UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number 0-13396
September 30, 1997
or
[ ] 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
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
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
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The number of shares outstanding of the issuer's common stock as of
September 30, 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 5. Management's Discussion and Analysis of Financial Condition and Results of Operations
PAGE 11. Table 1 - Consolidated Balance Sheets - September 30, 1997
PAGE 12. Table 2 - Consolidated Statements of Cash Flows - September 30, 1997
PAGE 13. Table 3Q - Consolidated Statements of Income - Quarter ending September 30, 1997
PAGE 14. Table 3Y - Consolidated Statements of Income For Nine Months Ending September 30, 1997
PAGE 15. Table 4 - Consolidated Yield Comparisons
PART II.
OTHER INFORMATION
PAGE 16. ITEM 4 Submission of Matters for Security Holders Vote
PAGE 16. ITEM 5 Other Information
PAGE 16. ITEM 6 Exhibits and Reports on Form 8-K
PAGE 16. Signatures
2
CNB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
In the opinion of Management of the registrant, the accompanying
consolidated financial statements for the three and nine month periods ended
September 30, 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 preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results will differ from those estimates and such
differences may be material to the financial statements.
The financial performance reported for the Corporation for the nine month
period ended September 30, 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 POLICIES
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established through provisions for loan
losses which are charged against income. Loans which are deemed to be
uncollectible are charged against the allowance account. Subsequent recoveries,
if any, are credited to the allowance account.
Management determines the adequacy of the reserves based on historical
patterns of charge-offs and recoveries, industry experience, and other
qualitative factors relevant to the collectability of the loan portfolio. While
management believes that the allowance is adequate to absorb estimated potential
loan losses, future adjustments may be necessary in circumstances that differ
substantially from the assumptions used in evaluating the adequacy of the
allowance for loan losses.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 128: Earnings per Share
- --------------------------------
SFAS No. 128, "Earnings per Share", is 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.
3
SFAS No. 129: Disclosure of Information About Capital Structure
- ---------------------------------------------------------------
SFAS No. 129, "Disclosure of Information About Capital Structure", is
effective for financial statements for periods ending after December 15, 1997.
This statement requires disclosure of rights and privileges of various
securities outstanding.
SFAS No. 130: Reporting Comprehensive Income
- --------------------------------------------
SFAS No. 130, "Reporting Comprehensive Income", is effective for fiscal
years beginning after December 15, 1997. This statement establishes standards
for reporting and display of comprehensive income and its components.
Comprehensive income includes net income and all other changes in shareholder's
equity except those resulting from investments and distributions to owners.
SFAS No. 131: Disclosures about Segments of an Enterprise and Related
- ---------------------------------------------------------------------
Information
- -----------
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", is effective for financial statements for periods beginning after
December 15, 1997. This statement requires financial and descriptive
information about an entity's operating segments to be included in the annual
financial statements.
None of these standards when implemented are expected to materially
impact the reported financial position or results of operations of the
(Corporation).
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.
4
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 Company is presented to provide insight into management's
assessment of financial results. The company's only 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, Centre, Elk, 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").
On December 16, 1996 the Bank acquired three full-service banking offices
and one limited service banking office and the corresponding customer lists for
those offices from an unaffiliated institution (referred hereafter as
"Acquisition"). The offices are located in west central Pennsylvania in the
communities of Clearfield, Philipsburg, and DuBois. Two of the full-service
offices have been closed, one in Clearfield and the second in Philipsburg, and
service transferred to existing banking offices in those communities. The
remaining full-service office in DuBois and the limited service office in
Philipsburg continue to operate as branches of the bank.
OVERVIEW OF BALANCE SHEET
Total assets increased from $327,008,000 at December 31, 1996 to
$365,448,000 at September 30, 1997 a growth rate of 11.8%. The increase in
assets can be attributed to the generation of $42,274,000 in new deposits of
which $29 million related to the branch locations and customers lists acquired
in the Acquisition made in the fourth quarter of 1996. These new deposits were
invested primarily in loans up $34,273,000 (or 15.4%) and to repay other
borrowings in the amount of $5,578,000.
