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 September 30, 2000
or
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
County National Bank
1 South Second Street
P.O. Box 42
Clearfield, Pennsylvania 16830
(Address of principal executive offices)
Registrant's telephone number, including area code, (814) 765-9621
Indicate by check mark whether the registrant (1) has filed all reports required
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
November 13, 2000:
COMMON STOCK: $1.00 PAR VALUE - 3,666,035 SHARES
1
INDEX
PART I.
FINANCIAL INFORMATION
Sequential
Page Number
- -----------
PAGE 3. Consolidated Balance Sheets - September 30, 2000 and December 31, 1999
PAGE 4. Consolidated Statements of Income - Quarter ending September 30, 2000 and 1999
PAGE 5. Consolidated Statements of Income - nine months ending September 30, 2000 and 1999
PAGE 6. Consolidated Statements of Comprehensive Income for the quarter and nine months ending September 30,
2000 and 1999
PAGE 7. Consolidated Statements of Cash Flows - nine months ending September 30, 2000 and 1999
PAGE 8. Notes to Consolidated Financial Statements
PAGE 10. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PAGE 12. Quantitative and Qualitative Disclosures About Market Risk
PART II.
OTHER INFORMATION
PAGE 15. ITEM 1. Legal Proceedings
PAGE 15. ITEM 2. Changes in Securities and Use of Proceeds
PAGE 15. ITEM 3. Defaults Upon Senior Securities
PAGE 15. ITEM 4. Submission of Matters for Security Holders Vote
PAGE 15. ITEM 5. Other Information
PAGE 15. ITEM 6. Exhibits and Reports on Form 8-K
PAGE 15. Signatures
2
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Sep. 30, Dec. 31,
ASSETS 2000 1999
-------------- --------------
Cash and due from banks..................................................... $16,085 $20,893
Interest bearing deposits with other banks.................................. 1,502 321
-------------- --------------
Total cash and cash equivalents 17,587 21,214
Securities available for sale............................................... 137,771 136,945
Investment securities held to maturity, fair value of $3,062
at September 30, 2000, and $6,652 at December 31, 1999..................... 3,025 6,618
Loans held for sale......................................................... 2,435 2,381
Loans and leases............................................................ 366,155 367,711
Less: unearned discount.................................................. 4,103 4,947
Less: allowance for loan losses........................................... 3,987 3,890
-------------- --------------
NET LOANS................................................................. 358,065 358,874
Premises and equipment...................................................... 12,817 12,854
Accrued interest receivable................................................. 3,806 3,463
Intangible assets, net...................................................... 14,828 15,899
Other assets................................................................ 1,863 2,914
-------------- --------------
TOTAL ASSETS.............................................................. $552,197 $561,162
============== ==============
LIABILITIES
Deposits:
Non-interest bearing deposits............................................. $55,148 $54,891
Interest bearing deposits................................................. 428,056 445,860
-------------- --------------
TOTAL DEPOSITS............................................................ 483,204 500,751
Other borrowings............................................................ 12,625 6,750
Accrued interest and other liabilities...................................... 6,584 6,018
-------------- --------------
TOTAL LIABILITIES......................................................... 502,413 513,519
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................................................ 3,732 3,717
Retained earnings......................................................... 44,001 42,278
Treasury stock, at cost .................................................. (698) (715)
(27,465 shares for September 2000, and 29,191 for December 1999)
Accumulated other comprehensive income.................................... (945) (1,331)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY................................................ 49,784 47,643
-------------- --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.................................. $552,197 $561,162
============== ==============
3
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30
INTEREST AND DIVIDEND INCOME 2000 1999
------------------ -------------------
Loans including fees............................................. $ 7,991 $7,119
Deposits with other banks........................................ 41 7
Federal funds sold............................................... 41 35
Investment securities:
Taxable....................................................... 1,475 1,109
Tax-exempt.................................................... 446 465
Dividends..................................................... 162 63
------------------ -------------------
TOTAL INTEREST AND DIVIDEND INCOME............................ 10,156 8,798
------------------ -------------------
INTEREST EXPENSE
