UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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 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 August
7, 2001:
COMMON STOCK: $1.00 PAR VALUE - 3,671,557 SHARES
1
INDEX
PART I.
FINANCIAL INFORMATION
Sequential
Page Number
- -----------
ITEM 1. - Financial Statements
PAGE 3. Consolidated Balance Sheets - June 30, 2001 and December 31, 2000
PAGE 4. Consolidated Statements of Income - Quarter ending June 30, 2001
and 2000
PAGE 5. Consolidated Statements of Income - Six months ending June 30,
2001 and 2000
PAGE 6. Consolidated Statements of Comprehensive Income and 2000 for the
quarter and six months ending June 30, 2001
PAGE 7. Consolidated Statements of Cash Flows - Six months ending June
30, 2001 and 2000
PAGE 8. Notes to Consolidated Financial Statements
ITEM 2 - Management's Discussion and Analysis
PAGE 10. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 3 - Quantitative and Qualitative Disclosures
PAGE 12. Quantitative and Qualitative Disclosures About Market Risk
PART II.
OTHER INFORMATION
PAGE 16. ITEM 1 Legal Proceedings
PAGE 16. ITEM 2 Changes in Securities and Use of Proceeds
PAGE 16. ITEM 3 Defaults Upon Senior Securities
PAGE 16. ITEM 4 Submission of Matters for Security Holders Vote
PAGE 16. ITEM 5 Other Information
PAGE 16. ITEM 6 Exhibits and Reports on Form 8-K
PAGE 16. Signatures
2
CONSOLIDATED BALANCE SHEETS
CNB FINANCIAL CORPORATION
Consolidated Balance Sheets (unaudited)
(Dollars in thousands)
June 30, Dec. 31,
ASSETS 2001 2000
-------------- --------------
Cash and due from banks............................................... $ 14,891 $ 15,711
Interest bearing deposits with other banks............................ 11,212 2,262
-------------- --------------
Total cash and cash equivalents..................................... 26,103 17,973
Securities available for sale......................................... 158,089 136,250
Loans held for sale................................................... 3,189 2,494
Loans and leases...................................................... 367,674 369,878
Less: unearned discount............................................ 2,936 3,722
Less: allowance for loan losses..................................... 4,066 3,879
-------------- --------------
NET LOANS........................................................... 360,672 362,277
FHLB and Federal Reserve Stock........................................ 1,920 3,025
Premises and equipment................................................ 12,832 12,805
Accrued interest receivable and other assets.......................... 7,201 6,412
Intangible, net....................................................... 13,537 14,129
-------------- --------------
TOTAL ASSETS........................................................ $583,543 $555,365
============== ==============
LIABILITIES
Deposits:
Non-interest bearing deposits....................................... $ 54,814 $ 52,757
Interest bearing deposits........................................... 444,592 432,460
-------------- --------------
TOTAL DEPOSITS...................................................... 499,406 485,217
Other borrowings...................................................... 22,000 13,341
Accrued interest and other liabilities................................ 8,211 5,604
-------------- --------------
TOTAL LIABILITIES................................................... 529,617 504,162
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.......................................... 3,758 3,742
Retained earnings................................................... 45,823 44,631
Treasury stock, at cost............................................. (670) (692)
(24,584 shares for June 2001, and 26,862 for December 2000)
Accumulated other comprehensive income (loss)....................... 1,321 (172)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY.......................................... 53,926 51,203
-------------- --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............................ $583,543 $555,365
============== ==============
3
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data) THREE MONTHS ENDED JUNE 30...