CASH AND CASH EQUIVALENTS
Cash and Cash equivalents totaled $19,681,000 at September 30, 1997
compared to $11,803,000 on September 30, 1996. This increase was primarily the
report of a liquidity buildup in anticipation of new loans which had been
approved but not yet funded.
Management believes the liquidity needs of the Company 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 matures within one year. These sources of funds will enable the
Company to meet cash obligations and off-balance sheet commitments as they come
due.
INVESTMENT SECURITIES
Investment securities declined $3,795,000 since December 31, 1996, with
funds utilized to meet loan demand. Of the Company's total investment portfolio
of $74,901,000 as of September 30, 1997, $62,494,000 (or 83.4%) is classified as
available for sale with the balance of $12,407,000 classified as held to
maturity.
Management monitors the earnings performance and the effectiveness of the
liquidity of the investment portfolio on a regular basis through Asset /
Liability Committee ("ALCO') meetings. The ALCO also reviews and manages
interest rate risk for the Company. Through active balance sheet management and
analysis of the investment securities portfolio, the Company maintains
sufficient liquidity to satisfy depositor requirements and various credit needs
of its customers.
LOANS
The Company's loan volume continues to grow and reflects the additional
credit opportunities in the markets served. The Company'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 also commercial lending primarily to locally owned small businesses. The
5
Company's lending market has grown as a result of the Acquisition and the entry
into the DuBois market. This market has yielded $6.0 million in new loan
outstandings in the first nine months of 1997. Management expects this market
to continue to provide significant loan growth over the next several quarters.
The following table details total outstanding loans at the specified
dates:
September 30, December 31, September 30,
1997 1996 1996
(000's) (000's) (000's)
--------------- ------------------ -------------------
Commercial, Financial, and Agricultural $ 55,062 $ 45,037 $ 45,946
Commercial Mortgage 37,204 31,451 30,461
Residential Mortgage 111,479 100,402 93,080
Consumer Installment 41,622 43,448 42,725
Lease Receivables 15,562 6,069 1,894
--------------- ------------------ -------------------
$260,929 $226,407 $214,106
At September 30, 1997, the Company had $257,376,000 in loans and leases
outstanding up $34,273,000 (or 15.4%) over December 31, 1996 and up $46,514,000
(or 22.1%) over September 30, 1996. This growth pattern is the result of
continued commercial lending opportunities resulting from customer
dissatisfaction with several superregional banks located within the market as
well as continued market penetration into recently added markets. Residential
mortgage activity has slowed somewhat but continues to be strong aided by the
Company's First Time Home Buyers mortgage product which has been available for
the past 24 months. Consumer loans appear stagnant but are actually increasing
when lease receivables are included in the total. Conventional auto financing
is being replaced with an ever greater number of leases. Management feels that
this trend will continue over the next several quarters.
LOAN CONCENTRATION
The Company does not have a concentration of its loan portfolio in any one
industry. The Company monitors loan concentrations by individual industries in
order to track potential risk exposures resulting from industry related
downturns. Residential real estate lending continues to be the largest
component of the loan portfolio representing 42.7% of total loans. Commercial
lending, including commercial mortgages, is the next largest component
representing 35.4% of the portfolio.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Allowance for Loan and Lease Losses as a percentage of loans decreased
from 1.09% at year-end 1996 to 0.97% at September 30, 1997. The dollar amount
of the reserve increased $35,000 for the nine months ended September 30, 1997,
provision for loan and lease losses totaled $450,000, while gross charge-offs
were $517,000 and recoveries amounted to $102,000. This level of charge-offs is
significantly higher than those experienced in the first nine months of 1996
when charge-offs were $217,000 with recoveries of $68,000.
This trend is consistent with the trend nationwide in the financial
services industry. It is the result of increased consumer credit problems often
resulting in bankruptcies. Management of the Company has implemented increased
loan collection activities which has resulted in decreased levels of loan
delinquency.
Management continues to closely monitor loan delinquency and loan losses.