Deposits......................................................... 4,790 3,627
Borrowed funds................................................... 328 323
------------------ -------------------
TOTAL INTEREST EXPENSE........................................ 5,118 3,950
Net interest income........................................... 5,038 4,848
Provision for loan losses..................................... 210 153
------------------ -------------------
NET INTEREST INCOME AFTER PROVISION.............................. 4,828 4,695
------------------ -------------------
NON-INTEREST INCOME
Trust & asset management fees.................................... 235 224
Service charges on deposit accounts.............................. 580 414
Other service charges and fees................................... 154 135
Net securities gains............................................. 2 31
Gains on sale of loans........................................... 6 13
Other income..................................................... 262 137
------------------ -------------------
TOTAL NON-INTEREST INCOME..................................... 1,239 954
------------------ -------------------
NON-INTEREST EXPENSES
Salaries......................................................... 1,520 1,464
Employee benefits................................................ 549 490
Net occupancy expense of premises................................ 570 509
Amortization of intangible....................................... 463 222
Other............................................................ 1,122 1,225
------------------ -------------------
TOTAL NON-INTEREST EXPENSES................................... 4,224 3,910
------------------ -------------------
Income before income taxes....................................... 1,843 1,739
Applicable income taxes.......................................... 450 446
------------------ -------------------
NET INCOME.................................................... $ 1,393 $1,293
================== ===================
EARNINGS PER SHARE, BASED ON WEIGHTED
AVERAGE SHARES OUTSTANDING
Net income, basic................................................ $0.38 $0.35
Net income, diluted............................................. $0.38 $0.35
Cash dividends per share......................................... $0.21 $0.20
4
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
NINE MONTHS ENDED SEPTEMBER 30
INTEREST AND DIVIDEND INCOME 2000 1999
------------------ -------------------
Loans including fees............................................ $24,003 $20,444
Deposits with other banks....................................... 72 16
Federal funds sold.............................................. 47 243
Investment securities:
Taxable...................................................... 4,459 3,076
Tax-exempt................................................... 1,373 1,417
Dividends.................................................... 404 178
------------------ -------------------
TOTAL INTEREST AND DIVIDEND INCOME........................... $30,358 $25,374
------------------ -------------------
INTEREST EXPENSE
Deposits........................................................ $13,745 $10,973
Borrowed funds.................................................. 978 858
------------------ -------------------
TOTAL INTEREST EXPENSE....................................... $14,723 $11,831
Net interest income.......................................... $15,635 $13,543
Provision for possible loan losses........................... 597 460
------------------ -------------------
NET INTEREST INCOME AFTER PROVISION............................. $15,038 $13,083
------------------ -------------------
OTHER INCOME
Trust & asset management fees................................... $ 685 $ 607
Service charges on deposit accounts............................. 1,691 1,119
Other service charges and fees.................................. 466 321
Realized securities gains....................................... (33) 60
Gains on sale of loans.......................................... 40 65
Other........................................................... 394 438
------------------ -------------------
TOTAL OTHER INCOME........................................... $ 3,243 $ 2,610
------------------ -------------------
OTHER EXPENSES
Salaries........................................................ $ 4,645 $ 4,187
Employee benefits............................................... 1,709 1,470
Net occupancy expense of premises............................... 1,792 1,458
Amortization of intangible...................................... 1,389 609
Other........................................................... 3,356 3,295
------------------ -------------------
TOTAL OTHER EXPENSES......................................... $12,891 $11,019
------------------ -------------------
Income before income taxes...................................... $ 5,390 $ 4,674
Applicable income taxes......................................... 1,357 1,101
------------------ -------------------
NET INCOME................................................... $ 4,033 $ 3,573
================== ===================
EARNINGS PER SHARE, BASED ON WEIGHTED
AVERAGE SHARES OUTSTANDING
Net income, basic............................................... $1.10 $0.97