INTEREST INCOME 2001 2000
------------------------- -------------------
Loans including fees......................................... $ 7,882 $ 8,138
Deposits with other banks.................................... 42 12
Federal funds sold........................................... 144 0
Securities:
Taxable................................................... 1,671 1,464
Tax-exempt................................................ 421 461
Dividends................................................. 144 158
------------------------- -------------------
TOTAL INTEREST AND DIVIDEND INCOME........................ 10,304 10,233
INTEREST EXPENSE
Deposits..................................................... 4,690 4,481
Borrowed funds............................................... 291 442
------------------------- -------------------
TOTAL INTEREST EXPENSE.................................... 4,981 4,923
------------------------- -------------------
Net interest and dividend income............................. 5,323 5,310
Provision for possible loan losses........................ 270 207
------------------------- -------------------
NET INTEREST INCOME AFTER PROVISION.......................... 5,053 5,103
OTHER INCOME
Trust & asset management fees................................ 272 218
Service charges on deposit accounts.......................... 676 580
Other service charges and fees............................... 143 180
Securities gains(losses)..................................... (14) 6
Gains on sale of loans....................................... (4) 27
Other income................................................. 146 81
------------------------- -------------------
TOTAL OTHER INCOME........................................ 1,219 1,092
OTHER EXPENSES
Salaries..................................................... 1,494 1,630
Employee benefits............................................ 542 586
Net occupancy expense........................................ 597 582
Amortization of intangible................................... 459 463
Other........................................................ 1,210 1,074
------------------------- -------------------
TOTAL OTHER EXPENSES...................................... 4,302 4,335
------------------------- -------------------
Income before income taxes................................... 1,970 1,860
Applicable income taxes...................................... 467 467
------------------------- -------------------
NET INCOME................................................ $ 1,503 $ 1,393
========================= ===================
Earnings Per Share, Based on Weighted Average Shares Outstanding
- ----------------------------------------------------------------
Net income, basic............................................ $ 0.41 $ 0.38
Net income, diluted......................................... $ 0.41 $ 0.38
Cash dividends per share..................................... $ 0.23 $ 0.21
- --------------------------------------------------------------------------------------------------------------------------
4
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
SIX MONTHS ENDED JUNE 30...
INTEREST AND DIVIDEND INCOME 2001 2000
---------------- ----------------
Loans including fees............................................................. $ 15,846 $ 16,012
Deposits with other banks........................................................ 96 31
Federal funds sold............................................................... 247 6
Securities:
Taxable....................................................................... 3,312 2,984
Tax-exempt.................................................................... 853 927
Dividends..................................................................... 289 242
---------------- ----------------
TOTAL INTEREST AND DIVIDEND INCOME............................................ 20,643 20,202
---------------- ----------------
INTEREST EXPENSE
Deposits......................................................................... 9,540 8,955
Borrowed funds................................................................... 585 650
---------------- ----------------
TOTAL INTEREST EXPENSE........................................................ 10,125 9,605
---------------- ----------------
Net interest income........................................................... 10,518 10,597
Provision for possible loan losses............................................ 540 387
---------------- ----------------
NET INTEREST INCOME AFTER PROVISION.............................................. 9,978 10,210
---------------- ----------------
OTHER INCOME
Trust & asset management fees.................................................... 495 450
Service charges on deposit accounts.............................................. 1,285 1,111
Other service charges and fees................................................... 302 312
Securities gains(losses)......................................................... (14) (35)
Gains on sale of loans........................................................... 4 34
Other............................................................................ 304 132
---------------- ----------------
TOTAL OTHER INCOME............................................................ 2,376 2,004
---------------- ----------------
OTHER EXPENSES
Salaries......................................................................... 2,973 3,125
Employee benefits................................................................ 1,062 1,160
Net occupancy expense............................................................ 1,230 1,222
Amortization of intangible....................................................... 897 926
Other............................................................................ 2,410 2,234
---------------- ----------------
TOTAL OTHER EXPENSES.......................................................... 8,572 8,667
---------------- ----------------
Income before income taxes....................................................... 3,782 3,547
Applicable income taxes.......................................................... 897 907
---------------- ----------------
NET INCOME.................................................................... $ 2,885 $ 2,640
================ ================
Earnings Per Share, Based on Weighted Average Shares Outstanding
- ----------------------------------------------------------------
Net income, basic................................................................ $ 0.79 $ 0.72
Net income, diluted.............................................................. $ 0.79 $ 0.72
Cash dividends per share......................................................... $ 0.46 $ 0.42
- --------------------------------------------------------------------------------
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 Six Month Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Net income $1,503 $1,393 $2,885 $2,640
Other comprehensive income, net to tax
Unrealized gains/(losses) on securities:
Unrealized gains/(losses) arising
during the period 209 146 1,484 (468)
Less: Reclassified adjustment for
accumulated gains/(losses)
included in net income (9) 4 (9) (23)
-------------- ---------------
Unrealized gains/(losses) on securities 218 142 1,493 (445)
-------------- ---------------
Comprehensive income $1,721 $1,535 $4,378 $2,195
-------------- ---------------
6
CONSOLIDATED STATEMENTS OF CASHFLOWS
CNB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (unaudited)
(Dollars in thousands)
Six Months Ended June 30...