Non-performing assets (NPA), which include loans 90 or more days past due, non-
accrual loans and other real estate owned were $1,363,000 or 0.37% of total
assets on September 30, 1997 compared to $1,264,000 or 0.39% on December 31,
1996 and $1,120,000 or 0.36% on September 30, 1996.
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 inherent losses in the portfolio.
6
FUNDING SOURCES
The Company considers deposits, short-term borrowings, and term debt when
evaluating funding sources. Traditional deposits continue to be the most
significant source of funds for the Company reaching $312,330,000 at September
30, 1997, an increase of $42,274,000 or 15.6% since year-end 1996. Deposit
growth occurred primarily as a result of the Acquisition and secondarily from
increasing market share in newer markets.
The Company utilizes term borrowings from the Federal Home Loan Bank
(FHLB) to meet fund needs not met by deposit growth. During the first nine
months of 1997 the Company repaid a $10 million FHLB borrowing in the first
quarter and borrowed $5 million in the second quarter resulting in $5 million
net decline in FHLB borrowings since December 31, 1996. Management plans to
maintain access to short-term and long-term FHLB borrowings as an appropriate
funding source.
The Company continues to experience a change in the mix of its deposit
base. Of the total deposit growth of $42,274,000 in the first nine months of
1997, $39,113,000 or 92.5% has come in the time deposit category. This results
in time deposits representing 44.4% of total deposits as of September 30, 1997
compared to 36.9% as of year-end 1996. Management expects this shift in deposit
mix to continue, however, at a lesser rate as deposit growth from the
Acquisition winds down.
CAPITAL/STOCKHOLDERS' EQUITY
The Company's Capital continues to provide a strong base for profitable
growth. Total Shareholders' Equity was $41,541,000 at September 30, 1997
compared to $39,716,000 at year-end 1996, and increase of $1,825,000 (or 4.6%).
Equity growth was the result of an increase in retained earnings of $1,268,000
and an increase of $557,000 in the net unrealized holding gain on available-for-
sale securities.
Approximately 83% of the investment securities in the Company's portfolio
are classified as available-for-sale making this portion of the Company's
balance sheet more sensitive to the changing market value of investments. In
the first nine months of 1997, interest rates have declined somewhat while the
market value of equities have increased resulting in increased valuations in the
available-for-sale category of investments. Management feels that the status of
the investment markets do not substantially affect the Company's equity.
In the first nine months of 1997, the Company earned $3,026,000 and
declared dividends of $1,757,000, a dividend payout ratio of 58.1% of net
income. In the third quarter, net income and dividends declared totaled
$1,118,000 and $586,000, respectively, a dividend payout ratio of 52.4%.
The Company has also complied with the standards of capital adequacy
mandated by the banking industry. 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 either 0% (lowest risk assets), 20%, 50%, or
100% (highest risk assets), is assigned to each asset on the balance sheet. The
Company's total risk-based capital ratio of 15.63% at September 30, 1997 is well
above the minimum standard of 8%. The Company's Tier 1 capital ratio of 14.65%
is above the regulatory minimum of 4%. The leverage ratio at September 30, 1997
was 10.94%, also above the minimum standard of 4%. The Company is deemed to be
well capitalized under regulatory industry standards. The ratios provide
quantitative data demonstrating the strength and future opportunities for use of
the Company's capital base. Management continues to evaluate risk-based capital
ratios and the capital position of the Company 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 12 of
the accompanying financial statements provide analysis of the Company's cash and
cash equivalents. Additionally, management considers that portion of the loan
portfolio that matures within one year and maturities within one year in the
investment portfolio as part of the Company's liquid assets. The Company's
liquidity is monitored by the ALCO which establishes and monitors ranges of
acceptable liquidity. Management feels the Company's current liquidity position
is acceptable.
7
The interest rate sensitivity position at September 30, 1997, indicated
the Company was liability sensitive in the short-term and asset sensitive for
periods longer than one year. Management measures the potential impact of
significant changes in interest rates on both the earnings and equity of the
Company. By the use of computer generated models, the potential impact of these
changes has been determined to be acceptable with modest affects on net income
and equity given an interest rate shock of an increase or decrease in rates of
2.0%. Management continues to monitor the interest rate sensitivity through the
ALCO and uses this data to make appropriate strategic decisions.
RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
For the nine months ended September 30, 1997, the Company earned
$3,026,000 in net income, a decrease of 5.2% from $3,193,000 in net income,
before the cumulative effect of a change in accounting principle in the same
period last year. For the quarter ended September 30, 1997, the Company
recorded net income of $1,118,000, a 1.0% increase from $1,107,000 in the third
quarter of 1996.
Net income in the third quarter and year to date has been negatively
effected when compared to the same period in 1996 by a lower net interest margin
and higher operating expenses related to the Acquisition. This impact was
anticipated by management and is the consequence of the nature of the
Acquisition which resulted in the Bank taking over the four acquired branches
and hiring the employees and over time acquiring the customers and their
respective deposits. Therefore, the Company experienced an immediate increase
in operating expenses without a comparable increase in operating revenues. In
addition, the Company began amortizing the premium paid for the customer lists
which added an operating expense previously not incurred. The Bank has since
closed two of the acquired branch facilities and assimilated the corresponding
employees into other positions resulting from growth or attrition. Not
withstanding these increased costs, management is confident that the Company's
financial performance targets will be met for the full year of 1997.
INTEREST INCOME AND EXPENSE
Net interest income totaled $3,709,000 in the third quarter, an increase
of 11.3% over the third quarter of 1996 and totaled $10,682,000 for the first
nine months of 1997, an increase of 8.2% over the same period of the prior year.
Continued growth in loans has been the primary factor in this increase which has
been mitigated somewhat by higher interest costs for deposits resulting from a
shift in deposit mix to higher cost time deposits. Total interest income
increased during the quarter by $1,023,000 or 17.9% while interest expense
increased by $646,000 or 26.9% when compared to the third quarter of 1996.
Total interest income for the first nine months of 1997 increased by $2,170,000
or 12.7% while interest expense increased by $1,363,000 or 18.8% when compared
to the first nine months of 1996.
The Company recorded a provision for loan and lease losses in the third
quarter of $150,000 up from $125,000 from the third quarter of 1996 and $450,000
for the first nine months of 1997 compared to $375,000 for the first nine months
of 1996. Management anticipates an increased provision in the fourth quarter
due to the continued loan growth and the increased level of losses.
NON-INTEREST INCOME
Non-interest income increased $87,000 or $18.2% in the third quarter of
1997 when compared to the third quarter of 1996. For the first nine months of
1997 non-interest income increased $188,000 or 12.9% compared to the same period
in 1996.
Increased deposit account service charges have been the primary source of
the growth in non-interest income. In the third quarter, account service
charges totaled $253,000 up $61,000 (or 31.8%) over last year's third quarter.
For the nine months ended September 30, 1997, account service charge income
totaled $664,000, an increase of $167,000 (or 33.6%) over 1996. These increases
in fee income were the result of the growth in the number of customers and
related deposit accounts acquired from the Acquisition. Revenues have also been
enhanced by a change in methodology in collecting fees related to overdrawn
account activity.
8
Non-interest income has also increased as a result of gains resulting from
the sale of securities. In the third quarter of 1997 the Company realized
$15,000 in gains compared to no gains in the third quarter of 1996. In the
first nine months of 1997 the gains totaled $74,000 compared to losses of
$13,000 in 1996. Management anticipates taking additional security gains in the
fourth quarter to affect a higher provision for loan and lease losses.
Other operating income declined to $25,000 (or 62.7%) in the quarter
ending September 30, 1997 from $67,000 in the third quarter of 1996. For the
first nine months of 1997 other operating income was $112,000, compared to
$183,000 in the same period of 1996. This decline is primarily the result of
the termination of the sale of mutual funds and annuities through a vendor and
the transfer of the mutual funds activity into the Trust and Asset Management
Division. Future revenue from this activity will be included in trust and asset
management fees.
