UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 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, 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
August 7, 2002:
COMMON STOCK: $1.00 PAR VALUE - 3,639,324 SHARES
1
INDEX
PART I.
FINANCIAL INFORMATION
Sequential
Page Number
- -----------
ITEM 1. - Financial Statements
PAGE 3. Consolidated Balance Sheets - June 30, 2002 and December 31, 2001
PAGE 4. Consolidated Statements of Income - Quarter ending June 30, 2002 and 2001
PAGE 5. Consolidated Statements of Income - Six months ending June 30, 2002 and 2001
PAGE 6. Consolidated Statements of Comprehensive Income for the quarter and six months ending June 30, 2002
and 2001
PAGE 7. Consolidated Statements of Cash Flows - Six months ending June 30, 2002 and 2001
PAGE 8. Notes to Consolidated Financial Statements
ITEM 2 - Management's Discussion and Analysis
PAGE 12. Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3 - Quantitative and Qualitative Disclosures
PAGE 17. Quantitative and Qualitative Disclosures About Market Risk
PART II.
OTHER INFORMATION
PAGE 18. ITEM 1 Legal Proceedings
PAGE 18. ITEM 2 Changes in Securities and Use of Proceeds
PAGE 18. ITEM 3 Defaults Upon Senior Securities
PAGE 18. ITEM 4 Submission of Matters for Security Holders Vote
PAGE 18. ITEM 5 Other Information
PAGE 18. ITEM 6 Exhibits and Reports on Form 8-K
PAGE 19. Signatures
2
CONSOLIDATED BALANCE SHEETS
CNB FINANCIAL CORPORATION
Consolidated Balance Sheets (unaudited)
(Dollars in thousands)
June 30, Dec. 31,
ASSETS 2002 2001
------------- -------------
Cash and due from banks ....................................... $ 13,287 $ 17,350
Interest bearing deposits with other banks .................... 20,265 2,041
------------- -------------
Total cash and cash equivalents ............................. 33,552 19,391
Securities available for sale ................................. 182,716 152,757
Loans held for sale ........................................... 1,601 5,334
Loans and leases .............................................. 402,866 388,455
Less: unearned discount .................................... 1,713 2,282
Less: allowance for loan losses ............................. 4,326 4,095
------------- -------------
NET LOANS ................................................... 396,827 382,078
FHLB and Federal Reserve Stock ................................ 3,825 1,932
Premises and equipment ........................................ 12,165 12,485
Accrued interest receivable and other assets .................. 7,074 6,052
Intangible, net ............................................... 11,965 12,765
------------- -------------
TOTAL ASSETS ................................................ $ 649,725 $ 592,794
============= =============
LIABILITIES
Deposits:
Non-interest bearing deposits ............................... $ 55,113 $ 60,241
Interest bearing deposits ................................... 475,296 446,399
------------- -------------
TOTAL DEPOSITS .............................................. 530,409 506,640
Other borrowings .............................................. 53,025 23,268
Accrued interest and other liabilities ........................ 8,477 7,992
------------- -------------
TOTAL LIABILITIES ........................................... 591,911 537,900
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 .................................. 3,676 3,753
Retained earnings ........................................... 49,452 47,731
Treasury stock, at cost ..................................... (1,212) (1,236)
(56,868 shares for June 2002, and 53,568 for December 2001)
Accumulated other comprehensive income ...................... 2,204 952
------------- -------------
TOTAL SHAREHOLDERS' EQUITY .................................. 57,814 54,894
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY .................... $ 649,725 $ 592,794
============= =============
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 2002 2001
-------- --------
Loans including fees .................................................................... $ 7,529 $ 7,882
Deposits with other banks ............................................................... 32 42
Federal funds sold ...................................................................... 64 144
Securities:
Taxable .............................................................................. 1,692 1,671
Tax-exempt ........................................................................... 551 421
Dividends ............................................................................ 99 144
-------- --------
TOTAL INTEREST AND DIVIDEND INCOME ................................................... 9,967 10,304
INTEREST EXPENSE
Deposits ................................................................................ 3,411 4,690
Borrowed funds .......................................................................... 516 291
-------- --------
TOTAL INTEREST EXPENSE ............................................................... 3,927 4,981
-------- --------
Net interest and dividend income ........................................................ 6,040 5,323
Provision for loan losses ............................................................ 360 270
-------- --------
NET INTEREST INCOME AFTER PROVISION ..................................................... 5,680 5,053
OTHER INCOME