Net income, fully diluted....................................... $1.10 $0.97
Cash dividends per share........................................ $0.63 $0.60
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CNB FINANCIAL CORPORATION
Consolidated statements of Comprehensive Income (Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2000 1999 2000 1999
Net income $ 1,393 $ 1,293 $ 4,033 $ 3,573
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities:
Unrealized gains/(losses) arising
during the period 832 (406) 364 (1,806)
Reclassified adjustment for
accumulated gains/(losses)
included in net income, net of tax 1 20 (22) 40
------------------------------------------------------------------
Other comprehensive income 831 (426) 386 (1,846)
------------------------------------------------------------------
Comprehensive income 2,224 $ 867 4,419 $ 1,727
==================================================================
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
CNB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (unaudited)
(Dollars in thousands)
Nine Months Ended September 30,
Cash flows from operating activities: 2000 1999
-------------- -------------
Net Income $ 4,033 $ 3,573
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses 597 460
Depreciation and amortization 2,211 1,275
Amortization and accretion and deferred loan fees (350) 153
Deferred taxes 434 (649)
Security gains (losses) 33 (60)
Gain on sale of loans (40) (65)
Net losses on dispositions of acquired property 4 21
Changes in:
Proceeds from sale of loans 7,723 12,497
Origination of loans for sale. (7,737) (10,420)
Other assets and intangibles 117 (2,770)
Interest payable (29) 510
Other liabilities (37) 495
-------------- -------------
Net cash from operating activities 6,959 5,020
Cash flows from investing activities:
Proceeds from maturities of:
Securities held to maturity 310 1,100
Securities available for sale 16,651 20,208
Proceeds from sales of securities available for sale 6,421 17,236
Purchase of:
Securities available for sale (20,038) (69,701)
Net principal disbursed on loans 685 (64,912)
(Purchase) of Federal Reserve Bank Stock (150) (11)
(Purchase) of Federal Home Loan Bank Stock 0 (1,258)
Acquisitions, net of cash received 0 (14,382)
Purchase of premises and equipment (785) (2,117)
Proceeds from the sale of foreclosed assets 269 (21)
-------------- -------------
Net cash from investing activities 3,363 (113,858)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts (9,630) 22,300
Certificates of deposit (7,917) 114,773
Acquisition of treasury stock 0 (607)
Sale of treasury stock 32 18
Cash dividends paid (2,309) (2,103)
Issuance of common stock 0 4,472
Net advances from other borrowings 5,875 1,169
-------------- -------------
Net cash from financing activities (13,949) 140,022
Net increase (decrease) in cash and cash equivalents (3,627) 31,184
Cash and cash equivalents at beginning of year 21,214 23,101
-------------- -------------
Cash and cash equivalents at end of period $ 17,587 $ 54,285
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to
certificate accounts) $ 14,755 $ 8,049
Income Taxes $ 1,000 $ 525
Transfer of Securities from held to maturity to
available for sale $ 3,283 $ 0
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 generally accepted accounting principles. Because
this report is based on an interim period, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
In the opinion of Management of the registrant, the accompanying
consolidated financial statements for the quarter and nine month periods ended
September 30, 2000 and 1999 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 nine-month periods
ended September 30, 2000 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, 1999.
COMMON STOCK PLAN
The Corporation has a common stock plan for key employees and independent
directors. The Stock Incentive Plan, which is administered by a disinterested
committee of the Board of Directors, provides for 250,000 shares of common stock
in the form of qualified options, nonqualified options, stock appreciation
rights or restrictive stock. The Corporation applies Accounting Principles
Board Opinion 25 and related interpretations in accounting for its common stock
plan. Accordingly, no compensation expense has been recognized for the plans.
MERGER AND ACQUISITIONS
On August 18, 1999, the Corporation acquired The First National Bank
of Spangler ("Spangler") located in Northern Cambria, PA. The merger, which was
accounted for as a pooling of interest, was affected by issuing 237,500 shares
of CNB Financial Corporation common stock in exchange for 100% of the
outstanding shares of Spangler. After consummation of the merger, Spangler was
merged into County National Bank. All financial information has been restated
to reflect the merger.
On February 12, 1999, the Corporation acquired the Punxsutawney branch
from an unaffiliated financial institution. This acquisition included deposits
of $36 million, loans of $11 million and certain fixed assets. On September 24,
1999, the Corporation acquired the Johnsonburg, Ridgway, Bradford and Kane
branches from an unaffiliated financial institution. This acquisition included
deposits of $116.2 million, loans of $21.7 million and certain fixed assets.