Cash flows from operating activities: 2001 2000
--------------- --------------
Net Income $ 2,885 $ 2,640
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses............................................... 540 387
Depreciation and amortization........................................... 1,478 1,470
Amortization and accretion and deferred loan fees....................... (245) (237)
Deferred taxes.......................................................... (486) 478
Security losses......................................................... 14 35
Gain on sale of loans................................................... (4) (34)
Proceeds from sale of loans.............................................. 10,331 5,618
Origination of loans for sale............................................ (11,021) (4,500)
Net (gains) losses on dispositions of acquired property.................. (5) 0
Changes in:
Interest receivable..................................................... 5 (65)
Other assets and intangibles............................................ (214) 684
Interest payable........................................................ (147) (161)
Other liabilities....................................................... 2,472 177
--------------- --------------
Net cash provided by operating activities................................... 5,603 6,492
Cash flows from investing activities:
Proceeds from maturities of:
Securities held to maturity........................................... 0 310
Securities available for sale......................................... 24,787 8,197
Proceeds from sales of securities available for sale...................... 60 4,934
Purchase of securities available for sale................................. (44,513) (9,924)
Loan originations and payments, net....................................... 1,384 (14,861)
Purchase of premises and equipment........................................ (608) (640)
Proceeds from the sale of foreclosed assets............................... 224 165
--------------- --------------
Net cash used in investing activities....................................... (18,666) (11,819)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts........................... 12,842 (4,203)
Certificates of deposit............................................... 1,347 (9,707)
Proceeds from sale of treasury stock.................................. 32 23
Cash dividends paid................................................... (1,687) (1,539)
Net advances from other borrowings........................................ 8,659 16,440
--------------- --------------
Net cash provided by financing activities................................... 21,193 1,014
--------------- --------------
Net increase (decrease) in cash and cash equivalents....................... 8,130 (4,313)
Cash and cash equivalents at beginning of year.............................. 17,973 21,214
--------------- --------------
Cash and cash equivalents at end of period.................................. $ 26,103 $ 16,901
=============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to certificate accounts).. $ 10,272 $ 9,444
Income Taxes........................................................... $ 1,120 $ 540
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 six month periods ended
June 30, 2001 and 2000 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, 2001 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, 2000.
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.
EARNINGS PER SHARE
Earnings per share is calculated on the weighted average number of common
shares outstanding during the year. The number of shares used for basic and
diluted was 3,667,970. Stock options for 47,500 shares of common stock were not
considered in computing diluted earnings per common share because they were
anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In July, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations,
effective for all business combinations initiated after June 30, 2001, as well
as all business combinations accounted for by the purchase method that are
completed after June 30, 2001. The new statement requires that the purchase
method of accounting be used for all business combinations and prohibits the use
of the pooling-of-interests method. The adoption of Statement No. 141 is not
expected to have a material effect on the Corporation's financial position or
results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. The new statement changes the accounting for
goodwill from an amortization method to an impairment-only approach. Thus,
amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this Statement. At June 30, 2001, the
Corporation has approximately$13.5 million of intangibles resulting from the
purchase of loans, deposits and banking facilities from other financial
institutions. Currently management is evaluating what effect the adoption of
Statement No. 142 will have on the Corporation's financial position or results
of operations.
