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 Commission File Number 0-13396 ended March 31, 1997 or [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to 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 Market and Second Streets P.O. Box 42 Clearfield, Pennsylvania 16830 (Address of principal executive offices) Registrant's telephone number, including area code, (814) 765-9621 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock: $4.00 Par Value 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 March 31, 1997: COMMON STOCK: $4.00 PAR VALUE - 1,722,834 SHARES 1 INDEX PART I. FINANCIAL INFORMATION Sequential Page Number - ----------- PAGE 3. Notes to Consolidated Financial Statements PAGE 4. Management's Discussion and Analysis of Financial Condition and Results of Operations PAGE 7. Table 1 - Consolidated Balance Sheets - March 31, 1997 PAGE 9. Table 2 - Consolidated Statements of Cash Flows - March 31, 1997 PAGE 13. Table 3 - Consolidated Statements of Income - Quarter ending March 31, 1997 PAGE 14. Table 4 - Consolidated Yield Comparisons PART II. OTHER INFORMATION PAGE 16. ITEM 5 Other Information PAGE 16. Signatures 2 CNB FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SCOPE In the opinion of Management of the registrant, the accompanying consolidated financial statements for the three month periods ended March 31, 1997 and 1996 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results for the period. 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, 1996. The financial performance reported for the Corporation as of March 31, 1997 is not necessarily the result to be expected for the full year. The results contain no extraordinary income (loss) for changes in accounting or other events. Tax provisions for interim financial statements are based on the estimated tax rates for the full fiscal year. The estimated effective tax rate differs from the statutory tax rate principally due to tax-free interest income on certain loans and investments which qualify for such treatment. ACCOUNTING GUIDELINES SFAS No. 106: Post Retirement Benefits - --------------------------------------- Effective January 1, 1993, the Corporation adopted Statement of Financial Accounting Standard (SFAS) No. 106 "Employers Accounting for Postretirement Benefits Other Than Pension", which requires the accrual of expected costs of providing for certain postretirement benefits during the years the employee provided services. The average annual assumed rates of increases in the per capita cost of covered benefits range from 10% in 1997 to 8% in 1999 and beyond. The healthcare cost trend rate assumption has a significant effect on the amounts reported. These rates have been determined to be in line with industry practice. The discount rate used in determining the accumulated postretirement benefit was 6.50 percent. SFAS No. 109: Accounting for Income Taxes - ------------------------------------------ The Corporation adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" in 1993. This statement requires the use of the liability method to account for deferred income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. These are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. SFAS No. 114 & SFAS No. 118: Accounting for the Impairment of a Loan - --------------------------------------------------------------------- 3 In May, 1993 the Financial Accounting Standards (FASB) issued Statement No. 114 "Accounting by Creditors for the Impairment of a Loan", which is effective for the fiscal years beginning after December 15, 1994. This guideline was subsequently amended by a second Statement of Financial Accounting Standard No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". The statement provides guidelines on how to determine if the loan is impaired, how to measure the impairment based on the type of loan and how to recognize interest based on the stream of cash flows which are expected to be received. The Corporation's accounting policy for loans is to quarterly examine non-accruing and significantly delinquent loans on a case-by-case basis and to determine if there is the possibility that the Bank has little or no chance of recovering its principal. In a case where there is a collateral shortfall and no foreseeable repayment stream, the loan is charged-off. If a borrower has some ability to meet part of its obligation, but total repayment is in serious question, Management may decide to restructure the terms of repayment. In such an instance, pro forma financials are performed on the borrower and if the financial strength of the borrower warrants it, management will restructure the loan using SFAS No. 114 and SFAS No. 118 guidelines. SFAS No. 115: Accounting for Certain Debt and Equity Securities - ----------------------------------------------------------------- At the time of acquisition, management classifies debt securities as either held to maturity, available for sale or trading securities in compliance with SFAS No. 115. Debt securities are classified as held to maturity when the Corporation has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Debt securities that the Corporation does not have the positive intent (i.e. the liquidity portfolio) and ability to hold to maturity, and all marketable equity securities, are classified as