NON-INTEREST EXPENSE
Non-interest expense increased $381,000 or 17.4% during the third quarter
when compared to the third quarter of 1996 and $1,214,000 or 18.4% in the first
nine months of 1997 compared to the same period of the prior year. This
increased level of non-interest expense is attributable to the salaries and
benefits and occupancy expenses related to the Acquisition and the opening of a
new branch facility. In addition, included in total non-interest expense is the
amortization of the premium paid for the customer lists obtained in the
Acquisition which added additional expense in 1997 which was not present in
1996. This intangible expense amounted to $236,000 for the first three quarters
of 1997.
In order to reduce operating costs, the Company during the third quarter
closed one of the branch facilities acquired in the Acquisition and consolidated
its operation into nearby existing branches. The property related to this
branch was sold on August 28, 1997 with a resulting asset writedown of $6,000.
In addition, during the fourth quarter of 1997 the Company will enter into a
lease agreement with a tenant for the branch facility in Clearfield acquired in
the Acquisition which had been previously closed during the first quarter of
1997. The revenue from this lease will be approximately equal to the Company's
cost of ownership of the property.
RETURN ON ASSETS
For the quarter ended September 30, 1997, the Company's return on average
assets ("ROA") totaled 1.25% down from the 1.44% recorded in the third quarter
of 1996. For the nine months ended September 30, 1997, ROA was 1.16% compared
to 1.40% for the same period in 1996.
Decreased ROA can be attributed to a narrowing net interest margin and
increased operating costs resulting from the Acquisition. The ROA levels in
each of the three quarters of 1997 has shown an increase over the prior quarter:
first quarter 1.04%, second quarter 1.18% and the third quarter 1.25%. This
trend was anticipated by management due to the nature of the Acquisition as
earning assets have been acquired over time rather than at the date of the
Acquisition.
RETURN ON EQUITY
The Company's return on average shareholder's equity ("ROE") in the third
quarter was 10.88% compared to 11.47% for the third quarter of 1996. For the
nine months ended September 30, 1997, ROE was 9.98% compared to 11.16% for the
same period in 1996. These decreases over comparable periods can be attributed
primarily to increased equity from retained earnings and net unrealized holding
gains coupled with a small decline in net income.
Management recognizes continued improvement in ROE during 1997 and
anticipates further increases as earnings grow. The Company is well capitalized
under regulatory industry standards.
FEDERAL INCOME TAX EXPENSE
Federal income taxes increased to $435,000 in the third quarter of 1997
compared to $388,000 in the third quarter of 1996. For the nine months ended
September 30, 1997 federal income taxes totaled $1,052,000, a decrease of
$127,000 or 10.8% compared to the same period a year earlier. This decrease
9
year to date can be attributed to the Company's lower pre-tax income during the
period. The increase in the third quarter reflects higher pre-tax income in the
period when compared to the same quarter of the prior year.
FUTURE OUTLOOK
Third quarter results showed improvement over the second quarter and were
in line with management expectations. Management continues to focus on asset
growth resulting from ongoing generation of new deposits from the customer lists
acquired via the Acquisition and also general growth via increased market share.
Management continues to be encouraged by the growth in the DuBois market which
represents a new community served by the Bank. Planning is in progress on the
design of a new banking facility for that location with a projected opening date
of mid-summer of 1998.
Loan growth continued to be strong in the third quarter and has exceeded
managements expectations year to date. While loan demand is good, competitive
pressure from other financing sources has not resulted in increased loan yields.
Management believes that the rate of loans will begin to slow in the fourth
quarter and into the first quarter of 1998. The Company's loan to deposit ratio
has remained relatively unchanged at the end of the third quarter at 82.4%
compared to 82.5% at the end of the second quarter and 82.6% at year-end 1996.
Management expects the loan to deposit ratio to remain relatively stable during
the fourth quarter.
Consumer loan charge-offs in the third quarter continued to comprise the
majority of the Company's recent charge-offs. In the third quarter, total net
charge-offs were $138,861 of which consumer net charge-offs totaled $127,923.