These acquisitions were accounted for under the purchase method of accounting
and the Corporation recorded $14.4 million as intangible assets. The
consolidated results include the operations of the acquired branches from the
date of acquisition.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments
- -------------------------------------
In June 1998, the Financial Accounting Standards Board (the FASB) issued
Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), subsequently amended by SFAS Nos. 137 and 138, which the Corporation
is required to adopt effective January 1, 2001. SFAS 133 will require the
Corporation to record all derivatives on the balance sheet at fair value.
Changes in derivative fair values will either be recognized in earnings as
offsets to the changes in fair value of related hedged assets, liabilities and
firm commitments or, for forecasted transactions, deferred and recorded as a
component of other stockholders' equity until the hedged transactions occur and
are recognized in earnings. The ineffective portion of a hedging derivative's
change in fair value will be immediately recognized in earnings. The impact of
SFAS 133 on the Corporation's financial statements will depend on a variety of
factors, including future interpretative guidance from the FASB, the future
level of forecasted and actual foreign currency transactions, the extent of the
Corporation's hedging activities, the types of hedging instruments used and the
effectiveness of such instruments. However, the Corporation does not believe
the effect of adopting SFAS 133 will be material to its financial position.
8
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation
Average Balances and Net Interest Margin
(Dollars in thousands)
September 30, 2000 September 30, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest
Balance Rate Inc./Exp. Balance Rate Inc./Exp.
Assets
Interest-bearing deposits with banks $ 1,536 6.25% 72 425 5.02% 16
Federal funds sold and securities
purchased under agreements to resell 981 6.39% 47 6,720 4.82% 243
Investment Securities:
Taxable 96,422 6.17% 4,459 75,093 5.57% 3,136
Tax-Exempt (1) 36,903 6.83% 1,890 37,891 7.00% 1,989
Equity Investments (1) 9,692 6.78% 493 5,444 5.12% 209
- --------------------------------------------------------------------------------------------------------------------------------
Total Investments 145,534 6.38% 6,961 125,573 5.94% 5,593
Loans
Commercial (1) 78,247 8.84% 5,186 64,055 8.67% 4,167
Mortgage (1) 219,736 8.63% 14,216 191,256 8.47% 12,150
Installment 45,811 9.10% 3,126 41,324 9.03% 2,798
Leasing 30,159 7.22% 1,634 28,228 7.46% 1,580
- --------------------------------------------------------------------------------------------------------------------------------
Total loans (2) 373,953 8.61% 24,162 324,863 8.49% 20,695
Total earning assets 519,487 7.99% 31,123 450,436 7.78% 26,288
Non Interest Bearing Assets
Cash & Due From Banks 13,764 - 11,199 -
Premises & Equipment 12,935 - 10,649 -
Other Assets 18,575 - 12,217 -
Allowance for Possible Loan Losses (3,857) - (3,492) -
- --------------------------------------------------------------------------------------------------------------------------------
Total Non-interest earning assets 41,417 -- - 30,573 -- -
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $560,904 $31,123 $481,009 $26,288
=========================================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing 117,763 2.48% 2,188 102,859 2.54% 1,956
Savings 72,232 3.73% 2,023 66,020 3.26% 1,616
Time 242,404 5.24% 9,534 193,299 5.11% 7,401
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 432,399 4.24% 13,745 362,178 4.04% 10,973
Short-term borrowings 6,413 5.86% 282 5,673 4.98% 212
Long-term borrowings 14,872 6.24% 696 17,067 5.05% 646
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 453,684 4.33% 14,723 384,918 4.10% 11,831
Demand - non-interest-bearing 52,004 - 40,408 -
Other liabilities 7,043 - 6,606 -
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 512,731 14,723 431,932 3.65% 11,831
Shareholders' equity 48,173 - 49,077 -- -
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity 560,904 14,723 481,009 11,831
=========================================================================
Interest income/earning assets 7.99% 31,123 7.78% $26,288
Interest expense/interest bearing liabilities 4.33% 14,723 4.10% 11,831
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.66% $16,400 3.68% $14,457
============================= ======================
Interest Income/Interest Earning Assets 7.99% $31,123 7.78% $26,288
Interest expense/Interest Earning Assets 3.78% 14,723 3.50% 11,831
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.21% $16,400 4.28% $14,457
============================= ======================
(1) The amounts are reflected on a fully tax equity basis using the federal
statutory rate of 34% in 2000 and 1999, 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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The following discussion and analysis of the consolidated financial
statements of the Corporation is presented to provide insight into management's
assessment of financial results. The Corporation's subsidiary County National
Bank (the "Bank") provides financial services to individuals and businesses
within the Bank's market area made up of the west central Pennsylvania counties
of Clearfield, 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. Actual unemployment percentages (as
of December 1999) by county are as follows: Cameron 6.4%; Centre 2.4%;
Clearfield 6.8%; Elk 5.2%; Jefferson 5.7%; and McKean 4.5%.