8
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation
Average Balances and Net Interest Margin
(Dollars in thousands)
June 30, 2001 June 30, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest
Balance Rate Inc./Exp. Balance Rate Inc./Exp.
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits with banks $ 3,600 5.33% 96 1,101 5.63% 31
Federal funds sold and securities
purchased under agreements to resell 10,715 4.61% 247 222 5.41% 6
Investment Securities:
Taxable 106,304 6.23% 3,312 97,271 6.14% 2,984
Tax-Exempt (1) 34,677 6.75% 1,171 36,169 7.08% 1,280
Equity Investments (1) 10,238 7.03% 360 8,973 6.58% 295
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investments 165,534 6.27% 5,186 143,736 6.40% 4,596
Loans
Commercial (1) 81,389 8.55% 3,480 77,323 8.78% 3,395
Mortgage (1) 223,489 8.66% 9,675 218,830 8.57% 9,381
Installment 39,167 9.61% 1,882 46,957 9.47% 2,223
Leasing 24,758 7.38% 914 30,802 7.29% 1,123
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans (2) 368,803 8.65% 15,951 373,912 8.62% 16,122
-----------------------------------------------------------------------------------
Total earning assets 534,337 7.91% 21,137 517,648 8.00% 20,718
Non Interest Bearing Assets
Cash & Due From Banks 12,823 - 13,840 -
Premises & Equipment 12,930 - 12,936 -
Other Assets 19,533 - 20,162 -
Allowance for Possible Loan Losses (4,015) - (3,816) -
- -----------------------------------------------------------------------------------------------------------------------------------
Total Non-interest earning assets 41,271 -- - 43,122 -- -
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $575,608 $21,137 $560,770 $20,718
===================================================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing 119,744 2.12% 1,270 118,340 2.44% 1,443
Savings 75,295 3.48% 1,310 72,839 3.68% 1,341
Time 245,858 5.66% 6,960 242,328 5.09% 6,171
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 440,897 4.33% 9,540 433,507 4.13% 8,955
Short-term borrowings 1,259 5.08% 32 8,510 5.92% 252
Long-term borrowings 19,945 5.55% 553 12,885 6.18% 398
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 462,101 4.38% 10,125 454,902 4.22% 9,605
Demand - non-interest-bearing 52,283 - 51,525 - -
Other liabilities 7,605 - 5,262 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 521,989 10,125 511,689 3.75% 9,605
Shareholders' equity 53,619 - 49,081 -- -
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity 575,608 10,125 560,770 9,605
===================================================================================
Interest income/earning assets 7.91% 21,137 8.00% $20,718
Interest expense/interest bearing liabilities 4.38% 10,125 4.22% 9,605
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.53% $11,012 3.78% $11,113
============================== ============================
Interest Income/Interest Earning Assets 7.91% $21,137 8.00% $20,718
Interest expense/Interest Earning Assets 3.79% 10,125 3.71% 9,605
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.12% $11,012 4.29% $11,113
----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
(1) The amounts are reflected on a fully tax equity basis using the federal
statutory rate of 34% in 2001 and 2000, 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
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 (shown in the Consolidated Balance Sheet) have grown 5.1%
since year-end 2000 to $583.5 million. The growth has occurred primarily in cash
equivalents and securities. The following comments will further explain the
details of the asset fluctuation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $26,103,000 at June 30, 2001 compared to
$17,973,000 on December 31, 2000. This increase resulted from a significant
inflow of deposits during the first half of 2001. The Corporation will continue
to focus on reducing the cash balance into higher yielding earning assets during
the year.
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 increased $21.8 million (or 16.0%) since December 31, 2000.