Trust & asset management fees ........................................................... 217 272
Service charges on deposit accounts ..................................................... 855 676
Other service charges and fees .......................................................... 127 143
Securities gains(losses) ................................................................ 12 (14)
Gains (losses) on sale of loans ......................................................... 44 (4)
Other income ............................................................................ 304 146
-------- --------
TOTAL OTHER INCOME ................................................................... 1,559 1,219
OTHER EXPENSES
Salaries ................................................................................ 1,705 1,494
Employee benefits ....................................................................... 556 542
Net occupancy expense ................................................................... 575 597
Amortization of intangible .............................................................. 468 459
Other ................................................................................... 1,355 1,210
-------- --------
TOTAL OTHER EXPENSES ................................................................. 4,659 4,302
-------- --------
Income before income taxes .............................................................. 2,580 1,970
Applicable income taxes ................................................................. 654 467
-------- --------
NET INCOME ........................................................................... $ 1,926 $ 1,503
======== ========
Earnings Per Share, Based on Weighted Average Shares Outstanding
Net income, basic ....................................................................... $ 0.53 $ 0.41
Net income, diluted .................................................................... $ 0.53 $ 0.41
Cash dividends per share ................................................................ $ 0.25 $ 0.23
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 2002 2001
---------- ----------
Loans including fees ........................................... $ 14,925 $ 15,846
Deposits with other banks ...................................... 47 96
Federal funds sold ............................................. 139 247
Securities:
Taxable ..................................................... 3,295 3,312
Tax-exempt .................................................. 1,021 853
Dividends ................................................... 235 289
-------- --------
TOTAL INTEREST AND DIVIDEND INCOME .......................... 19,662 20,643
-------- --------
INTEREST EXPENSE
Deposits ....................................................... 6,950 9,540
Borrowed funds ................................................. 973 585
-------- --------
TOTAL INTEREST EXPENSE ...................................... 7,923 10,125
-------- --------
Net interest income 11,739 10,518
Provision for loan losses ................................... 720 540
-------- --------
NET INTEREST INCOME AFTER PROVISION ............................ 11,019 9,978
-------- --------
OTHER INCOME
Trust & asset management fees .................................. 460 495
Service charges on deposit accounts ............................ 1,632 1,285
Other service charges and fees ................................. 266 302
Securities gains(losses) ....................................... 12 (14)
Gains on sale of loans ......................................... 87 4
Other .......................................................... 538 304
-------- --------
TOTAL OTHER INCOME .......................................... 2,995 2,376
-------- --------
OTHER EXPENSES
Salaries ....................................................... 3,273 2,973
Employee benefits .............................................. 1,138 1,062
Net occupancy expense .......................................... 1,185 1,230
Amortization of intangible ..................................... 941 897
Other .......................................................... 2,759 2,410
-------- --------
TOTAL OTHER EXPENSES ........................................ 9,296 8,572
-------- --------
Income before income taxes ..................................... 4,718 3,782
Applicable income taxes ........................................ 1,174 897
-------- --------
NET INCOME .................................................. $ 3,544 $ 2,885
======== ========
Earnings Per Share, Based on Weighted Average Shares Outstanding
Net income, basic .............................................. $ 0.98 $ 0.79
Net income, diluted ............................................ $ 0.97 $ 0.79
Cash dividends per share ....................................... $ 0.50 $ 0.46
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 Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net Income $ 1,926 $ 1,503 $ 3,544 $ 2,885
Other comprehensive income, net of tax
Unrealized gains/(losses)on securities:
Unrealized gains/(losses) arising
during the period 1,983 209 1,260 1,484
Reclassified adjustment for
accumulated gains/(losses)
included in net income, net of tax 8 (9) 8 (9)
----------------- -----------------
Other comprehensive income 1,975 218 1,252 1,493
----------------- -----------------
Comprehensive income $ 3,901 $ 1,721 $ 4,796 $ 4,378
