried as a separate component of shareholders' equity. Unrealized gains and
losses on securities classified as trading will be reported in earnings.
Management has not classified any debt or equity securities as trading.
The amortized cost of debt securities classified as held to maturity or
available for sale is adjusted for the amortization of premiums and the
accretion of discounts to maturity or, in the case of mortgage-backed securities
and collateralized mortgage obligations, over the estimated life of the
security. Such amortization is included in interest income from investments.
Realized gains and losses and declines in value judged to be other than
temporary are included in other income. The cost of securities sold is based on
the specific identification method.
The Corporation nor Bank engages in securities trading and therefore this
category has not been used. Management has decided that the Bank's liquidity
investments are designated as "Available For Sale" and portfolio investments are
purchased for holding until the security matures. Additionally, equity
securities held in the parent company are all considered "Available For Sale.
As of March 31, 1996, the Corporation had an after-tax unrealized gain in the
"Available For Sale" category of $339,000.
4
CONCLUSION
The accompanying financial statements have been prepared pursuant to rules
and regulations of the Securities and Exchange Commission (SEC). As a result,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The registrant believes that the disclosures
made are adequate to make the information presented a fair representation of the
corporation's financial status.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
MARKET AREA ECONOMIC CONDITIONS
CNB Financial Corporation and its subsidiary, County National Bank ("the
Bank") are headquartered in Clearfield, Pennsylvania in the north-central region
of the state. Due to the small population of the area, little specific economic
analysis is available. Despite the Corporation's relative proximity to State
College, the demographic and economic characteristics are significantly
different. Specific economic data on the county has been discontinued by the
Pennsylvania Bureau of Research Statistics. Therefore employment and other
indicators are no longer available on this specific area. Historically, the
region has followed national indicators with a very slight lag period between
national growth and contractions.
Industry in the area is dominated by trucking companies, coal producers and
timber/paper companies. The industries provide some stability to the region
while building and construction vary greatly by season and serve to distort true
unemployment and economic reporting.
With the recent location into the area of a nationally known retailer's
northeast distribution center, the area's housing market has been characterized
as there being a shortage of middle-income housing. This is evidenced in the
general rise in housing prices. Moderate housing construction is visible and
the Corporation's market area is believed to be growing though no formal
documents are available to substantiate this report.
ASSETS
- ------
Total assets (shown in Table 1 "Consolidated Balance Sheet") have grown
12.1% since one year ago to $304.4 million. Much of the growth has occurred in
the loan portfolios with approximately equal percentage increases in the mix of
commercial, consumer and real estate related loans. The Bank has maintained a
large amount of liquidity in the form of federal funds sold due to an expected
outflow from its Prime Money Fund Account. Total gross loans were $202.5 million
on March 31, 1996 compared to $185.4 million twelve months ago. The growth in
loans has been supported by $29 million in higher core deposit growth and
retained earnings.
The Corporation's interest earning assets consist of deposits with other
banks, federal funds sold, short term investments, investment securities and
loans. Management uses the short term liquid assets to balance changes in
either loans or core deposits. Over the past year, the increase in loans has
been funded mainly by core deposit growth in the Bank's new deposit product
called "The Prime Money Fund". This product has proved very successful in
stemming the outflow of deposits into non-bank financial service companies. The
Bank's product pays interest which is competitive with money market mutual
funds.
Bank premises and equipment increases reflect the investment the
Corporation has made in its expanded headquarters facility in Clearfield,
Pennsylvania, as well as the proportionately large increase in microcomputer
communications and software.
Additionally, the Bank opened a leased branch on November 15, 1995 in
Bradford, McKean County, Pennsylvania and opened a de novo branch in Houtzdale,
Clearfield County, on January 10, 1996. The Bank opened a remote ATM at the
University of Pittsburgh - Bradford on March 12, 1996.