Ten million dollars of the increase is from purchasing corporate notes against a
borrowing from the Federal Home Loan Bank of similar maturity. As previously
mentioned, the increase in cash has been fairly dramatic during 2001. The focus
has been to get these cash equivalents into higher yielding assets as
opportunities are defined. In addition to the $10.0 million borrowed,
approximately $10.0 million of cash equivalents have been placed into the
securities portfolio.
Also, contributing to the increase 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 an unrealized
gain of $2.0 million, an increase of $2.2 million over year-end. The
Corporation generally buys into the market over time and does not attempt to
"time" its transactions. In using this approach, the
10
high and lows of the market are average into the portfolio and minimize 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.
LOANS
The Corporation's loan demand was weak during the first six months of 2001. 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 June 30, 2001, the Corporation had $364,738,000 in loans and leases
outstanding, net of unearned discount, down $1,418,000 (or -0.4%) since December
31, 2000. This decline has mainly occurred in auto loans and leases. These
markets are very competitive currently and the Corporation has made a decision
not to stress interest margins in this area.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses as a percentage of loans
increased from 1.06% at December 31, 2000 to 1.11% at June 30, 2001. The dollar
amount of the reserve increased $187,000 since year-end 2000. The increase is a
result of the provision of $540,000 expensed during the six months less net
charge-offs. The gross charge-offs for the six months of 2001 were $434,000
while recoveries were $81,000. This level of net charge-offs is a slight
decrease from the six months of 2000 when charge-offs were $421,000 with
recoveries of $57,000
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 June 30, 2001. 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 were $2,471,000 or 0.68% of total loans
on June 30, 2001 compared to $2,571,000 or 0.70% on December 31, 2000.
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 $499,406,000 at June
30, 2001. Deposit increase of 2.9% since year-end 2000 is from a major
marketing strategy focusing on retail consumer customers. This strategy
includes direct mailing offering consumers a free checking product.
The Corporation utilizes term borrowings from the Federal Home Loan
Bank (FHLB) to meet funding needs not accommodated by deposit growth. During
2001, the Corporation borrowed $10 million 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 $53,926,000 at June 30, 2001
compared to $51,203,000 at December 31, 2000 an
11
increase of $2,723,000 (or 5.3%). In the first six months of 2001, the
Corporation earned $2,885,000 and declared dividends of $1,687,000, a dividend
payout ratio of 58.5% 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
2001 have declined dramatically. This situation has caused a fairly significant
increase in accumulated other comprehensive income, included in stockholders'
equity of $1,493,000 since December 31, 2000.
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 10.82% at June 30, 2001 is above
the well-capitalized standard of 10%. The Corporation's Tier 1 capital ratio of
9.79% is above the well-capitalized minimum of 6%. The leverage ratio at June
30, 2001 was 7.11%, 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 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.
12
RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
The Corporation had net income of $1,503,000 and $2,885,000 for the
second quarter and first six months of 2001, respectively. The earnings per
diluted share for the respective periods were $0.41 and $0.79. Net income was
$1,393,000 and $2,640,000 for the second quarter and first six months of 2000,
which equates to earnings per diluted share of $0.38 and $0.72, respectively.
The return on assets and the return on equity for the six months of 2001 are
1.00% and 10.86%.
INTEREST INCOME AND EXPENSE
Net interest income totaled $5,323,000 in the second quarter, an
increase of 0.2% over the second quarter of 2000 and totaled $10,518,000 for the
six months of 2001, a decrease of 0.7% compared to the prior year. Total
interest income increased during the quarter by $71,000 or 0.7% while interest
expense increased by $58,000 or 1.2% when compared to the second quarter of
2000. The relatively nominal increase in interest income is a result of a lower
yield on earning assets. 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. In addition, loans have decreased $5.1 million
on average since the prior year. Interest expense has been flat 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 $270,000 compared to the second quarter of 2000 at $207,000
and $540,000 for the six months of 2001 compared to $387,000 in 2000. Based on
managements' evaluation of problem loans, increased charge-offs, expected growth
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 $127,000 (11.6%) and $372,000 (18.6%) in
the second quarter and six months of 2001, respectively, when compared to the
same periods in 2000. Increased deposit account service charges have been the
primary source of the growth in non-interest income. In the six months, account
service charges totaled $1,285,000 up $174,000 (or 15.7%) 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 10.0% over 2000
to $495,000.