available for sale or trading and carried at fair value. Unrealized gains and losses, net of tax, on securities classified as available for sale are carried as a separate component of shareholders' equity. Unrealized gains and losses on securities classified as trading are to be reported in earnings. Management has not classified any debt or equity securities as trading. The amortized cost of debt securities classified as held to maturity or available for sale is adjusted for the amortization of premiums and the accretion of discounts on a "worst yield basis". For securities purchased at less than face value the discount is accreted to maturity , despite possible call features. For securities purchased at a price in excess of their face value, the premium is amortized to the earlier of call or put, rather than maturity. In the case of mortgage-backed securities and collateralized mortgage obligations discounts or premiums are realized over the estimated life of the security. Such amortization is included in interest income from investments. Realized gains and losses and declines in value judged to be other than temporary are included in other income. The cost of securities sold is accounted for under the specific identification method. Neither the Corporation nor the Bank engages in securities trading and therefore this category has not been used. Management has decided that the Bank's liquidity investments are designated as "Available For Sale" and portfolio investments are purchased for holding until the security matures. Additionally, equity securities held in the parent company are all considered "Available For Sale". As of March 31, 1997, the Corporation had an after-tax unrealized gain in the "Available For Sale" category of $439,000. SFAS No. 121: Impairment of Long-Lived Assets and Long-Lived Assets to Be - ------------------------------------------------------------------------- Disposed of - ----------- The Corporation adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of", effective January 1, 1996. This standard requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in 4 circumstances indicate the carrying value may not be recoverable. The adoption of this standard has not had a material impact on the Corporation's financial position or results of operation. SFAS No. 125: Accounting for Transfers and Servicing of Financial Assets and - ---------------------------------------------------------------------------- Extinguishment of Liabilities. - ------------------------------ In June, 1996, SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", was issued effective for transactions entered into after December 31, 1996. This standard establishes rules distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Adoption of this standard has not had a material impact on the Corporation's financial position or results of operation. SFAS No. 128: Earnings per Share - -------------------------------- In February 1997, SFAS No. 128, Earnings per Share, was issued, effective for periods ending after December 15, 1997, with retroactive presentation for all periods required. SFAS No. 128 specifies revised computation, presentation and disclosure requirements for earnings per share. Under the provisions of SFAS No. 128, primary and fully diluted earnings per share will be replaced with basic and diluted amounts. This standard would not have impacted reported earnings per share amounts for the first quarter of 1997 and management does not expect it to have a material impact on the Corporation's historical per share amounts. CONCLUSION The accompanying financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and in compliance with generally accepted accounting practices. 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. The registrant believes that the disclosures made are adequate to make the information presented a fair representation of the Corporation's financial status. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION MARKET AREA ECONOMIC CONDITIONS CNB Financial Corporation and its subsidiary, County National Bank ("the Bank") are headquartered in Clearfield, Pennsylvania in the north-central region of the state. The economy of the region is not dominated by any industry sector and includes coal producers, oil and natural gas producers, wholesale distribution, light manufacturing, glass production and trucking companies. Service related businesses such as hospitals, nursing homes and other health related providers are significant. Government related employers such as public schools, universities and correctional institutions are also a factor in the region. The health of the economy in the region is somewhat mixed with unemployment rates (December, 1996) ranging from a low of 2.7% in Centre County to a high of 7.6% in Clearfield County. Other counties' rates in the region are as follows: Cameron 5.7%; Elk 5.0%; Jefferson 7.0% and McKean 5.1%. While unemployment levels vary, the region is comparatively in better economic condition than prior years. Residential housing is in fair demand and values have been slowly rising throughout the region. In general, the economy of the Corporation's market area is seen to be improving but lagging behind other regions of the state. ASSETS - ------ Total assets (shown in Table 1 "Consolidated Balance