6
TABLE 1
CONSOLIDATED BALANCE SHEET
CNB FINANCIAL CORPORATION: March 31, 1996
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except percent data)
March 31 Dec. 31 March 31
1996 1995 1995
----------- ------------ -----------
ASSETS
Cash and Due from Banks............................................ $8,200 $9,110 $7,492
Deposits with Other Banks.......................................... 14 19 18
Federal Funds Sold................................................. 8,625 3,200 2,550
Investment Securities Available for sale 57,418 51,007 42,056
Investment Securities Held to Maturity, fair value of $21,383
at March 31, 1996, $25,541 at December 31, 1995 and
$29,806 at March 31, 1995 ......................................... 20,925 24,921 29,625
Loans 202,524 203,706 185,356
Less: Unearned Discount......................................... 3,512 3,668 3,275
Less: Allowance for Loan Losses.................................. 2,255 2,145 2,136
------- ------- -------
NET LOANS........................................................ 196,757 197,893 179,945
Premises and Equipment............................................. 7,890 7,782 5,694
Accrued Interest and Other Assets.................................. 4,554 3,591 4,226
------- ------- -------
TOTAL ASSETS..................................................... $304,383 $297,523 $271,606
LIABILITIES
Deposits:
Non-interest bearing deposits.................................... $26,947 $25,705 $24,878
Interest bearing deposits........................................ 234,263 230,082 207,175
------- ------- -------
TOTAL DEPOSITS................................................... 261,210 255,787 232,053
Other Borrowings................................................... 3,372 2,846 2,743
Accrued Interest and Other Liabilities............................. 1,998 1,347 1,415
------- ------- -------
TOTAL LIABILITIES................................................ 266,580 259,980 236,211
SHAREHOLDERS' EQUITY
Common Stock $4.00 Par Value
Authorized 2,500,000 Shares (issued 1,728,000) 6,912 6,912 6,912
Retained Earnings................................................ 30,652 30,142 28,689
Treasury Stock, At Cost (5,166) (100) (100) (100)
Net unrealized securities gains (losses)......................... 339 589 (106)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY....................................... 37,803 37,543 35,395
------- ------- -------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY......................... $304,383 $297,523 $271,606
7
Accrued interest and other assets rose slightly over the past twelve
months. Normal fluctuations in interest receipts and pre-paid expenses will
influence changes in these accounts.
LIABILITIES
- -----------
Total deposits on March 31, 1996 were $261.2 million, an increase of $29.1
million over March 31, 1995. Deposit growth has occurring primarily in a
deposit product called "The Prime Money Fund" which pays interest on an indexed
rate and is competitive with interest earned on short term mutual funds.
Other consumer deposit categories have remained at approximately the same
volume levels as compared to this time last year. The Bank gathers deposits
from its local communities and does not solicit funds from outside its market
areas.
The Bank does belong to the Federal Home Loan Bank of Pittsburgh and
maintained an average borrowing capacity with that institution in 1995 of
approximately $66 million. However, given the healthy growth in consumer
deposits the Bank has not accessed this facility in almost two years. An
analysis of the sources and uses of funds is shown in Table 2 "Statement of
Consolidated Cash Flow".
LIQUIDITY AND INTEREST RATE SENSITIVITY
- ---------------------------------------
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and interest rate sensitive liabilities so that earnings are not
excessively influenced by changes in interest rates. Liquidity management
involves the ability to meet the cash flow requirements of customers who may be
either depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. Interest risk
management seeks to avoid instability in net interest margins and to enhance
consistent growth of net interest income through periods of volatile interest
rates.
Sources of asset liquidity are investment securities maturing in one year
or less, time deposits with banks and federal funds sold. In extreme shortages
of liquidity, "Investments Available for Sale" can be liquidated with no capital
impairment due to SFAS No. 115 accounting guidelines. These assets totaled $57.4
million at March 31, 1996 compared to $42.1 million on March 31, 1995.
Contractual payments of principal and interest as well as some early pay-off of
loans also provide a source of liquidity. Principal payments of $51 million are
contractually due within one year as compared to $49 million as of March 31,
1995. Liquidity requirements can also be met by aggressively pricing deposits in
the market place, buying federal funds and by selling securities under an
agreement to repurchase at some future date. Additionally, the Bank has arranged
a large back-up facility at both Federal Reserve Bank of Philadelphia and the
Federal Home Loan Bank of Pittsburgh. As of March 31, 1996, the Bank had $18
million in unused lines of credit available with correspondent commercial banks.
