UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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
May 10, 2002:
COMMON STOCK: $1.00 PAR VALUE - 3,633,642 SHARES
1
INDEX
PART I.
FINANCIAL INFORMATION
Sequential
Page Number
- -----------
PAGE 3. Consolidated Balance Sheets - March 31, 2002 and December 31, 2001
PAGE 4. Consolidated Statements of Income - Quarters ending March 31, 2002 and 2001
PAGE 5. Consolidated Statements of Comprehensive Income for the quarters ending March 31,
2002 and 2001
PAGE 6. Consolidated Statements of Cash Flows - three months ending March 31, 2002 and 2001
PAGE 7. Notes to Consolidated Financial Statements
PAGE 8. Management's Discussion and Analysis of Financial Condition and Results of Operations
PAGE 13. Quantitative and Qualitative Disclosures About Market Risk
PART II.
OTHER INFORMATION
PAGE 14. ITEM 1. Legal Proceedings
PAGE 14. ITEM 2. Changes in Securities and Use of Proceeds
PAGE 14. ITEM 3. Defaults Upon Senior Securities
PAGE 14. ITEM 4. Submission of Matters for Security Holders Vote
PAGE 14. ITEM 5. Other Information
PAGE 14. ITEM 6. Exhibits and Reports on Form 8-K
PAGE 14. Signatures
2
CONSOLIDATED BALANCE SHEETS
CNB FINANCIAL CORPORATION
(Dollars in thousands)
March 31 Dec. 31,
ASSETS 2002 2001
------------ -------------
Cash and due from banks............................................ $15,292 $17,350
Interest bearing deposits with other banks......................... 14,487 2,041
------------ -------------
Total cash and cash equivalents.................................. 29,779 19,391
Securities available for sale...................................... 177,547 152,757
Loans held for sale................................................ 3,289 5,334
Loans and leases................................................... 394,409 388,455
Less: unearned discount......................................... 2,006 2,282
Less: allowance for loan and lease losses........................ 4,180 4,095
------------ -------------
NET LOANS........................................................ 388,223 382,078
FHLB and Federal Reserve stock..................................... 3,560 1,932
Premises and equipment, net........................................ 12,328 12,485
Accrued interest receivable and other assets....................... 6,404 6,052
Intangible assets, net............................................. 12,352 12,765
------------ -------------
TOTAL ASSETS..................................................... $633,482 $592,794
============ =============
LIABILITIES
Deposits:
Non-interest bearing deposits.................................... $ 54,523 $ 60,241
Interest bearing deposits........................................ 472,861 446,399
------------ -------------
TOTAL DEPOSITS................................................... 527,384 506,640
Other borrowings................................................... 43,025 23,268
Accrued interest and other liabilities............................. 8,371 7,992
------------ -------------
TOTAL LIABILITIES................................................ 578,780 537,900
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....................................... 3,705 3,753
Retained earnings................................................ 48,436 47,731
Treasury stock, at cost.......................................... (1,362) (1,236)
(61,655 shares for March 2002, and 53,568 for December 2001)
Accumulated other comprehensive income........................... 229 952
------------ -------------
TOTAL SHAREHOLDERS' EQUITY....................................... 54,702 54,894
------------ -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY......................... $633,482 $592,794
============ =============
3
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION
(Dollars in thousands, except per share data) Three Months Ended March 31,
2002 2001
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans including fees................................ $7,396 $ 7,964
Deposits with other banks........................... 15 54
Federal funds sold.................................. 75 103
Investment securities:
Taxable.......................................... 1,603 1,641
Tax-exempt....................................... 470 432
Dividends........................................ 136 145
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TOTAL INTEREST AND DIVIDEND INCOME............... 9,695 10,339
---------- -----------
INTEREST EXPENSE
Deposits............................................ 3,539 4,850
Borrowed funds...................................... 457 294
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TOTAL INTEREST EXPENSE........................... 3,996 5,144
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Net interest income.............................. 5,699 5,195
Provision for loan losses........................ 360 270
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NET INTEREST INCOME AFTER PROVISION................. 5,339 4,925
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NON-INTEREST INCOME
Trust & asset management fees....................... 243 223
Service charges on deposit accounts................. 777 609