Sheet") have grown ------- 11.8% since one year ago to $340.5 million. Much of the growth has occurred in the loan portfolios, mainly in mortgage lending. Total gross loans were $238.4 million on March 31, 1997 compared to $202.5 million twelve months ago. The growth in loans has been supported by $30.7 million in core deposit growth and retained earnings. The Corporation's interest earning assets consist of deposits with other banks, federal funds sold, short term investments, investment securities and loans. Management uses the short term liquid assets to balance changes in either loans or core deposits. Over the past year, the increase in assets has been funded mainly by core deposit growth. Core deposit growth has accelerated since mid-December, 1996, when the Bank acquired four retail branch locations and corresponding customer lists from PNC Bank. Three of these locations are located in the Corporation's market area and the fourth is located in DuBois, Pennsylvania representing a market area expansion. The increase in premises and equipment from $7.9 million a year ago to $9.3 million on March 31, 1997 represents the growth due to branch expansion from the PNC acquisitions and the placing in service of a de novo branch in Clearfield, Pennsylvania. It also is reflective of a major investment in the Corporation's headquarters facility which was expanded and renovated. This work was completed in August, 1996. Other assets and intangibles increased from $2.6 million on March 31, 1996 to $5.3 in March 31, 1997 primarily as a result of the recognition of the purchase price of the customer lists acquired from PNC Bank, N.A. 6 TABLE 1 CONSOLIDATED BALANCE SHEETS CNB FINANCIAL CORPORATION Consolidated Balance Sheets (Unaudited) (Dollars in thousands, except percent data) March 31, Dec. 31 March 31, 1997 1996 1996 --------- --------- --------- ASSETS Cash and Due from Banks........................................ $ 12,409 $ 10,806 $ 8,200 Deposits with Other Banks...................................... 14 14 14 Federal Funds Sold............................................. 0 0 8,625 Investment Securities Available for sale....................... 62,176 61,309 57,418 Investment Securities Held to Maturity, fair value of $16,643 at March 31, 1997, $17,717 at December 31, 1996 and $21,383 at March 31, 1996...................................... 16,390 17,387 20,925 Loans and Leases............................................... 238,390 226,407 202,524 Less: Unearned Discount..................................... 3,238 3,304 3,512 Less: Allowance for Loan Losses.............................. 2,551 2,473 2,255 -------- -------- -------- NET LOANS.................................................... 232,601 220,630 196,757 Premises and Equipment......................................... 9,311 9,312 7,890 Accrued Interest Receivable.................................... 2,263 2,181 2,115 Other Assets and Intangibles................................... 5,308 5,369 2,645 -------- -------- -------- TOTAL ASSETS................................................. $340,472 $327,008 $304,589 LIABILITIES Deposits: Non-interest bearing deposits................................ $ 31,078 $ 30,812 $ 26,947 Interest bearing deposits.................................... 260,795 239,244 234,263 -------- -------- -------- TOTAL DEPOSITS............................................... 291,873 270,056 261,210 Other Borrowings............................................... 5,742 14,656 3,372 Accrued Interest and Other Liabilities......................... 3,035 2,580 2,068 -------- -------- -------- TOTAL LIABILITIES............................................ $300,650 $287,292 $266,650 SHAREHOLDERS' EQUITY Common Stock $4.00 Par Value Authorized 2,500,000 Shares (issued 1,728,000).............. $ 6,912 $ 6,912 $ 6,912 Retained Earnings............................................ 32,571 32,289 30,788 Treasury Stock, At Cost (5,166).............................. (100) (100) (100) Net unrealized securities gains.............................. 439 615 339 -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY................................... 39,822 39,716 37,939 -------- -------- -------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY..................... $340,472 $327,008 $304,589 7 LIABILITIES - ----------- Total deposits on March 31, 1997 were $291.9 million, an increase of $30.7 million over March 31, 1996. As stated above, this deposit growth has been accelerated with the branch location acquisitions in December, 1996 with $21.8 million in growth occurring in the first quarter of 1997. Deposit growth has occurred in all categories with the largest increase over March 31, 1996 resulting from growth in time deposits of $20.9 million. The Bank has not utilized other liabilities to fund its assets. An analysis of the sources and uses of funds is shown in Table 2 "Statement of Consolidated ---------------------------------- Cash Flow". - ----------- LIQUIDITY AND INTEREST RATE SENSITIVITY - --------------------------------------- The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest rate sensitive earning assets and interest rate sensitive liabilities so that earnings are not excessively influenced by changes in interest rates. Liquidity management involves the ability to meet the cash