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, 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
November 7, 2001:
COMMON STOCK: $1.00 PAR VALUE - 3,675,221 SHARES
1
INDEX
PART I.
FINANCIAL INFORMATION
Sequential
Page Number
- -----------
ITEM 1. - Financial Statements
PAGE 3. Consolidated Balance Sheets - September 30, 2001 and December 31,
2000
PAGE 4. Consolidated Statements of Income - Quarters ending September 30,
2001 and 2000
PAGE 5. Consolidated Statements of Income - Nine months ending September
30, 2001 and 2000
PAGE 6. Consolidated Statements of Comprehensive Income for the quarters
and nine months ending September 30, 2001 and 2000
PAGE 7. Consolidated Statements of Cash Flows - Nine months ending
September 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 15. 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 (unudited)
(Dollars on thosands)
September 30 Dec.31,
ASSETS 2001 2000
-------- --------
Cash and due from banks............................... $ 17,808 $ 15,711
Interest bearing deposits with other banks............ 12,834 2,262
-------- --------
Total cash and cash equivalents .................... 30,642 17,973
Securities available for sale......................... 155,947 136,250
Loans held for sale................................... 3,070 2,494
Loans and leases...................................... 377,259 369,878
Less: unearned discount............................ 2,562 3,722
Less: allowance for loan losses..................... 4,001 3,879
-------- --------
NET LOANS........................................... 370,696 362,277
FHLB and Federal Reserve Stock........................ 1,911 3,025
Premises and equipment................................ 12,635 12,805
Accrued interest receivable and other assets.......... 6,427 6,412
Intangible assets, net................................ 13,130 14,129
-------- --------
TOTAL ASSETS........................................ $594,458 $555,365
======== ========
LIABILITIES
Deposits:
Non-interest bearing deposits....................... $ 57,318 $ 52,757
Interest bearing deposits........................... 450,410 432,460
-------- --------
TOTAL DEPOSITS...................................... 507,728 485,217
Other borrowings...................................... 22,000 13,341
Accrued interest and other liabilities................ 9,163 5,604
-------- --------
TOTAL LIABILITIES................................... 538,891 504,162
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.......................... 3,782 3,742
Retained earnings................................... 46,714 44,631
Treasury stock, at cost............................. (657) (692)
(22,598 shares for September 2001, and 26,862 for
December 2000)
Accumulated other comprehensive income (loss)....... 2,034 (172)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.......................... 55,567 51,203
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............ $594,458 $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 SEPTEMBER 30
INTEREST INCOME 2001 2000
------------ ---------
Loans including fees.............................................. $ 7,797 $ 7,991
Deposits with other banks......................................... 36 41
Federal funds sold................................................ 108 41
Securities:
Taxable........................................................ 1,769 1,475
Tax-exempt..................................................... 366 446
Dividends...................................................... 144 162
---------- ---------
TOTAL INTEREST AND DIVIDEND INCOME............................. 10,220 10,156
INTEREST EXPENSE
Deposits.......................................................... 4,477 4,790
Borrowed funds.................................................... 298 328
---------- ---------
TOTAL INTEREST EXPENSE......................................... 4,775 5,118
---------- ---------
Net interest and dividend income.................................. 5,445 5,038
Provision for loan losses...................................... 270 210
---------- ---------
NET INTEREST INCOME AFTER PROVISION............................... 5,175 4,828
NON-INTEREST INCOME
Trust & asset management fees..................................... 258 235
Service charges on deposit accounts............................... 753 580
Other service charges and fees.................................... 120 154
Securities gains(losses).......................................... 258 2
Gains on sale of loans............................................ 19 6
Other income...................................................... 268 262
---------- ---------
TOTAL NON-INTEREST INCOME...................................... 1,676 1,239
NON-INTEREST EXPENSES
Salaries.......................................................... 1,529 1,520
Employee benefits................................................. 500 549
Net occupancy expense............................................. 590 570
Amortization of intangible........................................ 462 463
Other............................................................. 1,408 1,122
---------- ---------
TOTAL NON-INTEREST EXPENSES.................................... 4,489 4,224
---------- ---------
Income before income taxes........................................ 2,362 1,843
Applicable income taxes........................................... 627 450
---------- ---------
NET INCOME..................................................... $ 1,735 $ 1,393
========== =========
Earnings Per Share, Based on Weighted Average Shares Outstanding
- ----------------------------------------------------------------
Net income, basic................................................. $ 0.47 $ 0.38