Other service charges and fees...................... 139 159
Securities gains(losses)............................ 0 0
Gains on sale of loans.............................. 43 8
Other income........................................ 234 158
---------- -----------
TOTAL NON-INTEREST INCOME........................ 1,436 1,157
---------- -----------
NON-INTEREST EXPENSES
Salaries............................................ 1,568 1,479
Employee benefits................................... 582 520
Net occupancy expense of premises................... 610 633
Amortization of intangible.......................... 473 438
Other............................................... 1,404 1,200
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TOTAL NON-INTEREST EXPENSES...................... 4,637 4,270
---------- -----------
Income before income taxes.......................... 2,138 1,812
Applicable income taxes............................. 520 430
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NET INCOME....................................... $1,618 $ 1,382
========== ===========
EARNINGS PER SHARE, BASED ON WEIGHTED
AVERAGE SHARES OUTSTANDING
Net income, basic.............................. $0.45 $0.38
Net income, diluted............................ $0.44 $0.38
DIVIDENDS PER SHARE
Cash dividends per share....................... $0.25 $0.23
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CNB FINANCIAL CORPORATION
(Dollars in thousands)
Three Months Ended
March 31,
---------------------
2002 2001
---------------------
Net income $ 1,618 $ 1,382
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities:
Unrealized gains/(losses) arising
during the period (723) 1,275
Reclassified adjustment for
accumulated gains/(losses)
included in net income, net of tax -- --
---------------------
Other comprehensive income (723) 1,275
---------------------
Comprehensive income $ 895 $ 2,657
=====================
5
CONSOLIDATED STATEMENTS OF CASHFLOWS
CNB FINANCIAL CORPORATION
(Dollars in thousands)
Three Months Ended March 31,
Cash flows from operating activities: 2002 2001
------------- -------------
Net Income $ 1,618 $ 1,382
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses 360 270
Depreciation and amortization 819 723
Amortization and accretion and deferred loan fees (50) (84)
Deferred taxes (415) (258)
Security (gains)/losses 0 0
Gain on sale of loans (43) (8)
Net (gains)losses on dispositions of acquired property (8) 0
Proceeds from sale of loans 11,892 2,002
Origination of loans for sale (9,803) (3,368)
Changes in:
Interest receivable (116) 142
Other assets and intangible (2,198) (901)
Interest payable (3) (39)
Other liabilities 1,164 1,372
------------- -------------
Net cash from operating activities 3,217 1,233
Cash flows from investing activities:
Proceeds from maturities of:
Securities available for sale 11,449 13,730
Proceeds from sales of securities available for sale 178 0
Purchase of:
Securities available for sale (37,622) (25,012)
Net principal disbursed on loans (6,339) 5,116
Purchase of premises and equipment (189) (443)
Proceeds from the sale of foreclosed assets 278 0
------------- -------------
Net cash from investing activities (32,245) (6,609)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts (3,833) 3,876
Certificates of deposit 24,577 4,256
Additional paid in capital (48) 0
Treasury stock (126) 31
Cash dividends paid (911) (843)
Net advances from other borrowings 19,757 7,968
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Net cash from financing activities 39,416 15,288
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Net increase (decrease) in cash and cash equivalents 10,388 9,912
Cash and cash equivalents at beginning of year 19,391 17,973
------------- -------------
Cash and cash equivalents at end of period $ 29,779 $ 27,885
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,993 $ 5,183
Income Taxes $ 0 $ 0
6
CNB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
pursuant to rules and regulations of the Securities and Exchange Commission
(SEC) and in compliance with accounting principles generally accepted in the
United States of America. Because this report is based on an interim period,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted.
In the opinion of the Management of the registrant, the accompanying
consolidated financial statements for the quarter ended March 31, 2002 and 2001
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-month period ended March 31, 2002 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, 2001.
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 (EPS) is calculated on the weighted average number
of common shares outstanding during the year. The weighted average shares used
in the calculation were 3,634,607 for basic and 3,643,236 diluted in 2002 and
3,667,014 for basic and diluted in 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
NONE
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation
Average Balances and Net Interest Margin
(Dollars in thousands)
March 31, 2002 March 31, 2001
- -------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest
Balance Rate Inc./Exp. Balance Rate Inc./Exp.