Also, the Bank has an available credit line with the Federal Home Loan Bank in
the amount of $73 million and a $9 million line with the Federal Reserve Bank of
Philadelphia. The reader is again referred to Table 2 "Statement of Consolidated
Cash Flows".
Management regularly monitors the relationship between interest earning
assets and interest bearing liabilities maturing or repricing reduce an
imbalance between such assets and liabilities. In doing this, management seeks
to avoid fluctuating net interest margins in periods of changing interest rates.
The Bank's ratio of interest-rate sensitive assets to interest-rate sensitive
liabilities maturing or repricing within one year was 79.6% compared to 132% on
March 31, 1995.
8
TABLE 2
CONSOLIDATED STATEMENT OF CASHFLOWS
CNB FINANCIAL CORPORATION: March 31, 1996
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended March 31...
Cash flows from operating activities: 1996 1995
--------- ----------
Net Income............................................................. $1,044 $864
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses............................................ 125 125
Depreciation......................................................... 157 122
Amortization and accretion of net deferred loan fees................. (176) 5
Amortization and accretion of premiums and discounts
on investments..................................................... 40 82
Security Losses...................................................... 13 --
Changes in:
Interest receivable.................................................. (18) (119)
Other assets......................................................... (746) (586)
Interest payable..................................................... (41) 185
Other liabilities.................................................... 691 373
Net cash provided by operating activities.............................. 1,089 1,051
Cash flows from investing activities:
Proceeds from maturities of:
Investment securities............................................... 4,979 6,303
Securities available for sale....................................... 3,886 2,603
Purchase of:
Investment securities............................................... (998) (2,017)
Securities available for sale....................................... (10,699) (6,588)
Net principal disbursed on loan....................................... 1,182 (319)
Purchase of Federal Home Loan Bank Stock.............................. (81) (14)
Purchase of premises and equipment.................................... (265) (672)
Proceeds from the sale of foreclosed assets........................... 2 10
Net cash used in investing activities.................................. (1,994) (694)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts...................... 4,638 (6,740)
Certificates of deposit.......................................... 785 8,152
Repayment of Federal Home Loan Bank Advances......................... (21) (20)
Other borrowed funds................................................. 547 (922)
Cash dividends paid.................................................. (534) (500)
Net cash (used in) provided by financing activities.................... 5,415 (30)
Net (decrease) in cash and cash equivalents............................ 4,510 327
Cash and cash equivalents at beginning of year......................... 12,329 9,715
Cash and cash equivalents at end of period............................. $16,839 $10,042
Noncash Investing Activities:
(Decrease) Increase in net unrealized gain/loss on
securities avaliable for sale................................... (377) 463
9
Some changes in assumptions and methodology account for the wide period-to-
period swing.
The Board of Directors, working through management, adopted a separate
Interest Rate Risk Policy on September 26, 1995. This policy sets specific
limits, responsibilities and reporting to provide for stability in earnings
under fluctuating interest rates. This policy provides for only the most
prudent measures to be taken by a community bank to avoid earnings instability.
CAPITAL RESOURCES
- -----------------
The Corporation's capital position, of $37.8 million on March 31, 1996, is
an above average capital position as compared to other bank holding companies of
similar size. Capital adequacy for a financial institution is its ability to
support asset growth and to sufficiently protect itself and depositors against
business risk. The Corporation has relied on earnings to increase equity, while
providing what management believes is an acceptable return on invested capital
to its shareholders.
The Federal Reserve Board standards classify capital into two tiers,
referred to as Tier 1 and Tier 2. Tier 1 capital consists of common
shareholders' equity, noncumulative perpetual preferred stock, and minority
interests less goodwill. Tier 2 capital consists of the allowance for possible
loan losses, perpetual preferred stock (not used in Tier 1), hybrid capital
instruments, term subordinate debt and intermediate-term (limited life)
preferred stock. All banks are required to meet a minimum ratio of 8% of
qualifying total capital to risk-adjusted total assets with at least 5.5% Tier 1
capital. Capital that qualifies as Tier 2 capital is limited to 100% of Tier 1
capital.