Net income, diluted............................................... $ 0.47 $ 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) NINE MONTHS ENDED SEPTEMBER 30
INTEREST AND DIVIDEND INCOME 2001 2000
----------- ---------
Loans including fees................................................ $ 23,643 $ 24,003
Deposits with other banks........................................... 132 72
Federal funds sold.................................................. 355 47
Securities:
Taxable.......................................................... 5,081 4,459
Tax-exempt....................................................... 1,219 1,373
Dividends........................................................ 433 404
----------- ---------
TOTAL INTEREST AND DIVIDEND INCOME............................... 30,863 30,358
----------- ---------
INTEREST EXPENSE
Deposits............................................................ 14,017 13,745
Borrowed funds...................................................... 883 978
----------- ---------
TOTAL INTEREST EXPENSE........................................... 14,900 14,723
----------- ---------
Net interest income.............................................. 15,963 15,635
Provision for loan losses........................................ 810 597
----------- ---------
NET INTEREST INCOME AFTER PROVISION................................. 15,153 15,038
----------- ---------
NON-INTEREST INCOME
Trust & asset management fees....................................... 753 685
Service charges on deposit accounts................................. 2,038 1,691
Other service charges and fees...................................... 422 466
Securities gains(losses)............................................ 244 (33)
Gains on sale of loans.............................................. 23 40
Other............................................................... 572 394
----------- ---------
TOTAL NON-INTEREST INCOME........................................ 4,052 3,243
----------- ---------
NON-INTEREST EXPENSES
Salaries............................................................ 4,502 4,645
Employee benefits................................................... 1,562 1,709
Net occupancy expense............................................... 1,820 1,792
Amortization of intangible.......................................... 1,359 1,389
Other............................................................... 3,818 3,356
----------- ---------
TOTAL NON-INTEREST EXPENSES...................................... 13,061 12,891
----------- ---------
Income before income taxes.......................................... 6,144 5,390
Applicable income taxes............................................. 1,524 1,357
----------- ---------
NET INCOME....................................................... $ 4,620 $ 4,033
=========== =========
Earnings Per Share, Based on Weighted Average Shares Outstanding
- ----------------------------------------------------------------
Net income, basic................................................... $ 1.26 $ 1.10
Net income, diluted................................................. $ 1.26 $ 1.10
Cash dividends per share............................................ $ 0.69 $ 0.63
- ------------------------------------------------------------------------------------------------------------
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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 1,735 $ 1,393 $ 4,620 $ 4,033
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities:
Unrealized gains/(losses) arising
during the period 884 832 2,367 364
Less: Reclassified adjustment for
accumulated gains/(losses)
included in net income 171 1 161 (22)
---------------------- -----------------------
Other comprehensive income 713 831 2,206 386
---------------------- -----------------------
Comprehensive income $ 2,448 $ 2,224 $ 6,826 $ 4,419
====================== =======================
6
CONSOLIDATED STATEMENTS OF CASHFLOWS
CNB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30...
CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000
--------------- ------------------
Net Income................................................................... $ 4,620 $ 4,033
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses................................................ 810 597
Depreciation and amortization............................................ 2,243 2,211
Amortization and accretion and deferred loan fees ....................... (407) (350)
Deferred taxes........................................................... (469) 434
Security (gains) losses.................................................. (244) 33
Gain on sale of loans.................................................... (23) (40)
Proceeds from sale of loans............................................... 17,117 7,723
Origination of loans for sale............................................. (17,670) (7,737)
Net (gains) losses on dispositions of acquired property................... 48 4
Changes in:
Interest receivable...................................................... 367 (343)
Other assets............................................................. (104) 310
Interest payable......................................................... (142) (29)
Other liabilities........................................................ 3,035 (37)
--------------- ------------------
Net cash provided by operating activities.................................... 9,181 6,809
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of:
Securities held to maturity............................................ 0 310
Securities available for sale.......................................... 37,926 16,651
Proceeds from sales of securities available for............................ 17,250 6,421
sale.......................