demands of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate risk management seeks to avoid instability in net interest margins and to enhance consistent growth of net interest income through periods of volatile interest rates. Sources of asset liquidity are investment securities maturing in one year or less, time deposits with banks and federal funds sold. In extreme shortages of liquidity, "Investments Available for Sale" can be liquidated with no capital impairment due to SFAS No. 115 accounting practices. These assets totaled $62.1 million at March 31, 1997 compared to $57.4 million on March 31, 1996. Contractual payments of principal and interest as well as some early pay-offs of loans also provide a source of liquidity. Principal payments of $53 million are contractually due within one year as compared to $51 million as of March 31, 1996. Liquidity requirements can also be met by aggressively pricing deposits in the market place, buying federal funds and by selling securities under an agreement to repurchase at some future date. The Bank maintains large back-up facilities at both Federal Reserve Bank of Philadelphia and the Federal Home Loan Bank of Pittsburgh. As of March 31, 1997, the Bank had $15 million in lines of credit available with correspondent commercial banks. Also, the Bank had a remaining available credit line with the Federal Home Loan Bank in the amount of $93 million. The reader is again referred to Table 2 "Statement of ------- Consolidated Cash Flows". Management regularly monitors the relationship between interest earning assets and interest bearing liabilities maturing or repricing to reduce an imbalance between such assets and liabilities. In doing this, management seeks to avoid fluctuating net interest margins in periods of changing interest rates. The Bank's ratio of interest-rate sensitive assets to interest-rate sensitive liabilities maturing or repricing within one year was 75.9% compared to 75.5% on March 31, 1996. 8 TABLE 2 CONSOLIDATED STATEMENTS OF CASHFLOWS CNB FINANCIAL CORPORATION Consolidated Statements of Cash Flows (Dollars in thousands) Three Months Ended March 31 1997 1996 Cash flows from operating activities: Net Income.................................................................. $ 869 $ 1,180 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses................................................. 150 125 Depreciation.............................................................. 183 157 Amortization and accretion of net deferred loan fees...................... (155) (176) Amortization and accretion of premiums and discounts on investments......... 8 40 Security Losses (Gains)................................................... (78) 13 Gain on sale of loans..................................................... 2 0 Changes in: Interest receivable........................................................ (82) (18) Other assets and intangibles............................................... (79) (952) Interest payable........................................................... (260) (41) Other liabilities.......................................................... 715 761 Net cash provided by operating activities................................... 1,273 1,089 Cash flows from investing activities: Proceeds from maturities of: Securities held to maturity............................................... 1,000 4,979 Securities available for sale............................................. 2,080 3,886 Proceeds from sales of: Securities available for sale............................................. 153 0 Loans..................................................................... 262 0 Purchase of: Securities held to maturity............................................... 0 (998) Securities available for sale............................................. (3,300) (10,699) Net principal disbursed on loans........................................... (12,240) 1,182 Purchase of Federal Home Loan Bank Stock................................... 240 (81) Purchase of premises and equipment......................................... (182) (265) Proceeds from the sale of foreclosed assets................................ 0 2 Net cash used in investing activities....................................... (11,987) (1,994) Cash flows from financing activities: Net change in: Checking, money market and savings accounts............................... 2,314 4,638 Certificates of deposit................................................... 19,503 785 Other borrowed funds...................................................... 1,115 547 Cash dividends paid........................................................ (586) (534) Principal reduction in Federal Home Loan Bank advances..................... (10,029) (21) Net cash provided by financing activities................................... 12,317 5,415 Net increase in cash and cash equivalents................................... 1,603 4,510 Cash and cash equivalents at beginning of year.............................. 10,820 12,329 Cash and cash equivalents at end of period.................................. 