================= =================
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: 2002 2001
---------- ----------
Net Income ................................................................... $ 3,544 $ 2,885
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses ................................................ 720 540
Depreciation and amortization ............................................ 1,533 1,478
Amortization and accretion and deferred loan fees ........................ (160) (245)
Deferred taxes ........................................................... (796) (486)
Security (gains) losses .................................................. (12) 14
Gain on sale of loans .................................................... (87) (4)
Proceeds from sale of loans ............................................... 16,804 10,331
Origination of loans for sale ............................................. (12,983) (11,021)
Net (gains) on dispositions of acquired property .......................... (10) (5)
Changes in:
Interest receivable ...................................................... (403) 5
Other assets and intangibles ............................................. (2,926) (214)
Interest payable ......................................................... (167) (147)
Other liabilities ........................................................ 798 2,472
-------- --------
Net cash provided by operating activities .................................... 5,855 5,603
Cash flows from investing activities:
Proceeds from maturities of:
Securities available for sale .......................................... 21,806 24,787
Proceeds from sales of securities available for sale ....................... 227 60
Purchase of securities available for sale .................................. (50,299) (44,513)
Net principal disbursed on loans ........................................... (15,087) 1,384
Purchase of premises and equipment ......................................... (272) (608)
Proceeds from the sale of foreclosed assets ................................ 280 224
-------- --------
Net cash used in investing activities ........................................ (43,345) (18,666)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts ............................ (4,324) 12,842
Certificates of deposit ................................................ 28,093 1,347
Additional paid in capital ............................................. (77) 32
Cash dividends paid .................................................... (1,820) (1,687)
Short term borrowings .................................................. (243) (1,341)
Proceeds from sale of treasury stock ....................................... 349 0
Treasury stock purchased ................................................... (327) 0
Advances from long term borrowings ......................................... 30,000 10,000
Repayments of long term borrowings ......................................... 0 0
-------- --------
Net cash provided by financing activities .................................... 51,651 21,193
-------- --------
Net increase (decrease) in cash and cash equivalents ......................... 14,161 8,130
Cash and cash equivalents at beginning of year ............................... 19,391 17,973
-------- --------
Cash and cash equivalents at end of period ................................... $ 33,552 $ 26,103
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to certificate
accounts) ............................................................ $ 7,926 $ 10,272
Income Taxes ............................................................ $ 1,660 $ 1,120
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, 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 and six-month periods
ended June 30, 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 is calculated on the weighted average number of
common shares outstanding during the year. The number of shares used for basic
and diluted was 3,634,625 and 3,643,254 for the three and six month periods
ended June 30, 2002 and 3,667,970 for basic and diluted for the three and six
month periods ended June 30,2001. Stock options for 69,000 shares of common
stock were considered in computing diluted earnings per common share.
8
SECURITIES
Securities available for sale at:
June 30, 2002 December 31, 2001
Amortized Unrealized Market Amortized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- -------- -------- -------- --------- -------- -------- --------
U.S. Treasury $ 11,060 $ 159 $ (0) $ 11,219 $ 14,046 $ 263 $ (1) $ 14,308
U.S. Government
agencies and
corporations: 27,102 409 (0) 27,511 24,073 503 (7) 24,569
Obligations of States
and Political
Subdivisions 47,331 1,577 (103) 48,805 25,450 478 (175) 25,753
Mortgage-backed
Securities 41,898 624 (16) 42,506 39,073 238 (308) 39,003
Corporate Notes
and Bonds 43,350 1440 (527) 44,263 40,563 967 (514) 41,016
Marketable equity
Securities 8,635 250 (473) 8,412 8,115 97 (104) 8,108
-------- -------- -------- -------- -------- -------- -------- --------
Total securities
available for sale $179,376 $ 4,459 $ (1,119) $182,716 $151,320 $ 2,546 $ (1,109) $152,757
======== ======== ======== ======== ======== ======== ======== ========
On June 30, 2002 investment securities carried at $31,638 were pledged
to secure public deposits and for other purposes provided by law.