OVERVIEW OF BALANCE SHEET
Total assets (shown in "Consolidated Balance Sheet") have declined 1.2%
since year-end 1999 to $552.2 million. The decline has occurred primarily in
cash and short term investments. The following comments will further explain the
details of the asset fluctuation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $17,587,000 at September 30, 2000
compared to $21,214,000 on December 31, 1999. This decrease resulted from a
reduction of cash build up at year-end 1999 as a contingency for potential risk
of the year 2000 date change. Also, the Corporation has focused on decreasing
the cash balance and investing funds in interest earning assets.
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 $2.8 million (or 2.0%) since December 31, 1999. Of
the Corporation's total securities portfolio, $137,771,000 as of September 30,
2000, (or 97.9%) is classified as available for sale with the balance of
$3,025,000 classified as held to maturity.
The decrease results from payments received on mortgage-backed securities,
as well as maturities of municipal bonds, which were not reinvested into the
portfolio but were used to decrease other borrowings. Also mitigating the
decrease was a change in the fair market valuation of the bond portfolio. In a
declining interest rate environment, bond prices generally increase. This
increase gave the Corporation a decline in unrealized loss of $582,000. The
Corporation generally buys into the market over time and does not attempt to
"time" its transactions. In doing this the highs and lows of the market are
averaged into the portfolio and minimizes the overall effect of different rate
environments.
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.
10
LOANS
The Corporation's loan demand was weak during the third quarter of 2000.
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.
A September 30, 2000, the Corporation had $362,052,000 in loans and leases
outstanding, net of unearned discount, down $712,000 (or -0.2%) since December
31, 1999. The decrease was caused by a loss of floorplan loans to a major US
automaker along with the weak demand throughout the third quarter. Our lending
focus remains on commercial lending which has expanded over the past several
years with additional staff increases to handle more small business loans. We
are also in the process of developing a plan to penetrate the consumers in our
market area.
ALLOWANCE FOR LOAN AND LEASE LOSSES AND NONPERFORMING ASSETS
The Allowance for Loan and Lease Losses as a percentage of loans increased
from 1.07% at December 31, 1999 to 1.10% at September 30, 2000. The dollar
amount of the reserve increased $97,000 since year-end 1999. The increase is a
result of the provision of $597,000 expensed during the nine months less net
charge-offs. The gross charge-offs for the nine months of 2000 were $617,000
while recoveries were $117,000. This level of charge-offs is an increase from
the nine months of 1999 when charge-offs were $418,000 with recoveries of
$170,000.
The adequacy of the allowance for loan and lease losses is subject to a
formal analysis by the loan review staff of the Bank and is deemed to be
adequate to absorb probable losses in the portfolio as of September 30, 2000.
The Corporation has disclosed in its annual report on Form 10-K the process and
methodology supporting the loan loss provision.
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 $2,046,000 or 0.57% of total loans on
September 30, 2000 compared to $2,142,000 or 0.59% on December 31, 1999.