12,423 $16,839 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (including amount credited directly to certificate accounts).... $ 2,716 $ 2,431 Income Taxes........................................................... $ -- $ 380 Noncash Investing Activities: (Decrease) in net unrealized gain on securities available for sale..... $ (266) $ (377) Real estate acquired in settlement of loans............................. $ -- $ -- 9 The Board of Directors, working through management, adopted a separate Interest Rate Risk Policy on September 26, 1995. This policy sets specific limits, responsibilities and reporting to provide for stability in earnings under fluctuating interest rates. This policy provides for what management believes is the most prudent measures to be taken by a community bank to avoid earnings instability. CAPITAL RESOURCES - ----------------- The Corporation's capital position, of $39.8 million on March 31, 1997, is an above average capital position as compared to other bank holding companies of similar size. Capital adequacy for a financial institution is its ability to support asset growth and to sufficiently protect itself and depositors against business risk. The Corporation has relied on earnings to increase equity, while providing what management believes is an acceptable return on invested capital to its shareholders. The Federal Reserve Board standards classify capital into two tiers, referred to as Tier 1 and Tier 2. Tier 1 capital consists of common shareholders' equity, noncumulative perpetual preferred stock, and minority interests less intangibles. Tier 2 capital consists of the allowance for possible loan and lease losses (subject to a maximum), perpetual preferred stock (not used in Tier 1), hybrid capital instruments, term subordinate debt and intermediate-term (limited life) preferred stock. All banks are required to meet a minimum ratio of 8% of qualifying total capital to risk-adjusted total assets with at least 4.0% Tier 1 capital. Capital that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital. In addition to the above referenced risk based capital requirements, the Federal Reserve also requires a minimum leverage capital ratio of 4% of Tier 1 capital to total assets less any intangibles. The table below summarizes the Corporation's regulatory capital ratios at March 31, 1997 and 1996: 1st Qtr. 1st Qtr. Regulatory 1997 1996 Minimums --------- --------- ----------- Tier 1 Risk-Based Capital Ratio 16.98% 17.73% 4.0% Total Risk-Based Capital Ratio 18.08% 18.81% 8.0% Leverage Ratio 11.88% 12.42% 4.0% REGULATORY MATTERS - ------------------ The Corporation and the Bank are subject to the regulations of certain federal agencies. Regulators often make recommendations during the course of their examination that relate to the normal operations of the Corporation and the Bank. Management reviews all such recommendations promptly and initiates corrective action. The primary regulator, the Office of the Comptroller of the Currency, conducted a safety and soundness review during July and August of 1996. The results included several recommendations to improve the overall operations of the Bank, but there were no significant deficiencies in the Bank's reported results or functionality. The Federal Reserve Bank of Philadelphia concluded an examination of the Corporation during the third quarter of 1994. The agency noted no substantial deficiencies at that time. Presently, management is unaware of any recommendation by these regulatory authorities, that, if implemented, would likely have a material effect on the liquidity, capital or operations of the Corporation and the Bank. 10 CONCENTRATION OF CREDIT RISK AND ASSET QUALITY - ---------------------------------------------- The Corporation, specifically the Bank, generates profits primarily through lending and investing activities. The risk of loss from lending and investing activities include the possibility that a loss may occur from the failure of a borrower or one of its affiliates to perform according to their terms of the loan or investment agreement. This possibility of loss is known as credit risk. Credit risk is increased by lending and / or investing activities that concentrate financial institution's earning assets in such a way as to expose the institution to a material loss from any single occurrence or group of related occurrences. This can occur through lending heavily to one borrower, an industry segment or heavy concentration in a particular type of lending or investing. The Bank seeks to mitigate credit risk by limiting concentrations within various industries and single borrowers by established legal lending limits. Management also seeks to keep a stable allocation among the various loan types. The Bank firmly follows all regulatory limits of credits to a single borrower. In addition, the Bank monitors the local economic conditions and the financial performance of its larger credit customers in an effort to promptly identify and address deteriorating industries. The Corporation also seeks to minimize credit risk in its investment portfolio by adhering to an investment policy that limits exposure to credit risks inherent in the investment process. This policy sets parameters for appropriate investments of the Corporation and provides for supervision and oversight of this policy by the Board of Directors. Management uses a variety of reports to gauge local economic conditions. One important source of information is the quarterly subscription to PNC Bank Economics Division's "National Economic Outlook" which includes focus on both Pennsylvania and some Metropolitan Statistical Areas in the state. The Bank's formal loan review process provides the best defense against credit losses by providing early warning of a borrowing company's financial deterioration. The Bank's loan policy states that loans over 90 days past due be placed on non-accrual status. However, policy allows that if the loan is sufficiently collateralized and in the process of collection, the loan review officer may allow the loan to continue accruing based on the expected full return of the Bank's monies when the collateral is liquidated. The table below compares loans past due 90 days and over by type of loan for March 31, 1997 and March 31, 1996. 