The following is a schedule of the contractual maturity of investments
excluding equity securities, at June 30, 2002:
Available for Sale
Amortized Cost Market Value
-------------- --------------
1 year or less ................... $ 28,576 $ 29,116
1 year-5 years ................... 40,322 41,163
5 years-10 years ................. 20,916 22,045
After 10 years ................... 39,029 39,474
--------- --------
128,843 131,798
Mortgage-backed securities ....... 41,898 42,506
--------- --------
Total securities ................. $ 170,741 $174,304
========= ========
Collateralized mortgage obligations and other asset-backed securities are not
due at a single date; periodic payments are received based on the payment
patterns of the underlying collateral.
OTHER BORROWINGS
Other borrowings include $2,000 and $308 of demand notes payable to the
US Treasury Department at June 30, 2002 and December 31, 2001. These notes are
issued under the US Treasury Department's program of investing the treasury tax
and loan account balances in interest bearing demand notes insured by depository
institutions. These notes bear interest at a rate of .25 percent less than the
average Federal funds rate as computed by the Federal Reserve Bank. The
Corporation has available a $5 million line of credit with an unaffiliated
institution. Terms of the line are floating at 30 day LIBOR plus 180 basis
points, which equates to a rate of 3.64% at June 30, 2002. The outstanding
balance on the loan at
9
June 30 was $1,025 and $710 at year end 2001. The Corporation issued $10 million
of trust-preferred securities. The issue is callable on June 25, 2007 in whole
or in part and matures on June 25, 2032. Interest is variable and adjusts
quarterly based on the 3 month LIBOR plus 345 basis points. The interest rate at
June 30, 2002 was 5.3369%. At June 30, 2002, the Bank had remaining borrowing
capacity with the Federal Home Loan Bank of Pittsburgh (FHLB) of $144 million.
Borrowings with the FHLB are secured by a blanket pledge of selected securities
in the amount of $76,974 and certain mortgage loans with a value of $162,964.
Also other borrowings include advances from the FHLB at June 30, 2002 and
December 31, 2001 as follows:
June 30, December 31,
Interest Rate Maturity 2002 2001
-----------------------------------------------------------------
Variable
Overnight Daily $ -- $ 2,250
[a] 3/1/10 10,000 10,000
[b] 1/3/11 10,000 10,000
[c] 1/24/12 20,000 --
-------- --------
Total borrowed funds $ 40,000 $ 22,250
======== ========
[a] Interest rate is fixed for one year at which time FHLB has option to float
the interest rate based on the 3 month LIBOR + .16, the interest rate was
6.09% at June 30, 2002.
[b] Interest rate is fixed for one year at which time FHLB has option to float
the interest rate based on the 3 month LIBOR + .20, the interest rate was
4.95% at June 30, 2002.
[c] Interest rate is fixed until 1/26/04 at which time FHLB has option to float
the interest rate based on the 3 month LIBOR + .18, the interest rate was
4.52% at June 30, 2002.
Following are maturities of borrowed funds as of June 30, 2002:
2002 $ 3,025
2003 --
2004 --
2005 --
2006 --
Thereafter 50,000
--------
Total Borrowed Funds $ 53,025
========
RECENT ACCOUNTING PRONOUNCEMENTS
None.
10
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation
Average Balances and Net Interest Margin
(Dollars in thousands)
June 30, 2002 June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest
Balance Rate Inc./Exp. Balance Rate Inc./Exp.