FUNDING SOURCES
The Corporation considers deposits, short-term borrowings, and term debt
when evaluating funding sources. Traditional deposits continue to be the most
significant source of funds for the Corporation at $483,204,000 at September 30,
2000. Deposit decline of 3.5% since year-end 1999 primarily resulted from a
runoff of jumbo CD's that were acquired via our branch purchases, but were
excluded from the premium paid at the time of purchase. This runoff was
anticipated, as the interest rate being paid on these deposits was higher than
the Corporation generally offers.
The Corporation utilizes term borrowings from the Federal Home Loan Bank
(FHLB) to meet funding needs not accommodated by deposit growth. During 2000,
the Corporation borrowed $20 million, of which $10 million was paid off during
the quarter, to fund loan growth and to take advantage of opportunities existing
in the bond market. 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 strong base for profitable
growth. Total Shareholders' Equity was $49,784,000 at September 30, 2000
compared to $47,643,000 at December 31, 1999 an increase of $2,141,000 (or
4.5%). In the first nine months of 2000, the Corporation earned $4,033,000 and
declared dividends of $2,309,000, a dividend payout ratio of 57.2% of net
income.
Approximately 98% of the investment securities in the Corporation's
portfolio are classified as available-for-sale making this portion of the
Corporation's balance sheet more sensitive to the changing market value of
investments. Interest rates in the third quarter of 2000 have been on a
downward trend. This situation has caused an increase in accumulated other
comprehensive income which is included in stockholders' equity of $386,000 since
December 31, 1999.
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
11
capital ratio of 11.17% at September 30, 2000 is above the well-capitalized
standard of 10%. The Corporation's Tier 1 capital ratio of 10.09% is above the
well-capitalized minimum of 6%. The leverage ratio at September 30, 2000 was
6.81%, 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 6 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 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.
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, 1999.
12
RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
The Corporation had net income of $1,393,000 and $4,033,000 for the third
quarter and first nine months of 2000, respectively. The earnings per diluted
share for the respective periods were $0.38 and $1.10. Net income was
$1,293,000 and $3,573,000 for the third quarter and first nine months of 1999,
which equates to earnings per diluted share of $0.35 and $0.97, respectively.
The annualized return on assets and the annualized return on equity for the nine
months of 2000 are 0.96% and 10.80%.
INTEREST INCOME AND EXPENSE
Net interest income totaled $5,038,000 in the third quarter, an increase of
3.9% over the third quarter of 1999 and totaled $15,635,000 for the nine months
of 2000, an increase of 15.4% over the prior year. Total interest income
increased during the quarter by $1,358,000 or 15.4% while interest expense
increased by $1,168,000 or 29.6% when compared to the third quarter of 1999.
PROVISION FOR LOAN LOSSES
The Corporation recorded a provision for loan and lease losses in the third
quarter of $210,000 compared to the third quarter of 1999 at $153,000 and
$597,000 for the nine months of 2000 compared to $460,000 for the same period in
1999. Based on managements evaluation of problem loans, increased charge-offs
and growth in the loan portfolio, managements' analysis indicates the need for a
higher allowance provision.
NON-INTEREST INCOME
Non-interest income increased $285,000 (or 29.9%) and $633,000 (or 24.3%)
in the third quarter and nine months of 2000, respectively, when compared to the
same periods in 1999. Increased deposit account service charges have been the
primary source of the growth in non-interest income. In the nine months,
account service charges totaled $1,691,000 up $572,000 (or 51.1%) over last
year. These increases in fee income were mainly the result of growth in the
number of customers and related deposit accounts over the past twelve months.
Also, trust and asset management fees continue to improve as they increased
12.9% for the nine months ended September 30, 2000 compared to the same period
in 1999 to $685,000 due in large part to an increase in assets under management.
NON-INTEREST EXPENSE
Non-interest expense increased $314,000 or 8.0% during the third quarter of
2000 and $1,872,000 or 17.0% in the nine months of 2000 when compared to the
same periods in 1999. This increased level of non-interest expense is
attributable to the acquisitions that occurred throughout 1999, which increased
our number of locations by five. Increases in salaries and benefits of $697,000
and amortization expense of $780,000 in the first nine months of 2000 over 1999
were due primarily to these acquisitions.