Management anticipates increasing the provision for loan losses in the fourth
quarter in order to maintain the Allowance for Loan and Lease Losses at an
adequate level to cover potential losses and to increase the allowance
proportional to the rate of growth of loans outstanding. This increase in the
provision will be funded by realizing security gains in the Company's equity
portfolio.
Enhanced non-interest income and controlled non-interest expense are
important factors in the success of the Company 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 taxable net interest income and non-interest income (less
non-recurring income). For the nine months ended September 30, 1997, the
Company's efficiency ratio was 59.28% compared to 55.58% for the same period
last year.
The efficiency ratio was negatively impacted by increased non-interest
expense resulting from higher levels of salaries and benefits and occupancy
expense relating to the branch acquisitions in late 1996. The efficiency ratio
has improved since the first quarter of 1997 as the level of non-interest
expense has stabilized and non-interest income has increased. Management
believes that this trend will continue until the efficiency ratio returns to
pre-Acquisition levels.
The interest rate environment will continue to play an important role in
the future earnings of the Company. The net interest margin has been declining
as more higher cost time deposits continue to be obtained as a result of the
Acquisition. However, overall net interest income continues to increase due to
growth in interest earning assets. Management expects little further decline in
the net interest margin and further growth in net interest income in the
remainder of 1997.
Management concentrates on return on average assets and earnings per share
evaluations, plus other methods, to measure and direct the performance of the
Company. While past results are not an indication of future earnings,
management feels the Company is positioned to enhance performance of normal
operations through the remainder of 1997.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements in this Form 10-Q which are not historical fact are forward
looking statements that involve risks and uncertainties, including, but not
limited to, the interest rate environment, the effect of federal and state
banking and tax regulations, the effect of economic conditions, the impact of
competitive products and pricing, and other risks detailed in the Company's
Securities and Exchange Commission filings.
10
TABLE 1
CONSOLIDATED BALANCE SHEETS
CNB FINANCIAL CORPORATION: September 30, 1997
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except percent data)
Sept. 30, Dec. 31 Sept. 30,
ASSETS 1997 1996 1996*
---------- ---------- ----------
Cash and Due from Banks.................................... $11,342 $10,806 $11,789
Deposits with Other Banks.................................. 14 14 14
Federal Funds Sold......................................... 8,325 0 0
Investment Securities Available for sale 62,494 61,309 61,825
Investment Securities Held to Maturity, fair value of $12,606
at September 30, 1997, $17,717 at December 31, 1996 and
$20,537 at September 30, 1996 ............................. 12,407 17,387 18,189
Loans and Leases........................................... 260,929 226,407 214,106
Less: Unearned Discount................................. 3,553 3,304 3,244
Less: Allowance for Loan Losses.......................... 2,508 2,473 2,370
---------- ---------- ----------
NET LOANS................................................ 254,868 220,630 208,492
Premises and Equipment..................................... 8,963 9,312 8,748
Accrued Interest Receivable................................ 2,255 2,181 2,130
Other Assets and Intangibles............................... 4,780 5,369 2,405
---------- ---------- ----------
TOTAL ASSETS............................................. $365,448 $327,008 $313,592
LIABILITIES
Deposits:
Non-interest bearing deposits............................ $32,000 $30,812 $31,840
Interest bearing deposits................................ 280,330 239,244 226,921
---------- ---------- ----------
TOTAL DEPOSITS........................................... 312,330 270,056 258,761
Other Borrowings........................................... 9,078 14,656 14,291
Accrued Interest and Other Liabilities..................... 2,499 2,580 1,405
---------- ---------- ----------
TOTAL LIABILITIES........................................ $323,907 $287,292 $274,457
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........................................ 33,557 32,289 31,888
Treasury Stock, At Cost (5,166 Shares)................... (100) (100) (100)
Net unrealized securities gains (losses) ................ 1,172 615 435
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY............................... 41,541 39,716 39,135
---------- ---------- ----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY................. $365,448 $327,008 $313,592
* September 1996 amounts have been restated to reflect the cumulative effect
of the change in accounting for trust fee income.
11
TABLE 2
CONSOLIDATED STATEMENTS OF CASHFLOWS
CNB FINANCIAL CORPORATION: September 30, 1997
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine Months Ended Sept. 30...