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits with banks $ 4,600 2.04% 47 3,600 5.33% 96
Federal funds sold and securities
purchased under agreements to resell 13,703 2.03% 139 10,715 4.61% 247
Investment Securities:
Taxable 121,925 5.40% 3,295 106,304 6.23% 3,312
Tax-Exempt(1) 41,860 7.39% 1,547 34,677 6.75% 1,171
Equity Investments(1) 12,166 4.98% 303 10,238 7.03% 360
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments 194,254 5.49% 5,331 165,534 6.27% 5,186
Loans
Commercial(1) 100,457 6.90% 3,464 81,389 8.55% 3,480
Mortgage(1) 235,771 7.90% 9,313 223,489 8.66% 9,675
Installment 40,859 8.29% 1,693 39,167 9.61% 1,882
Leasing 18,155 7.12% 646 24,758 7.38% 914
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans(2) 395,242 7.65% 15,116 368,803 8.65% 15,951
---------------------------- ---------- -------------------------------------
Total earning assets 589,496 6.94% 20,447 534,337 7.91% 21,137
Non Interest Bearing Assets
Cash & Due From Banks 13,283 -- 12,823 --
Premises & Equipment 12,359 -- 12,930 --
Other Assets 17,102 -- 19,533 --
Allowance for Possible Loan Losses (4,191) -- (4,015) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Non-interest earning assets 38,553 -- 41,271 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 628,049 $ 20,447 $ 575,608 $ 21,137
================================================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing 133,176 0.97% 648 119,744 2.12% 1,270
Savings 78,689 1.64% 647 75,295 3.48% 1,310
Time 256,278 4.41% 5,654 245,858 5.66% 6,960
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 468,143 2.97% 6,949 440,897 4.33% 9,540
Short-term borrowings 2,282 2.28% 26 1,259 5.08% 32
Long-term borrowings 37,459 5.06% 948 19,945 5.55% 553
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 507,884 3.12% 7,923 462,101 4.38% 10,125
Demand - non-interest-bearing 55,456 -- 52,283 -- --
Other liabilities 9,221 -- 7,605 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 572,561 7,923 521,989 3.88% 10,125
Shareholders' equity 55,488 -- 53,619 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity 628,049 7,923 575,608 10,125
================================================================================
Interest income/earning assets 6.94% 20,447 7.91% $ 21,137
Interest expense/interest bearing liabilities 3.12% 7,923 4.38% 10,125
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.82% $ 12,524 3.53% $ 11,012
==================== =====================
Interest Income/Interest Earning Assets 6.94% $ 20,447 7.91% $ 21,137
Interest expense/Interest Earning Assets 2.69% 7,923 3.79% 10,125
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.25% $ 12,524 4.12% $ 11,012
==================== =====================
(1) The amounts are reflected on a fully tax equity basis using the federal
statutory rate of 34% in 2002 and 2001, 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.
11
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 have grown 9.6% since year-end 2001 to $649.7 million. The
growth has occurred in all areas of the balance sheet. The following comments
will further explain the details of the asset fluctuation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $33,552,000 at June 30, 2002 compared
to $19,391,000 on December 31, 2001. This increase resulted primarily from an
inflow of capital from the issuance of a $10 million Trust Preferred Security on
June 26, 2002. The timing of the event left the cash uninvested at month end.
The Corporation continues 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 $30.0 million or 19.6% since December 31, 2001. A
major portion of 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. As previously mentioned, the increase in cash has
been fairly dramatic during 2002. The focus has been to get these cash
equivalents into higher yielding assets as opportunities are defined. In
addition to the $20.0 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 $3.3 million, an increase of $1.9 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
12
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 six months 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.