In addition to the above referenced risk based capital requirements, the
Federal Reserve also requires a minimum leverage capital ratio of 3% of Tier 1
capital to total assets less any goodwill.
The table below summarizes the Corporation's regulatory capital ratios at March
31, 1996 and 1995
1st Qtr. 1st Qtr. Regulatory
1996 * 1995 Minimum
---- ---- -------
Tier 1 Risk-Based Capital Ratio 14.09% 19.47% 5.5%
Total Risk-Based Capital Ratio 14.99% 20.75% 8.0%
Leverage Ratio 11.88% 13.03% 3.0%
* Ratio is adjusted for all off-balance Committments.
REGULATORY MATTERS
- ------------------
The Corporation and the Bank are subject to the regulations of certain
federal agencies. Regulators often make recommendations during the course of
their examination that relate to the normal operations of the Corporation and
the Bank. Management reviews all such recommendations promptly and initiates
corrective action. The primary regulator, the Comptroller of the Currency,
conducted a safety and soundness review during July 1995 and their results
included several recommendations to improve the overall operations of the
Corporation, but found no significant deficiencies in the Bank's reported
results or functionality. The Federal Reserve Bank of Philadelphia concluded an
examination during the third quarter of 1994. The agency noted no substantial
deficiencies at that time. Presently, management is unaware of any
recommendation by these regulatory authorities, that, if implemented, would
likely have a material effect on the liquidity, capital or operations of the
Corporation and the Bank.
10
CONCENTRATION OF CREDIT RISK AND ASSET QUALITY
- ----------------------------------------------
The Corporation, in its role as a financial institution, generates profits
primarily through lending and investing activities. The risk of loss from
lending and investing activities include the possibility that a loss may occur
from the failure of a borrower or one of its affiliates to perform according to
their terms of the loan or investment agreement. This possibility of loss is
known as credit risk.
Credit risk is increased by lending and / or investing activities that
concentrate financial institution's earning assets in such a way as to expose
the institution to a material loss from any single occurrence or group of
related occurrences. This can occur through lending heavily to one type of
industry or heavy concentration in a particular type of lending.
The Bank monitors credit risk by limiting concentrations within various
industries and single borrowers by established legal lending limits. Management
also seeks to keep a stable allocation among the various loan types. The Bank
firmly follows all regulatory limits of credits to a single borrower. In
addition, the Bank monitors the local economic conditions, in an effort to
promptly identify and address deteriorating industries.
Management uses a variety of reports to gauge local economic conditions.
One important source of information is the quarterly subscription to PNC Bank
Economics Division's "National Economic Outlook" which includes focus on both
Pennsylvania and some Metropolitian Statistical Areas. Visible signs of modest
growth are evident in the new construction and the prices in the housing market.
The formal loan review process provides the best defense against credit losses
by providing early warning of a company's financial deterioration or
improvement.
The Bank's loan policy states the loans over 90 days past due be placed on
non-accrual status. However, policy allows that if the loan is sufficiently
collateralized, the loan review officer may allow the loan to continue accruing
based on the expected full return of the Bank's monies when the collateral is
liquidated. The table below compares 90 days and over delinquencies by type of
loan for March 31, 1996 and March 31, 1995.
1996 1995
--------------------------- ---------------------------
Over 90 Days Over 90 Days Over 90 Days Over 90 Days
Accruing Non-Accruing Accruing Non-Accruing
-------- ------------ -------- ------------
Commercial Loans $ 265,852 $ 0 $ 181,103 $ 819,657
Mortgage Loans 238,373 0 352,311 120,388
Installment Loans 124,092 0 148,264 0
-------- ---- ---------- ----------
TOTAL $ 628,317 $ 0 $ 681,678 $ 940,045
11
RESULTS OF OPERATIONS
The "Consolidated statement of income" (Table 3) compares the periods
ending March 31, 1996 and 1995. The table summarizes at the bottom that the
Corporation has earned $0.61 per share in the first quarter of 1996 compared to
$0.51 per share one year ago.