Cash flows from operating activities: 1997 1996*
------------------- -------------------
Net Income......................................................................... $ 3,026 $ 3,349
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses...................................................... 450 375
Depreciation................................................................... 561 494
Amortization and accretion of net deferred loan fees........................... (538) (583)
Amortization and accretion of premiums and discounts on investments.............. 25 89
Security Losses (Gains)........................................................ (74) 13
Gain on sale of loans.......................................................... (24) (22)
Changes in:
Interest receivable............................................................ (73) (33)
Other assets and intangibles................................................... 398 (268)
Interest payable............................................................... 172 (72)
Other liabilities.............................................................. (253) (83)
---------- ----------
Net cash provided by operating activities.......................................... 3,670 3,259
Cash flows from investing activities:
Proceeds from maturities of:
Securities held to maturity.................................................. 4,990 7,710
Securities available for sale................................................ 7,497 6,905
Proceeds from sales of:
Securities available for sale................................................ 1,981 1,981
Loans........................................................................ 1,681 1,506
Purchase of:
Securities held to maturity.................................................. 0 (998)
Securities available for sale................................................ (9,854) (19,996)
Net principal disbursed on loans................................................. (36,031) (11,879)
(Purchase) of Federal Reserve Bank Stock........................................ (39) 0
Redemption (Purchase) of Federal Home Loan Bank Stock........................... 240 (596)
Purchase of premises and equipment............................................... (212) (1,359)
Proceeds from the sale of foreclosed assets...................................... 0 122
Net cash used in investing activities.............................................. (29,747) (16,604)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts.................................. 2,001 4,195
Certificates of deposit...................................................... 40,273 (1,220)
Other borrowed funds......................................................... (537) 1,292
Cash dividends paid.............................................................. (1,758) (1,602)
Proceeds from Federal Home Loan Bank Advances................................... 5,000 10,175
Principal reduction in Federal Home Loan Bank advances........................... (10,041) (21)
---------- ----------
Net cash provided by financing activities.......................................... 34,938 12,819
Net increase (decrease) in cash and cash equivalents.............................. 8,861 (526)
Cash and cash equivalents at beginning of year..................................... 10,820 12,329
Cash and cash equivalents at end of period......................................... $ 19,681 $ 11,803
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to certificate accounts)......... $ 8,766 $ 7,159
Income Taxes.................................................................. $ 1,155 $ 1,240
Noncash Investing Activities:
Inc. (Dec.) in net unrealized gain on securities available for sale......... $ 557 ($154)
Real estate acquired in settlement of loans................................... $ 128 $ 0
* September 30, 1996 amounts have been restated to reflect the cumulative
effect of the change in accounting for trust fee income.
12
TABLE 3-Q
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION: September 30, 1997
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
THREE MONTHS ENDED SEPT. 30...