At June 30, 2002, the Corporation had $401,153,000 in loans and leases
outstanding, net of unearned discount, an increase of $14,980,000 or 3.9% since
December 31, 2001. The increase was caused by demand in commercial loans,
including commercial mortgages. While we remain dedicated to the success of
commercial lending, as we see this as our competitive advantage, a concentrated
effort toward increased secured consumer lending has begun. 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
The allowance for loan and lease losses as a percentage of loans
increased from 1.06% at December 31, 2001 to 1.08% at June 30, 2002. The dollar
amount of the reserve increased $231,000 since year-end 2001. The increase is a
result of the provision of $720,000 expensed during the six months less net
charge-offs. The net charge-offs for the first six months of 2002 totaled
$489,000 compared to $353,000 for the same period of 2001. The most significant
cause for this increase was a higher level of losses related to auto leasing. As
a result of a changing market, the Bank suspended origination of new leases at
the end of the second quarter of 2002 and will allow its current portfolio of
leases to runoff.
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, 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 $2,715,000 or 0.69% of total
loans on June 30, 2002 compared to $2,098,000 or 0.54% on December 31, 2001.
While total non-performing assets increased from year end, total delinquency of
loans 30 or more days past due declined to $7,798,000 or 1.94% of total loans at
June 30, 2002 from $9,564,000 or 2.46% at 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
main focus for source of funds in the Corporation reaching $530,409,000 at June
30, 2002. Deposits increased 4.7% since year-end 2001 primarily resulting from a
major marketing strategy focusing on retail consumer customers as well as a
general lack of consumer confidence in the economy. This strategy includes
direct mailing offering consumers a free checking product and the offering of
several new certificate of deposit products.
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. In addition, the
Corporation issued $10,000,000 as part of a pooled trust preferred security.
This debt issuance allowed the Corporation to provide additional capital to its
subsidiary, County National Bank. The Bank needed the capital to fund its strong
growth in recent periods as well as expected growth over the next several years.
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SHAREHOLDERS' EQUITY
The Corporation's capital continues to provide a base for profitable
growth. Total shareholders' equity was $57,814,000 at June 30, 2002 compared to
$54,894,000 at December 31, 2001 an increase of $2,920,000 or 5.3%. In the first
six months of 2002, the Corporation earned $3,544,000 and declared dividends of
$1,820,000, a dividend payout ratio of 51.4% 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
2002 have continued to decline. This situation has caused a fairly significant
increase in accumulated other comprehensive income, included in stockholders'
equity of $1,252,000 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 12.93% at June 30,
2002 is above the well-capitalized standard of 10%. The Corporation's Tier 1
capital ratio of 11.97% is above the well-capitalized minimum of 6%. The
leverage ratio at June 30, 2002 was 8.59%, 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.
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RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
The Corporation had net income of $1,926,000 and $3,544,000 for the
second quarter and first six months of 2002, respectively. The earnings per
diluted share for the respective periods were $0.53 and $0.97. Net income was
$1,503,000 and $2,885,000 for the second quarter and first six months of 2001,
which equates to earnings per diluted share of $0.41 and $0.79, respectively.
The return on assets and the return on equity for the six months of 2002 are
1.13% and 13.18%.
INTEREST INCOME AND EXPENSE
Net interest income totaled $6,040,000 in the second quarter, an
increase of 13.5% over the second quarter of 2001 and totaled $11,739,000 for
the six months of 2002, an increase of 11.6% compared to the prior year. Total
interest income decreased during the quarter by $337,000 or 3.3% while interest
expense decreased by $1,054,000 or 21.2% when compared to the second quarter of
2001. The decrease in interest income is a result of lower yields on earning
assets caused by an overall decline in interest rates in the United States since
June of 2001. 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 has declined significantly 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 $360,000 compared to the second quarter of 2001 of $270,000
and $720,000 for the six months of 2002 compared to $540,000 in 2001. 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 $340,000 (27.9%) and $619,000 (26.1%) in
the second quarter and six months of 2002, respectively, when compared to the
same periods in 2001. 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 $1,632,000 up $347,000 or 27.0% over last year. The
increases in fee income were mainly derived from a new service that began in
April 2001 and took approximately eight months to mature. This service provides
customers with the assurance of having their checks paid and not returned when
funds are not sufficient in their account. Also during 2002, income derived from
the sale of mortgages is higher due to continued low mortgage rates.