Purchase of securities available for....................................... (71,414) (20,038)
sale............................
Loan originations and payments, net........................................ (8,695) 685
Purchase of premises and equipment......................................... (714) (785)
Proceeds from the sale of foreclosed assets................................ 427 269
--------------- ------------------
Net cash provided by (used in) investing activities.......................... (25,220) 3,513
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Checking, money market and savings accounts............................ 17,990 (9,630)
Certificates of deposit................................................ 4,521 (7,917)
Proceeds from sale of treasury stock....................................... 70 32
Cash dividends paid........................................................ (2,532) (2,309)
Net advances from other borrowings......................................... 8,659 5,875
--------------- ------------------
Net cash provided by (used in) financing activities.......................... 28,708 (13,949)
--------------- ------------------
Net increase (decrease) in cash and cash equivalents........................ 12,669 (3,627)
Cash and cash equivalents at beginning of year............................... 17,973 21,214
--------------- ------------------
Cash and cash equivalents at end of period................................... $ 30,642 $ 17,587
=============== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (including amount credited directly to certificate accounts)... $ 15,042 $ 14,755
Income Taxes............................................................ $ 1,770 $ 1,000
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, 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 nine-month periods
ended September 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 3,669,184. 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 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 September 30,
2001, the Corporation has approximately $12.8 million of intangibles resulting
from the purchase of loans, deposits and banking facilities from other financial
institutions. Management expects no effect from the adoption of Statement No.
142 on the Corporation's financial position or results of operations. However,
there remains some uncertainty in the interpretation of some sections within
statement 142, which could have a positive impact to the Corporation.
8
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation
Average Balances and Net Interest Margin
(Dollars in thousands)
September 30, 2001 September 30, 2000
- -----------------------------------------------------------------------------------------------------------------------------
Average ANNUAL Interest Average ANNUAL INTEREST
Balance RATE Inc./Exp. Balance RATE INC./EXP.
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-bearing deposits with banks $ 3,650 4.82% 132 1,536 6.25% 72
Federal funds sold and securities
purchased under agreements to resell 11,593 4.08% 355 981 6.39% 47
Securities:
Taxable 110,255 6.14% 5,081 96,422 6.17% 4,459
Tax-Exempt (1) 33,045 6.77% 1,679 36,903 6.83% 1,890
Equity (1) 10,280 7.06% 544 9,692 6.78% 493
- -----------------------------------------------------------------------------------------------------------------------------
Total Investments 168,823 6.15% 7,791 145,534 6.38% 6,961
LOANS
Commercial (1) 83,078 8.28% 5,158 78,247 8.84% 5,186
Mortgage (1) 223,528 8.66% 14,526 219,736 8.63% 14,216
Installment 39,939 9.36% 2,804 45,811 9.10% 3,126
Leasing 23,941 7.31% 1,313 30,159 7.22% 1,634
- -----------------------------------------------------------------------------------------------------------------------------
Total loans (2) 370,486 8.57% 23,801 373,953 8.61% 24,162
------------------------------------------------------------------------
Total earning assets 539,309 7.81% 31,592 519,487 7.99% 31,123
NON INTEREST BEARING ASSETS
Cash & Due From Banks 13,354 - 13,764 -
Premises & Equipment 12,872 - 12,935 -
Other Assets 19,973 - 18,575 -
Allowance for Possible Loan Losses (4,023) - (3,857) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Non-interest earning assets 42,176 -- - 41,417 -- -
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $581,485 $31,592 $560,904 $31,123
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING DEPOSITS
Demand - interest-bearing 121,162 1.98% 1,798 117,763 2.48% 2,188
Savings 76,465 3.23% 1,852 72,232 3.73% 2,023
Time 246,809 5.60% 10,368 242,404 5.24% 9,533
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 444,436 4.21% 14,018 432,399 4.24% 13,744
Short-term borrowings 1,277 4.39% 42 6,413 5.86% 282
Long-term borrowings 19,963 5.61% 840 14,872 6.25% 697
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 465,676 4.27% 14,900 453,684 4.33% 14,723
Demand - non-interest-bearing 53,372 52,004
Other liabilities 8,175 7,043
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 527,223 14,900 512,731 14,723
Shareholders' equity 54,262 48,173