NET INTEREST INCOME
- -------------------
Operating results are substantially dependent on net interest income. Net
interest income is the difference between interest earned on loans and
investments and interest paid on deposits and borrowings. Operating results are
also affected by the levels of non-interest income and expense.
Total interest income for the quarter of $5.721 million reflects a 13.6%
increase or $684,000 more interest income when compared with the same three
months of 1995. This interest income increase for the quarter comes despite
relatively large fluctuations in interest rates and represents active management
of the margin by executive management. Table 4 "Yield Comparisons" highlights
effective interest rates on interest bearing assets and liabilities.
Total interest expense of $2.469 million for the quarter reflects an
increase of 24.3% from interest expense of $1.85 million for the same quarter of
1995. The increase represents a marked shift by consumers from lower yielding
non-maturity accounts to longer term, higher rate certificates of deposit and
the inflow into the Prime Money Fund account which pays a higher rate than the
traditional Money Market accounts.
Table 4 "Yield Comparisons" shows that the yield on earning assets have
risen from 8.10% on March 31, 1995 to 8.32% on March 31, 1996. However,
interest expense has from 3.81% to 4.21% during the same period. The increase
in net interest income is attributable to higher earning assets, in the loan and
investment categories. While, the loan categories are expected to grow, the
investment portfolio is expected to drop by $8.5 million in the second quarter
as known outflows in the consumer deposits are to be funded by a decrease in
federal funds sold.
PROVISION FOR POSSIBLE LOAN LOSSES
- ----------------------------------
The provision for possible loan losses was $125,000 for the first quarter
of 1996, the same as for the first quarter of 1995. Management has seen
decreasing trends in charge-offs and increased recoveries over the past eight
quarters. The present allowance for loan losses of $2.3 million represents 1.11%
of outstanding loans compared to $2.13 million or 1.15% of loans on March 31,
1995. Non-performing assets (NPA), which include non-accrual loans and other
real estate owned were $154,000 at end of quarter. This gives an NPA to loan
loss reserve ratio of 0.07% at the period end. The greater provision for loan
losses as compared to actual loan losses is intended to reach a goal management
has set which will place the company in the high performing percentiles for peer
comparison.
Management performs quarterly adequacy analysis on the loan loss reserve.
The loan review officer determines adequacy by following the BC-201 Qualitative
factors and eight quarters of loan loss experience. The officer's analysis is
performed by the separate loan categories; Commercial and Industrial Loans,
Commercial Real Estate Loans, Residential Real Estate, Consumer Installment and
Credit Card Loans.
12
TABLE 3
CONSOLIDATED STATEMENT OF INCOME
CNB FINANCIAL CORPORATION: March 31, 1996
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data) THREE MONTHS ENDED
MARCH
INTEREST INCOME 1996 1995
---------- ----------
Loans including Fees................................................................. $4,497 $3,953
Deposits with Other Banks............................................................ 1 1
Federal Funds Sold................................................................... 58 3
Other Short Term Investments......................................................... -- --
Investment Securities:
Taxable Securities: Available for Sale............................................ 621 532
Tax-Exempt Securities: Available for Sale......................................... 172 59
Taxable Securities: Being Held to Maturity........................................ 216 246
Tax-Exempt Securities: Being Held to Maturity..................................... 142 243
Interest on restructured loans....................................................... 14 --
Interest on other assets............................................................. -- --
--------- ---------
TOTAL INTEREST INCOME............................................................. $5,721 $5,037
INTEREST EXPENSE
Deposits............................................................................. $2,432 $1,905
Borrowed Funds....................................................................... 37 81
-- --
TOTAL INTEREST EXPENSE............................................................ $2,469 $1,986
Net Interest Income............................................................... $3,252 $3,051
Provision for possible loan losses................................................ 125 125
--- ---
NET INTEREST INCOME AFTER PROVISION ................................................. $3,127 $2,926
NON-INTEREST INCOME
Fiduciary Commissions and Fees....................................................... $229 $130
Service charges on deposit accounts.................................................. 129 119
Other service charges and fees....................................................... 94 59
Securities gains (losses)............................................................ (13) --
Gains (losses) on Sale of Assets..................................................... 2 --
Other income......................................................................... 53 104
-- ---
TOTAL NON-INTEREST INCOME......................................................... $493 $412
NON-INTEREST EXPENSE
Salaries............................................................................. $964 $855
Employee benefits.................................................................... 315 285
Net occupancy expense................................................................ 353 311
Other Operating Expense.............................................................. 564 689
--- ---
TOTAL NON-INTEREST EXPENSE........................................................ 2,196 2,140
Income Before Federal Income Taxes................................................... $1,424 $1,198
Applicable Taxes..................................................................... 380 334
=================================
NET INCOME........................................................................ $1,044 $864
=================================
Per Share Data
- --------------
Primary
Net Income $0.61 $0.50
Cash dividends paid $0.31 $0.29
_______________________________________________________________________________
13
TABLE 4
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation: March 31, 1996
Average Balances and Net Interest Margin
(Dollars in thousands)
March 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest
Balance Rate Inc./Exp. Balance Rate Inc./Exp.