NON-INTEREST EXPENSE
Non-interest expense increased $357,000 or 8.3% during the second
quarter of 2002 and $723,000 or 8.4% in the six months of 2002 when compared to
the same periods in 2002. The increase can be attributed to rising salary and
benefit costs of $376,000 and increased advertising and promotion expense of
$100,000 over the first six months compared to 2001.
RETURN ON ASSETS
For the six months ended June 30, 2002, the Corporation's return on
average assets ("ROA") totaled 1.13% up from the 1.00% recorded in 2001.
RETURN ON EQUITY
The Corporation's return on average shareholder's equity ("ROE") in the
first six months was 13.18% compared to 10.86% for 2001. 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.
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Management expects improvement in ROE during 2002 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 $654,000 in the second quarter of 2002
compared to $467,000 in the second quarter of 2001. For the six-month period
comparisons, the federal tax expense was $1,174,000 in 2002 and $897,000 in
2001. These increases are the result of higher taxable earnings in both the
second quarter and first six months of 2002
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
strong internal growth generated by increased market share. The objective of
this growth in earning assets and net income is increased shareholder value from
future dividends and capital accumulation from retained earnings.
Loan demand was strong during the first six months of 2002 and is
anticipated to continue through the remainder of the year. Loan growth for the
full year of 2002 is anticipated to be 4% over the yearend 2001. While loan
growth is expected to continue, it may not keep pace with deposit growth, which
increased at an annualized rate of 9.4% during the first half of 2002. As a
result, we have implemented a plan to expand our commercial loan market into
additional counties to help deploy these additional funds.
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 $489,000 of which consumer net charge-offs totaled
$388,000. The charge-off level for the remainder of 2002 is expected to remain
constant when compared to the first six months of 2002.
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, 2002, the
Corporation's efficiency ratio was 53.39% compared to 55.92% 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 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 valuations, 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.
"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,"
16
"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, 2001.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CNB Financial Corporation and its subsidiary County Nation
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 costs and attorney fees.
The corporation and the other defendants denied any wrongdoing
or injury to the plaintiffs whatsoever. All defendants have filed Motions
to Dismiss the federal action. The motions to dismiss the federal action
were granted. The plaintiff can appeal the dismissal of its federal case to
the US Court of Appeals for the Third Circuit. If it does not, it will then
be left to resume its state action. 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
CNB Financial Corporation held its Annual Meeting of
Shareholders on April 16, 2002, 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 F. Falger James J. Leitzinger Jeffrey S. Powell Peter F. Smith James B. Ryan
For 2,787,425 2,745,662 2,790,795 2,790,603 2,787,447
The total shares voted at the annual meeting were 2,876,080.
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
A Form 8-K was filed on July 3, 2002 announcing
the sale of $10,000,000 in trust preferred securities in a
pooled offering underwritten by FTN Financial and Keefe
Bruyette & Woods Inc. The Corporation will use the proceeds to
support the company's growth.
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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: August 7, 2002 /s/ William F. Falger
---------------------- ------------------------------
William F. Falger
President and Director
(Principal Executive Officer)
DATE: August 7, 2002 /s/ Joseph B. Bower, Jr.
----------------------- ------------------------------
Joseph B. Bower, Jr.
Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)
CERTIFICATE
As required by 18 U.S.C. 1350, the undersigned certify that this Report
on Form 10-Q fully complies with the requirements of section 13(a) of the
Securities Exchange Act of 1934, as amended, and that the information contained
in this Report on Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of the registrant.
/s/ William F. Falger
------------------------------
William F. Falger
Chief Executive Officer
/s/ Joseph B. Bower, Jr.
------------------------------
Joseph B. Bower, Jr.
Chief Financial Officer
Dated: August 7, 2002
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