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 581,485 14,900 560,904 14,723
======================================================================
Interest income/earning assets 7.81% 31,592 7.99% $31,123
Interest expense/interest bearing liabilities 4.27% 14,900 4.33% 14,723
- -----------------------------------------------------------------------------------------------------------------------------
NET INTEREST SPREAD 3.54% $16,692 3.66% $16,400
==================== =====================
Interest Income/Interest Earning Assets 7.81% $31,592 7.99% $31,123
Interest expense/Interest Earning Assets 3.68% 14,900 3.78% 14,723
- -----------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.13% $16,692 4.21% $16,400
==================== =====================
- -----------------------------------------------------------------------------------------------------------------------------
(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 7.0%
since year-end 2000 to $594.5 million. The growth has occurred in securities,
loans and cash equivalents. The following comments will further explain the
details of the asset fluctuation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $30,642,000 at September 30, 2001
compared to $17,973,000 on December 31, 2000. The increase resulted from a
significant inflow of deposits during 2001. The Corporation will continue to
focus on redeploying the cash balance by buying in higher yielding earning
assets during the fourth quarter.
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 $19.7 million (or 14.5%) since December 31, 2000.
Ten million dollars of the increase is from purchasing corporate notes utilizing
borrowed funds 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 $2.2 million, an increase of $2.4 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 highs and lows of the
market are averaged 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.
10
LOANS
The Corporation's loan demand improved during the third quarter 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 September 30, 2001, the Corporation had $374,697,000 in loans and
leases outstanding, net of unearned discount, up $8,541,000 (or 2.3%) since
December 31, 2000. The increase has mainly occurred in commercial and mortgage
loans. The increase has been mitigated by significant decreases in auto loans
and leases that occurred during 2001. The auto financing market is currently
very competitive and the Corporation has elected to maintain acceptable margins
rather than compete at reduced margins. This strategy has the effect of
reducing new auto loan and lease originations.
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 1.07% at September 30, 2001. The
dollar amount of the reserve increased $122,000 since year-end 2000. The
increase is a result of the provision of $810,000 expensed during the nine
months less net charge-offs. The gross charge-offs for the nine months of 2001
were $803,000 while recoveries were $115,000. This level of net charge-offs is
an increase from the nine months of 2000 when charge-offs were $617,000 with
recoveries of $117,000.
The adequacy of the allowance for loan and lease losses is subject to
a formal analysis by the credit administration staff of the Bank and is deemed
to be adequate to absorb probable losses in the portfolio as of September 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 $2,449,000 or 0.65% of total loans on
September 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 $507,728,000 at
September 30, 2001. Deposits have increased 4.6% since year-end 2000 primarily
as a result of a major marketing strategy focusing on consumer customers. The
principal component of this strategy has been the introduction of free checking
accounts promoted by a direct mail campaign offering a premium item for account
opening.
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 $55,567,000 at September 30,
2001 compared to $51,203,000 at December 31, 2000 an increase of $4,364,000 (or
8.5%). In the first nine months of 2001, the Corporation earned $4,620,000 and
declared dividends of $2,532,000, a dividend payout ratio of 54.8% 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 nine months
of 2001 have declined dramatically. This situation has caused a significant
increase in
11
accumulated other comprehensive income, included in stockholders' equity of
$2,206,000 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 10.88% at September 30, 2001 is
above the well-capitalized standard of 10%. The Corporation's Tier 1 capital
ratio of 9.87% is above the well-capitalized minimum of 6%. The leverage ratio
at September 30, 2001 was 7.13%, 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 $1,735,000 and $4,620,000 for the
third quarter and first nine months of 2001, respectively. The earnings per
diluted share for the respective periods were $0.47 and $1.26. Net income was
$1,393,000 and $4,033,000 for the third quarter and first nine months of 2000,
which equates to earnings per diluted share of $0.38 and $1.10, respectively.