Assets
Interest-bearing deposits with banks $ 3,001 2.00% $ 15 $ 3,410 6.33% $ 54
Federal funds sold and securities
purchased under agreements to resell 15,059 1.99% 75 7,761 5.31% 103
Investment Securities:
Taxable 119,640 5.36% 1,603 103,433 6.35% 1,641
Tax-Exempt (1) 38,653 6.85% 662 35,130 6.73% 591
Equity Investments (1) 11,515 6.08% 175 10,210 7.05% 180
- -------------------------------------------------------------------------------------------------------------------
Total Investments 187,868 5.39% 2,530 159,944 6.42% 2,569
Loans
Commercial (1) 94,990 6.80% 1,616 80,031 8.74% 1,749
Mortgage (1) 232,671 7.99% 4,646 221,033 8.72% 4,819
Installment 41,945 8.27% 867 41,762 9.26% 967
Leasing 19,030 7.08% 337 25,650 7.49% 480
- -------------------------------------------------------------------------------------------------------------------
Total loans (2) 388,636 7.68% 7,466 368,476 8.70% 8,015
Total earning assets 576,504 6.94% 9,996 528,420 8.01% 10,584
Non Interest Bearing Assets
Cash & Due From Banks 13,356 -- 11,769 --
Premises & Equipment 12,444 -- 12,967 --
Other Assets 18,834 -- 20,642 --
Allowance for Possible Loan Losses (4,140) -- (3,958) --
- -------------------------------------------------------------------------------------------------------------------
Total Non-interest earning assets 40,494 -- -- 41,420 -- --
- -------------------------------------------------------------------------------------------------------------------
Total Assets $616,998 $9,996 $569,840 $10,584
===================================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing $132,495 1.09% $ 361 $117,811 2.29% $ 674
Savings 78,802 1.70% 334 73,554 3.78% 695
Time 249,118 4.57% 2,844 245,814 5.66% 3,481
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 460,415 3.07% 3,539 437,179 4.44% 4,850
Short-term borrowings 2,536 2.05% 13 1,379 6.09% 21
Long-term borrowings 34,889 5.09% 444 19,889 5.49% 273
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 497,840 3.21% 3,996 458,447 4.49% 5,144
Demand - non-interest-bearing 54,421 -- 51,008 --
Other liabilities 8,404 -- 7,294 --
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 560,665 3,996 516,749 5,144
Shareholders' equity 56,333 -- 53,091 --
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $616,998 $3,996 $569,840 $ 5,144
===================================================================
Interest income/earning assets 6.94% $9,996 8.01% $10,584
Interest expense/interest bearing liabilities 3.21% 3,996 4.49% 5,144
- -------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.73% $6,000 3.52% $ 5,440
======================== =====================
Interest Income/Interest Earning Assets 6.94% $9,996 8.01% $10,584
Interest expense/Interest Earning Assets 2.77% 3,996 3.89% 5,144
- -------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.17% $6,000 4.12% $ 5,440
======================== =====================
(1) The amounts are reflected on a fully tax equivalent basis using the federal
statutory rate of 34% in 2002 and 2001, adjusted for certain tax exemptions
(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.
8
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 has remained relatively stable. Unemployment in our
region has run consistently higher than the state average over time.
OVERVIEW OF BALANCE SHEET
Total assets (shown in "Consolidated Balance Sheet") have increased 6.9%
since year-end 2001 to $633.5 million. The increase has occurred primarily in
cash and investments. The following comments will further explain the details of
the asset fluctuation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $29,779,000 at March 31, 2002 compared to
$19,391,000 on December 31, 2001. This increase resulted from a significant
inflow of deposits mainly during March 2001. The Corporation will focus on
decreasing the cash balance and investing funds in higher yielding earning
assets during the second 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 securities 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 $24.8 million (or 16.2%) since December 31, 2001. The
increase resulted from an opportunity to borrow money from the Federal Home Loan
Bank and invest in $20 million of State and Municipal Bonds having similar
duration. Also aiding the increase was the deposit growth. The Corporation has
been investing the dollars in prudent investments over time. 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.
LOANS
The Corporation's loan demand was strong during the first quarter of 2002.