NON-INTEREST EXPENSE
Non-interest expense decreased $33,000 or 0.8% during the second
quarter of 2001 and $95,000 1.1% in the six months of 2001 when compared to the
same periods in 2000. The decrease can be attributed to adjustments made to our
staffing levels as well as a change in our health care provider, both of which
occurred in the fourth quarter of 2000. These adjustments resulted in a
reduction of $250,000 in salaries and benefits during the first six months of
2001 as compared to 2000.
RETURN ON ASSETS
For the six months ended June 30, 2001, the Corporation's return on average
assets ("ROA") totaled 1.00% up from the 0.94% recorded in 2000. Operating cash
earnings ROA, which represents
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earnings excluding one-time merger related costs and amortization expense, for
the six months of 2001 was 1.21% as compared to 1.16% in the same period for
2000.
RETURN ON EQUITY
The Corporation's return on average shareholder's equity ("ROE") in
the first six months was 10.86% compared to 10.79% for 2000. The increase can be
attributed to the Corporation's improvement in core earnings. The continued
increase in assets without adding additional capital will provide the
shareholders more earnings from virtually the same capital base. Operating cash
earnings ROE for the first six months was 13.09% compared to 13.29% in 2000.
Management expects improvement in ROE during 2001 and anticipates
further increases with earnings growth. The Corporation is currently well
capitalized under regulatory industry standards.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $467,000 in the second quarter of 2001
compared to $467,000 in the second quarter of 2000. For the six-month period
comparisons, the federal tax expense was $897,000 in 2001 and $907,000 in 2000.
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 first six months. Loan growth is
expected to provide an increase of 1% to 3% for the year over year-end 2000.
The Corporation's loan to deposit ratio has decreased through the first six
months to 72.2% compared to 74.7% at year-end 2000. Deposit growth has
continued to be much stronger than loan activity with this trend expected to
continue throughout the remainder of the year.
Consumer loan charge-offs in the second quarter continued to comprise
the majority of the Corporation's recent charge-offs. In the first six months,
total net charge-offs were $353,000 of which consumer net charge-offs totaled
$203,000. The charge-off level for the remainder of 2001 is expected to
increase slightly when compared to the first six months due to a commercial loan
foreclosure that could reflect a one-time loss of approximately $100,000.
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 six months ended June 30, 2001, the
Corporation's efficiency ratio was 55.92% compared to 57.43% for the same period
last year.
The efficiency ratio improved as the level of non-interest income has
increased and non-interest expense has decreased 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 non-interest expenses during the remainder
of 2001. Also, the Bank expects to see continued improvement in non-interest
income as the result of several initiatives that are taking place in 2001.
Since year end 2000, short term interest rates such as the Federal
Funds Rate and the Prime Lending Rate have declined by 250basis points,
resulting in a more rapidly declining yield on earning assets compared to the
more slowly declining cost of funds. This downward movement in interest rates
has
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therefore created some compression to the net interest margin. Overall interest
income continues to increase due to the growth in the amount of interest earning
assets. Management expects further growth in interest income coupled with
reduced interest costs to provide the Corporation with improved net interest
income for the remainder of 2001.
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 2001.
"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.
ITEM 3
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, 2000.
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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 17, 2001, 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
William A. Franson Richard D. Gathagan Dennis L. Merrey William R. Owens
For 2,700,897 2,753,400 2,719,007 2,698,497
The total shares voted at the annual meeting were 2,850,174.
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - None
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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: August7,2001 /s/ William F. Falger
------------------- -----------------------------
William F. Falger
President and Director
(Principal Executive Officer)
DATE: August 7,2001 /s/ Joseph B. Bower, Jr.
-------------------- -----------------------------
Joseph B. Bower, Jr.
Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)
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