1997 1996 --------------------------- -------------------------- Over 90 Days Over 90 Days Over 90 Days Over 90 Days Accruing Non-Accruing Accruing Non-Accruing ------------ ------------ ------------ ------------ Commercial Loans $ 395 $152 $ 437 $0 Mortgage Loans 341 136 585 0 Installment Loans 322 0 352 0 ------ ---- ------ -- TOTAL $1,058 $288 $1,374 $0 11 RESULTS OF OPERATIONS The "Consolidated Statement of Income" (Table 3) compares the three month -------- period ending March 31, 1997 and 1996. The table summarizes at the bottom that the Corporation has earned $0.50 per share in the first quarter of 1997 compared to $0.69 per share one year ago. NET INTEREST INCOME - ------------------- Operating results are substantially dependent on net interest income. Net interest income is the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Operating results are also affected by the levels of non-interest income and expense. Total interest income for the quarter of $6.1 million reflects a 7.0% increase or $0.4 million more interest income when compared with the same three months of 1996. This interest income increase for the quarter is a result of a higher level of earning assets of the Corporation. Table 4 "Yield Comparisons" --------------------------- highlights effective interest rates on interest bearing assets and liabilities. Table 4 interest income totals differ from those in Table 3 in that tax free interest is converted to a fully taxable equivalent basis. Total interest expense of $2.7 million for the quarter reflects an increase of 8.0% from the interest expense of $2.5 million for the same quarter of 1996. The change represents higher interest expense due to increased deposits as average interest bearing deposits for the quarter were 8.5% greater than those in the first quarter of 1996. The weighted average cost of interest bearing deposits decreased from 4.21% to 4.16% as shown in Table 4 due to maturing time deposits repricing at lower interest rates. Table 4 "Yield Comparisons" shows that the yield on earning assets dropped from 8.32% on March 31, 1996 to 8.23% on March 31, 1997. The increase in net interest income is attributable to higher levels of earning assets in the loan and investment categories. PROVISION FOR POSSIBLE LOAN LOSSES - ---------------------------------- The provision for possible loan losses was $150,000 for the first quarter of 1997, $25,000 higher than the first quarter of 1996. The Bank has experienced increasing level of loan losses over the past two quarters reversing a positive trend for losses in the eight quarters prior to September 30, 1996. The present allowance for loan losses of $2.6 million represents 1.07% of outstanding loans compared to $2.3 million or 1.11% of loans on March 31, 1996. Non-performing assets (NPA), which includes loans contractually past due 90 days or more, loans in a non-accrual status and other real estate owned totaled $1.4 million at end of quarter. This yields a ratio of NPA to loan loss reserve of 0.54% at period end. Management performs quarterly adequacy analysis on the loan loss reserve. The loan review officer determines adequacy by following the Comptroller of the Currency's BC-201 qualitative factors and eight quarters of loan loss experience. The officer's analysis is performed by separate loan categories; Commercial and Industrial Loans, Commercial Real Estate Loans, Residential Real Estate, Consumer Installment and Credit Card Loans. The officer's report is presented to the Bank's board of directors for approval and a subcommittee of the Board meets to review his detailed accounts. 12 TABLE 3 CONSOLIDATED STATEMENTS OF INCOME CNB FINANCIAL CORPORATION Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data) THREE MONTHS ENDED MARCH 31 INTEREST INCOME 1997 1996 ------- ------- Loans including Fees ............................................................. $ 4,908 $ 4,511 Deposits with Other Banks ........................................................ 0 1 Federal Funds Sold ............................................................... 16 58 Investment Securities: Taxable Securities: Available for Sale ........................................ 681 621 Tax-Exempt Securities: Available for Sale ..................................... 225 172 Taxable Securities: Being Held to Maturity .................................... 159 216 Tax-Exempt Securities: Being Held to Maturity ................................. 