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.
9
At March 31, 2002, the Corporation had $392,403,000 in loans and leases
outstanding, net of unearned discount, up $6,230,000 (or 1.6%) since December
31, 2001. The increase was caused by demand in commercial loans including
mortgages. While we remain dedicated to the success of commercial lending, as
we see this as our competitive advantage, a stronger approach has been adopted
toward secured consumer loans. This strategy is part of an overall initiative
to increase our market share of households in loans and deposits.
ALLOWANCE FOR LOAN AND LEASE LOSSES AND NONPERFORMING ASSETS
The Allowance for Loan and Lease Losses as a percentage of loans increased
from 1.06% at December 31, 2001 to 1.07% at March 31, 2002. The dollar amount
of the reserve increased $85,000 since year-end 2001. The increase is a result
of the provision of $360,000 expensed during the three months less net charge-
offs. The gross charge-offs for the three months of 2002 were $324,000 while
recoveries were $49,000. This level of charge-offs is an increase from the
three months of 2001 when charge-offs were $193,000 with recoveries of $46,000.
The economic downturn has caused consumers to slow in their payment stream. It
does not appear that the situation is in a continuing downturn for our portfolio
as the situation has appeared to stabilize.
The adequacy of the allowance for loan and lease losses is subject to a
formal analysis by an independent loan review analyst, as well as our internal
credit administrator, and is deemed to be adequate to absorb probable losses in
the portfolio as of March 31, 2002. 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 $2,619,000 or 0.67% of total loans on
March 31, 2002 compared to $2,098,000 or 0.54% on December 31, 2001.
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 $527,384,000 at March 31,
2002. Deposit increase of 4.1% since year-end 2001 is a result of the
previously mentioned strategy to focus on consumer households. The focus has
included a low cost checking solution as well as several certificate of deposit
promotions. Also adding to the increase is the decline in value of the stock
market which continues to draw investors back to bank deposits.
The Corporation utilizes term borrowings from the Federal Home Loan Bank
(FHLB) to meet funding needs not accommodated by deposit growth. During 2002,
the Corporation borrowed $20 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 base for profitable
growth. Total Shareholders' Equity was $54,702,000 at March 31, 2002 compared
to $54,894,000 at December 31, 2001 a decrease of $192,000 (or -0.3%). In the
first three months of 2002, the Corporation earned $1,618,000 and declared
dividends of $906,000, a dividend payout ratio of 56.0% of net income.
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
first quarter of 2002 have risen in the shorter maturities. This situation has
caused a decrease in accumulated other comprehensive income which is included in
stockholders' equity of $723,000 since December 31, 2001.
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 10.51% at March 31, 2002 is
above the well-capitalized standard of 10%. The Corporation's Tier 1 capital
ratio of 9.56% is above the well-capitalized minimum of 6%. The leverage ratio
at March 31, 2002 was 6.99%, 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.
10
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.
11
RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
The Corporation had net income of $1,618,000 for the first quarter of 2002.
The earnings per diluted share for the period was $0.44. Net income was
$1,382,000 for the first quarter of 2001, which equated to earnings per diluted
share of $0.38.
INTEREST INCOME AND EXPENSE
Net interest income totaled $5,699,000 in the first quarter, an increase of
9.7% over the first quarter of 2001. Total interest income decreased during the
quarter by $644,000 or -6.2% while interest expense decreased by $1,148,000 or
22.3% when compared to the first quarter of 2001. Our cost of funds decreased
faster than the yield on assets. The main cause of this was the rapid decline
in interest rates throughout 2001 allowing for a more rapid repricing in our
liabilities than occurred in the loan and securities portfolios.
PROVISION FOR LOAN LOSSES
The Corporation recorded a provision for loan and lease losses in the first
quarter of $360,000 compared to the first quarter of 2001 at $270,000. Based on
managements' evaluation of problem loans, increased charge-offs, expected growth
in the loan portfolio, and the overall effects of the economy managements'
analysis indicates the allowance provision appears to be adequate.