RETURN ON ASSETS
For the nine months ended September 30, 2000, the Corporation's annualized
return on average assets ("ROA") totaled 0.96% down from the 0.99% recorded in
1999. Operating cash earnings ROA, which represents earnings excluding one-time
merger related costs and amortization expense, for the nine months of 2000 was
1.18% as compared to 1.18% in the same period for 1999.
RETURN ON EQUITY
The Corporation's annualized return on average shareholder's equity ("ROE")
in the first nine months was 10.80% compared to 9.88% for 1999. The increase can
be attributed to the Corporation's plan in the previous year to leverage its
capital through acquisition. The increase in assets without adding additional
capital will provide the shareholders more earnings from the same capital base.
Operating cash earnings ROE for the first nine months was 13.26% compared to
11.84% in 1999.
13
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $450,000 in the third quarter of 2000
compared to $446,000 in the third quarter of 1999. For the nine month period
comparisons, the federal tax expense was $1,357,000 in 2000 and $1,101,000 in
1999. The increase reflects higher pre-tax income in the period when compared
to the same period in the prior year.
FUTURE OUTLOOK
Year-to-date results improved when compared to the prior year and were
consistent with management's expectations. Management continues to focus on
growth from increased market share. The goal of growth is to increase
shareholder value as well as provide favorable results in the long-term
profitability of the Corporation.
Loan demand was weak during the third quarter. Loan growth is expected to
be moderate throughout the remainder of the year. The Corporation's loan to
deposit ratio has increased through the first nine months to 74.10% compared to
71.7% at year-end 1999 as funds from the acquisition are being deployed into the
market mainly in consumer and small commercial loans. Management expects the
loan to deposit ratio to remain constant throughout the remainder of 2000.
Consumer loan charge-offs in the third quarter continued to comprise the
majority of the Corporation's recent charge-offs. In the first nine months,
total net charge-offs were $500,000 of which consumer net charge-offs totaled
$410,000. Management believes that the increased efforts of loan review and
collections and our high underwriting standards will give the Bank favorable
charge-off history when compared to peer institutions.
Enhanced non-interest income and controlled non-interest expense are
important factors in the success of the Corporation and is measured in the
financial services industry by the efficiency ratio, calculated according to the
following: non-interest expense (less amortization of intangibles) as a
percentage of fully tax equivalent net interest income and non-interest income
(less non-recurring income). For the nine months ended September 30, 2000, the
Corporation's efficiency ratio was 57.00% compared to 60.37% for the same period
last year.
The efficiency ratio improved as the level of non-interest income has
increased over the 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 during the remainder of 2000, as the Bank
implements a profitability enhancement program and a formal review of our
operational processes. The effects of these two procedures will streamline our
operations and result in an incremental reduction of expenses through the use of
technology and personnel restructuring.
The interest rate environment will continue to play an important role in
the future earnings of the Corporation. The net interest margin has remained
the central focus of management as competitive pressures in the form of reduced
lending rates coupled with higher cost of funds has created pressure to the
margin. Overall net interest income continues to increase due to growth in
average interest earning assets. Management expects further growth in net
interest income for the remainder of 2000.
Management concentrates on return on average equity and earnings per share
evaluations, plus other methods, to measure and direct the performance of the
Corporation. While past results are not an indication of future earnings,
management feels the Corporation is positioned to enhance performance of normal
operations through the remainder of 2000.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements in this Form 10-Q which are not historical fact are forward
looking statements that involve risks and uncertainties, including, but not
limited to, the interest rate environment, the effect of federal and state
banking and tax regulations, the effect of economic conditions, the impact of
competitive products and pricing, and other risks detailed in the Corporation's
Securities and Exchange Commission filings.
14
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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports for the period ended September 30, 2000.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB FINANCIAL CORPORATION
(Registrant)
DATE: November 13, 2000 /s/ James P. Moore
--------------------- -----------------------------
James P. Moore
President and Director
(Principal Executive Officer)
DATE: November 13, 2000 /s/ Joseph B. Bower, Jr.
----------------- -----------------------------
Joseph B. Bower, Jr.
Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)
16