The return on assets and the return on equity for the nine months of 2001 are
1.06% and 11.54%.
INTEREST INCOME AND EXPENSE
Net interest income totaled $5,445,000 in the third quarter, an
increase of 8.1% over the third quarter of 2000 and totaled $15,963,000 for the
nine months of 2001, an increase of 2.1% compared to the prior year. Total
interest income increased during the quarter by $64,000 or 0.6% while interest
expense decreased by $343,000 or 6.7% when compared to the third 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. Interest expense began to decline during the
quarter 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
third quarter of $270,000 compared to the third quarter of 2000 at $210,000 and
$810,000 for the nine months of 2001 compared to $597,000 in 2000. Based on
managements' evaluation of problem loans, increased charge-offs 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 $437,000 (35.3%) and $809,000 (24.9%) in
the third quarter and the first nine months of 2001, respectively, when compared
to the same periods in 2000. Increased deposit account related charges have
been the primary source of the growth in non-interest income. In the nine
months, deposit account charges totaled $2,038,000 up $347,000 (or 20.5%) over
last year. This increase in fee income was mainly the result of growth in the
number of customers and related deposit accounts over the past twelve months.
Also, the Corporation has done some restructuring within the securities
portfolio that resulted in realized gains of $214,000. Total security gains
reflected during the nine months have increased $277,000 compared to the prior
year.
NON-INTEREST EXPENSE
Non-interest expense increased $265,000 or 6.3% during the third
quarter of 2001 and $170,000 or 1.32% in the nine months of 2001 when compared
to the same periods in 2000. The increase can be attributed mainly to the cost
of the direct mailing and premiums associated with the free checking promotion.
In addition, costs of foreclosure on assets have increased throughout the year.
These increases have been mitigated by 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 have resulted in a reduction of
$290,000 in salaries and benefits during the first nine months of 2001 as
compared to 2000.
RETURN ON ASSETS
For the nine months ended September 30, 2001, the Corporation's
annualized return on average assets ("ROA") totaled 1.06% up from the 0.96%
recorded in 2000. Operating cash earnings ROA, which represents earnings
excluding acquisition related amortization expense, for the nine months of 2001
was 1.27% as compared to 1.18% in the same period for 2000.
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RETURN ON EQUITY
The Corporation's annualized return on average shareholder's equity
("ROE") in the first nine months was 11.54% compared to 10.80% 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 nine months was 13.79% compared to 13.26% in
2000.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $627,000 in the third quarter of 2001
compared to $450,000 in the third quarter of 2000. For the nine-month period
comparisons, the federal tax expense was $1,524,000 in 2001 and $1,357,000 in
2000. This increase in tax expense is the result of taxable income in 2001
compared to 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 improved during the third quarter of 2001, however the
Corporation's loan to deposit ratio has decreased through the first nine months
to 73.0% compared to 74.7% at year-end 2000. The decline in this ratio is the
result in a faster rate of growth in deposits versus loans during the year.
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 $688,000 of which consumer net charge-offs totaled
$413,000. The charge-off level for the fourth quarter of 2001 is expected to be
comparable with the third quarter.
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, 2001, the
Corporation's efficiency ratio was 55.84% compared to 58.45% for the same period
last year.
The efficiency ratio improved as the level of non-interest income has
increased at a higher rate than non-interest expense 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. 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 400 basis 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 therefore created 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 earning assets 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.
14
"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.
15
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 - August 17, 2001
On August 15, 2001 CNB Financial Corporation announced the approval
of a plan to repurchase up to 180,000 shares of its common stock.
The plan for repurchase will expire on August 14, 2002.
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 9, 2001 /s/ William F. Falger
--------------------- ----------------------
William F. Falger
President and Director
(Principal Executive Officer)
DATE: November 9, 2001 /s/ Joseph B. Bower, Jr.
--------------------- -------------------------
Joseph B. Bower, Jr.
Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)
16