NON-INTEREST INCOME
Non-interest income increased $279,000 (or 24.1%) in the first quarter of
2002 when compared to the same period in 2001. Increased deposit account
service charges have been the primary source of the growth in non-interest
income. In the three months, account service charges totaled $777,000 up
$168,000 (or 27.6%) over last year. The increases in fee income were mainly
derived from a new service that began in April 2001. This service provided
customers with the comfort of having their checks paid and not returned as
insufficient. Also during 2002, income derived from the sale of mortgages was
high due to low interest rates and a wave of refinancing.
NON-INTEREST EXPENSE
Non-interest expense increased $367,000 or 8.6% during the first quarter of
2002 when compared to the same period in 2001. The increase occurred across all
areas without any single category being significantly different.
RETURN ON ASSETS
For the three months ended March 31, 2002, the Corporation's annualized
return on average assets ("ROA") totaled 1.06% up from the 0.97% recorded in
2001. Operating cash earnings ROA, which represents earnings excluding one-time
merger related costs, if applicable, and amortization expense, for the three
months of 2002 was 1.27% as compared to 1.17% in the same period for 2001.
RETURN ON EQUITY
The Corporation's annualized return on average shareholder's equity ("ROE")
in the first quarter was 11.91% compared to 10.47% for 2001. The increase can be
attributed to both increased earnings and controlled levels of capital through
dividends and stock repurchase into Treasury shares. Operating cash earnings
ROE for the first quarter was 14.21% compared to 12.66% in 2001.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $520,000 in the first quarter of 2002
compared to $430,000 in the first quarter of 2001. The increase reflects a
higher level of overall income in the period when compared to the same period in
the prior year.
12
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 especially in transactional deposit accounts.
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 strong during the first quarter. Loan growth is expected
to provide for an increase of over 3% for the year over year-end 2001. The
Corporation's loan to deposit ratio has decreased through the first quarter to
73.61% compared to 75.43% at year-end 2001 as deposit growth has been very good
during the first quarter and is expected to remain strong throughout 2002. A
plan to expand our commercial lending niche into surrounding market areas should
help to stabilize the loan to deposit ratio.
Consumer loan charge-offs in the first quarter continued to comprise the
majority of the Corporation's recent charge-offs. In the first three months,
total net charge-offs were $275,000 of which consumer net charge-offs totaled
$173,000. Management believes that the loan review and collections procedures
as well as our 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 three months ended March 31, 2002, the
Corporation's efficiency ratio was 54.97% compared to 56.66% for the same period
last year.
The efficiency ratio improved as the level of non-interest income has
increased at a faster rate and higher dollar amount than non-interest expense.
Management believes controlling the operating costs of the Corporation is
imperative to the future increased profitability derived from core earnings. A
strong focus by management continues to be placed on controlling non-interest
expenses. Through the use of technology and more efficient processes, our non-
interest costs have shown modest increases throughout the first quarter of 2002
and is expected to assist us throughout 2002.
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 along with the search for low cost deposits has created pressure
to the margin for the industry. The Corporation has been able to increase the
margin slightly. This occurrence has been aided by the sharp steepening in the
yield curve. Management expects further growth in interest income coupled with
managed interest costs to provide the Corporation with improved net interest
income for the remainder of 2002.
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 2002.
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, 2001.
"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.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CNB Financial Corporation and its subsidiary County National
Bank were named codefendants with six other parties in a civil action
for monetary damages in excess of $25,000. The suit claims civil
conspiracy and intentional interference with contractual relations.
Further proceedings in that case were stayed by order entered
September 24, 2001. The stay was entered because plaintiffs initiated
a federal case with the claims of civil conspiracy and intentional
interference with contractual relations and a violation of Section 1
of the Sherman Act. The complaint seeks unspecified treble damages
plus attorney fees.
The Corporation and the other defendants have denied any
wrongdoing or injury to the plaintiffs whatsoever. All defendants
have filed Motions to Dismiss the federal action. Those motions are
currently under consideration by the court. While the outcome of
litigation is never certain, CNB Financial Corporation and its counsel
believe that they will succeed in defending against these claims.
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 March 31, 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: May 10, 2002 /s/ William F. Falger
---------------------- -----------------------------
William F. Falger
President and Director
(Principal Executive Officer)
DATE: May 10, 2002 /s/ Joseph B. Bower, Jr.
---------------------- -----------------------------
Joseph B. Bower, Jr.
Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)
14