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits with banks $15 3.61% $0 $18 2.42% $0
Federal funds sold and securities
purchased under agreements to resell 4,607 5.05% 58 1,450 5.59% 81
Other short-term investments
Investment Securities:
Taxable 54,791 6.13% 837 54,681 6.07% 3,319
Tax-Exempt (1) 23,673 8.07% 476 21,495 8.62% 1,853
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities 83,086 6.62% 1,371 77,644 6.77% 5,253
Loans
Commercial 49,442 8.40% 1,036 44,621 8.56% 3,818
Mortgage 95,859 9.41% 2,249 89,215 9.03% 8,057
Installment 55,226 8.90% 1,226 54,293 9.16% 4,974
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans (2) 200,527 9.02% 4,511 188,129 8.96% 16,849
Total earning assets 283,613 8.32% 5,882 265,773 8.32% 22,102
Non Interest Bearing Assets
Cash & Due From Banks 7,844 0 7,480 0
Premises & Equipment 7,872 0 6,482 0
Other Assets 2,895 0 2,902 0
Allowance for Possible Loan Losses (2,195) 0 (2,173) 0
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-interest earning assets 16,416 -- 0 14,691 -- 0
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $300,029 $5,882 $280,464 $22,102
==================================================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing $80,232 3.33% $666 $56,284 1.98% $1,115
Savings 36,161 1.64% 148 38,716 2.72% 1,052
Time 115,999 5.59% 1,618 116,239 5.83% 6,778
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing deposit 232,392 4.20% 2,492 211,239 4.23% 8,945
Short-term borrowings 2,926 5.07% 37 5,229 5.32% 278
Long-term borrowings 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing liabilities 235,318 4.21% 2,469 216,468 4.26% 9,223
Demand - non-interest-bearing 24,947 -- 0 25,788 -- 0
Other liabilities 1,889 -- 0 1,766 -- 0
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 262,154 3.78% 2,469 244,022 3.78% 9,233
Shareholders' equity 37,875 -- 0 36,442 -- 0
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $300,029 $2,469 $280,464 $9,233
==================================================================================
Interest income/earning assets 8.32% $5,882 8.32% $22,102
Interest expense/interest bearing liabilities 4.21% 2,469 4.26% 9,223
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 4.11% $3,413 4.06% $12,879
=============================== =======================
Interest Income/Interest Earning Assets 8.32% $5,882 8.32% $22,102
Interest expense/Interest Earning Assets 3.49% 2,469 3.47% 9,223
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.83% $3,413 4.85% $12,879
=============================== =======================
March 31, 1995
- ---------------------------------------------------------------------------------------------------------------
Average Annual Interest
Balance Rate Inc./Exp.