106 142 ------- ------- TOTAL INTEREST INCOME ......................................................... $ 6,095 $ 5,721 INTEREST EXPENSE Deposits ......................................................................... $ 2,589 $ 2,432 Borrowed Funds ................................................................... 126 37 ------- ------- TOTAL INTEREST EXPENSE ........................................................ $ 2,715 $ 2,469 Net Interest Income ........................................................... $ 3,380 $ 3,252 Provision for possible loan losses ............................................ 150 125 ------- ------- NET INTEREST INCOME AFTER PROVISION .............................................. $ 3,230 $ 3,127 OTHER INCOME Trust & Asset Management Fees .................................................... $ 159 $ 199 Service charges on deposit accounts .............................................. 181 129 Other service charges and fees ................................................... 102 94 Securities gains (losses) ........................................................ 78 (13) Gains on Sale of Loans ........................................................... 2 0 Other income ..................................................................... 63 54 ------- ------- TOTAL OTHER INCOME ............................................................ $ 585 $ 463 OTHER EXPENSES Salaries ......................................................................... $ 1,114 $ 964 Employee benefits ................................................................ 239 315 Net occupancy expense ............................................................ 436 353 Other Operating Expense .......................................................... 853 564 ------- ------- TOTAL OTHER EXPENSES .......................................................... $ 2,642 $ 2,196 Income Before Income Taxes and Cumulative Effect of Change in Accounting Principle .......................................................... $ 1,173 $ 1,394 Applicable Income Taxes .......................................................... 304 370 ------- ------- Income Before Cumulative Effect of Change in Accounting Principle ............................................................. 869 1,024 Cumulative Effect of Change in Accounting Principle, after Taxes ................. 0 156 ------- ------- NET INCOME .................................................................... $ 869 $ 1,180 ======= ======= Per Share Data - -------------- Income Before Cumulative Effect of Accounting Change ............................. $ 0.50 $ 0.60 Cumulative Effect of Change in Accounting Principle .............................. 0.00 0.09 Net Income........................................................................ 0.50 0.69 Cash Dividends Per Share ......................................................... 0.34 0.31 13 TABLE 4 CONSOLIDATED YIELD COMPARISONS CNB Financial Corporation Average Balances and Net Interest Margin (Dollars in thousands) March 31, 1997 December 31, 1996 March 31, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Average Annual Interest Average Annual Interest Average Annual Interest Balance Rate Inc./Exp. Balance Rate Inc./Exp. Balance Rate Inc./Exp. - ------------------------------------------------------------------------------------------------------------------------------------ Assets Interest-bearing deposits with banks $ 14 0.00% $ 0 $ 14 0.00% $ 0 $ 15 3.61% $ 0 Federal funds sold and securities purchased under agreements to resell 1,156 5.27% 16 1,597 5.45% 87 4,607 5.05% 58 Other short-term investments 0 0.00% 0 0 Investment Securities: Taxable 54,847 6.14% 842 55,861 6.17% 3,445 54,791 6.13% 837 Tax-Exempt (1) 25,395 7.88% 500 24,740 7.92% 1,962 23,673 8.07% 476 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities 81,412 6.67% 1,358 82,212 6.68% 5,494 83,086 6.62% 1,371 Loans Commercial 50,686 8.05% 1,020 47,679 8.14% 3,882 49,442 8.40% 1,036 Mortgage 129,694 8.11% 2,631 116,233 8.52% 9,898 95,859 9.41% 2,249 Installment 47,696 10.53% 1,256 42,009 10.60% 4,451 55,226 8.90% 1,226 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans (2) 228,076 8.61% 4,907 205,921 8.85% 18,231 200,527 9.02% 4,511 Total earning assets 309,488 8.10% 6,265 288,133 8.23% 23,725 283,613 8.32% 5,882 Non Interest Bearing Assets Cash & Due From Banks 9,592 0 8,579 0 7,844 0 Premises & Equipment 9,334 0 8,297 0 7,872 0 Other Assets 6,368 0 2,965 0 2,895 0 Allowance for Possible Loan Losses (2,520) 0 (2,301) 0 (2,195) 0 - ------------------------------------------------------------------------------------------------------------------------------------ Total Non-interest earning assets 22,774 -- 0 17,540 -- 0 16,416 -- 0 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $332,262 $6,265 $305,673 $23,725 $300,029 $5,882 ================================================================================ Liabilities and Shareholders' Equity Interest-Bearing Deposits Demand - interest-bearing $ 83,751 3.13% $ 657 $ 76,496 3.13% $ 2,397 $ 80,232 3.33% $ 666 Savings 35,754 1.68% 150 36,266 1.66% 601 36,161 1.64% 148 Time 132,592 5.38% 1,782 117,339 5.47% 6,423 115,999 5.59% 1,618 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 252,097 4.11% 2,589 230,101 4.09% 9,421 232,392 4.20% 2,432 Short-term borrowings 8,150 5.35% 109 7,186 5.23% 376 2,926 5.07% 37 Long-term borrowings 1,071 6.34% 17 