- ---------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits with banks $18 5.57% $0
Federal funds sold and securities
purchased under agreements to resell 208 5.79% 3
Other short-term investments
Investment Securities:
Taxable 54,072 5.77% 778
Tax-Exempt (1) 20,612 8.91% 458
- ---------------------------------------------------------------------------------------------------------------
Total securities 74,910 6.64% 1,239
Loans
Commercial 41,553 8.18% 847
Mortgage 87,119 8.87% 1,927
Installment 53,419 8.85% 1,179
- ---------------------------------------------------------------------------------------------------------------
Total loans (2) 182,091 8.71% 3,953
Total earning assets 257,001 8.10% 5,192
Non Interest Bearing Assets
Cash & Due From Banks 7,296 0
Premises & Equipment 5,402 0
Other Assets 2,399 0
Allowance for Possible Loan Losses (2,075) 0
- ---------------------------------------------------------------------------------------------------------------
Total Non-interest earning assets 13,022 -- 0
- ---------------------------------------------------------------------------------------------------------------
Total Assets $270,023 $5,192
=====================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing $49,910 1.85% $230
Savings 40,621 2.25% 228
Time 112,507 5.16% 1,447
- ---------------------------------------------------------------------------------------------------------------
Total Interest-bearing deposit 203,038 3.76% 1,905
Short-term borrowings 6,300 5.16% 81
Long-term borrowings 0 0
- ---------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 209,338 3.81% 1,986
Demand - non-interest-bearing 25,148 -- 0
Other liabilities 1,020 -- 0
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities 235,506 3.38% 1,986
Shareholders' equity 34,517 -- 0
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $270,023 $1,986
=====================================================
Interest income/earning assets 8.10% $5,192
Interest expense/interest bearing liabilities 3.81% 1,986
- ---------------------------------------------------------------------------------------------------------------
Net Interest Spread 4.30% $3,206
====================================
Interest Income/Interest Earning Assets 8.10% $5,192
Interest expense/Interest Earning Assets 3.10% 1,986
- ---------------------------------------------------------------------------------------------------------------
Net Interest Margin 5.00% $3,206
====================================
(1) The amounts are reflected on a fully tax equivalent basis using the federal
statutory rate of 34% in 1996 and 1995, adjusted for certain tax
preferences.
(2) Average outstanding includes the average balance outstanding of all non-
accrual loans. Loans consist of the average of total loans less average
unearned income. The amount of loan fees included in the interest income on
loans is not material.
14
NON-INTEREST INCOME
- -------------------
Total other income for the first quarter of 1996 of $493,000 is $81,000
more than during the same period in 1995. Increased service charge revenues,
higher fiduciary fees and higher credit card fees account for the added
revenues.
NON-INTEREST EXPENSE
- --------------------
The Corporation's first quarter operating expenses rose $56,000 over the
first quarter of 1995. Increases in the salary and benefit categories reflect
the personnel hired to operate the two new branch offices opened since late last
year. Merit and cost of living adjustments for existing personnel are also
reflected in those costs. Occupancy expense was higher in the first quarter of
1996 compared to the same period last year due to the amortization of costs
related to the expansion of the Corporation's headquarters. Management does
include these costs in estimates of future earnings.
The Corporation's expenses to date as compared to the first three months of
1995 reflect a $128,000 decrease in the cost to insure the Bank's deposits. The
determination and subsequent action by the Federal Deposit Insurance Corporation
in September 1995 is discussed in previous filings.
NET INCOME
- ----------
Net income for the first quarter of 1996 was $1,044,000 or $.61 per share.
This compares to net income and earnings per share for the same quarter in 1995
of $864,000 and $.50 per share.
The Corporation's first quarter earnings contain no extra-ordinary income
or expense. The increased income over last year comes from higher net interest
income from a higher earning asset base. The net interest spread, however, is
slightly lower than the same period in 1995. Fee income levels are also higher,
particularly in the fiduciary income and credit card fees. No service charge
price increases have been implemented since the last reporting period.
Return on average assets in 1996 is 1.39% and return on average equity is
11.44%.
INCOME TAXES
- ------------
The provision for income taxes of $380,000 for the first quarter of 1996 is
$46,000 more than the same period in 1995.
15
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) There were no reports on Form 8-K for the quarter ended
March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB FINANCIAL CORPORATION
(Registrant)
DATE: May 13, 1996 /s/ James P. Moore
------------------ -------------------
James P. Moore
President and Director
(Principal Executive Officer)
DATE: May 13, 1996 /s/ J. Matthew McEnroe
------------------ -----------------------
J. Matthew McEnroe
Treasurer,
Principal Financial Officer
16