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 261,318 4.16% 2,715 237,287 4.13% 9,797 235,318 4.21% 2,469 Demand - non-interest-bearing 28,684 -- 0 27,852 -- 0 24,947 -- 0 Other liabilities 2,386 -- 0 2,054 -- 0 1,889 -- 0 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 292,388 3.71% 2,715 267,193 3.67% 9,797 262,154 3.78% 2,469 Shareholders' equity 39,874 -- 0 38,480 -- 0 37,875 -- 0 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $332,262 $2,715 $305,673 $ 9,797 $300,029 $2,469 ================================================================================ Interest income/earning assets 8.10% $6,265 8.23% 23,725 8.32% $5,882 Interest expense/interest bearing liabilities 4.16% 2,715 4.13% 9,797 4.21% 2,469 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Spread 3.94% $3,550 4.10% 13,928 4.11% $3,413 ============== =============== ================= Interest Income/Interest Earning Assets 8.23% $6,265 8.23% $23,725 8.32% $5,882 Interest expense/Interest Earning Assets 3.50% 2,715 3.40% 9,797 3.49% 2,469 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Margin 4.73% $3,550 4.83% $13,928 4.83% $3,413 ============== =============== ================= (1) The amounts are reflected on a fully tax equivalent basis using the federal statutory rate of 34% in 1997 and 1996, 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 is not material. 14 NON-INTEREST INCOME - ------------------- Total other income for the first quarter of 1997 of $585,000 is $122,000 more than during the same period in 1996. Increased service charge income and gains from the sale of securities more than offset a decline in fiduciary fee income resulting in an overall increase in non-interest income. NON-INTEREST EXPENSE - -------------------- Non-interest expenses increased $446,000 or 20.3% in the first quarter of 1997 compared to the first quarter of 1996. This increase is the result of higher operating expenses for salaries and occupancy expense related to the purchase of the four PNC Bank branches and the opening of a de novo office in the quarter. These increases were mitigated somewhat by a decline in the cost of employee benefits due to favorable trends in healthcare costs under the Corporation's self-funded healthcare program. In addition, the Corporation began amortizing the acquisition cost of the acquired PNC customer lists in the first quarter of 1997. After further analysis of deposit inflows during the first quarter of 1997, the amortization period for this expense was extended to 10 years from 7.5 years which was previously established and noted in the 1996 10-K filing of the Corporation. This modification did not affect any previously reported results of operations. NET INCOME - ---------- Net income for the first quarter of 1997 was $869,000 or $0.50 per share. This compares to net income of $1,024,000 or $0.60 per share in the first quarter of 1996. During the first quarter of 1996 the Corporation changed its method of accounting for trust income from the cash basis to the accrual basis. All first quarter 1996 financial information has been restated to reflect the cumulative effect of this change in accounting principle. The comparative decline in net income is the result of net interest income growth and other income growth being exceeded by the growth in operating expenses. During the quarter the Corporation also experienced a decline in its net interest spread as higher cost time deposits were acquired at a faster rate than other deposits and interest income could not be increased at the same rate in order to maintain the spread. As mentioned previously the higher operating expenses were a result of growth in branch operations resulting of the PNC Bank branch acquisitions. For the remainder of 1997, net interest income and non-interest income are expected to continue to increase as more earning assets are acquired as a result of anticipated further deposit growth. Non-interest income is anticipated to increase as the Bank begins originating and selling mortgages into the secondary market in the second quarter which should result in higher levels of fee income during the remainder of the year. During the rest of the year operating expenses are anticipated to remain fairly constant. The Corporation cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which may change over time. Actual results could differ materially from forward-looking statements. The return on average assets was 1.04% and the return on average equity was 8.74% during the quarter ending March 31, 1997 compared to 1.37% and 10.81% respectively in the first quarter of 1996. INCOME TAXES - ------------ The provision for income taxes was $304,000 in the first quarter of 1997 compared to $370,000 in the first quarter of 1996. This is the result of lower taxable income in the first quarter of 1997. 15 PART II OTHER INFORMATION ITEM 5. OTHER INFORMATION No Form 8-K's were filed for this period. 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 14, 1997 /s/ James P. Moore ------------ ------------------------------------- James P. Moore President and Director (Principal Executive Officer) DATE: May 14, 1997 /s/ William F. Falger ------------ ------------------------------------- William F. Falger Executive Vice President and Director (Principal Financial Officer) (Principal Accounting Officer) 16