INTEREST INCOME 1997 1996*
-------------- -------------
Loans including Fees.................................................................... $5,565 $4,532
Deposits with Other Banks............................................................... 0 0
Federal Funds Sold...................................................................... 98 1
Investment Securities:
Taxable Securities: Available for Sale............................................... 667 688
Tax-Exempt Securities: Available for Sale............................................ 228 223
Taxable Securities: Being Held to Maturity........................................... 105 184
Tax-Exempt Securities: Being Held to Maturity........................................ 91 103
-------------- -------------
TOTAL INTEREST INCOME................................................................ $6,754 $5,731
INTEREST EXPENSE
Deposits................................................................................ $2,931 $2,319
Borrowed Funds.......................................................................... 114 80
-------------- -------------
TOTAL INTEREST EXPENSE............................................................... $3,045 $2,399
Net Interest Income.................................................................. $3,709 $3,332
Provision for possible loan losses................................................... 150 125
-------------- -------------
NET INTEREST INCOME AFTER PROVISION..................................................... $3,559 $3,207
OTHER INCOME
Trust & Asset Management Fees........................................................... $ 158 $ 83
Service charges on deposit accounts..................................................... 253 192
Other service charges and fees.......................................................... 113 134
Securities gains (losses)............................................................... 15 0
Gains on Sale of Loans.................................................................. 2 3
Other income............................................................................ 25 67
-------------- -------------
TOTAL OTHER INCOME................................................................... $ 566 $ 479
OTHER EXPENSES
Salaries................................................................................ $1,157 $1,021
Employee benefits....................................................................... 198 168
Net occupancy expense................................................................... 389 351
Other Operating Expense................................................................. 828 651
-------------- -------------
TOTAL OTHER EXPENSES................................................................. $2,572 $2,191
Income Before Income Taxes and Cumulative Effect of Change
In Accounting Principle................................................................. $1,553 $1,495
Applicable Income Taxes................................................................. 435 388
-------------- -------------
Income Before Cumulative Effect of Change in
Accounting Principle.................................................................... 1,118 1,107
Cumulative Effect of Change in Accounting Principle, after Taxes........................ 0 0
-------------- -------------
NET INCOME........................................................................... $1,118 $1,107
============== =============
Per Share Data
- --------------
Income Before Cumulative Effect of Accounting Change.................................... $0.65 $0.64
Cumulative Effect of Change in Accounting Principle..................................... 0.00 0.00
-------------- -------------
Net Income.............................................................................. 0.65 0.64
Cash Dividends Per Share................................................................ 0.34 0.31
* Sept. 1996 amounts have been restated to reflect the cumulative effect of
the change in accounting for trust fee income.
13
TABLE 3-Y
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION: September 30, 1997
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
NINE MONTHS ENDED SEPT. 30...
INTEREST INCOME 1997 1996*
-------------- --------------
Loans including Fees.................................................................... $15,742 $13,480
Deposits with Other Banks............................................................... 0 1
Federal Funds Sold...................................................................... 154 82
Investment Securities:
Taxable Securities: Available for Sale............................................... 2,008 1,980
Tax-Exempt Securities: Available for Sale............................................ 678 595
Taxable Securities: Being Held to Maturity........................................... 397 596
Tax-Exempt Securities: Being Held to Maturity........................................ 297 372
------------- --------------
TOTAL INTEREST INCOME................................................................ $19,276 $17,106
INTEREST EXPENSE
Deposits................................................................................ $ 8,278 $ 7,070
Borrowed Funds.......................................................................... 316 161
------------- --------------
TOTAL INTEREST EXPENSE............................................................... $ 8,594 $ 7,231
Net Interest Income.................................................................. $10,682 $ 9,875
Provision for possible loan losses................................................... 450 375
------------- --------------
NET INTEREST INCOME AFTER PROVISION..................................................... $10,232 $ 9,500
OTHER INCOME
Trust & Asset Management Fees........................................................... $ 447 $ 444
Service charges on deposit accounts..................................................... 664 497
Other service charges and fees.......................................................... 319 319
Securities gains (losses)............................................................... 74 (13)
Gains on Sale of Loans.................................................................. 24 22
Other income............................................................................ 112 183
------------- --------------
TOTAL OTHER INCOME................................................................... $ 1,640 $ 1,452
OTHER EXPENSES
Salaries................................................................................ $ 3,435 $ 2,965
Employee benefits....................................................................... 663 794
Net occupancy expense................................................................... 1,230 1,051
Other Operating Expense................................................................. 2,466 1,770
------------- --------------
TOTAL OTHER EXPENSES................................................................. $ 7,794 $ 6,580
Income Before Income Taxes and Cumulative Effect of Change
In Accounting Principle................................................................. $ 4,078 $ 4,372
Applicable Income Taxes................................................................. 1,052 1,179
------------- --------------
Income Before Cumulative Effect of Change in
Accounting Principle.................................................................... 3,026 3,193
Cumulative Effect of Change in Accounting Principle, after Taxes........................ 0 156
------------- --------------
NET INCOME........................................................................... $ 3,026 $ 3,349
============== ==============
Per Share Data
- --------------
Income Before Cumulative Effect of Accounting Change.................................... $1.76 $1.85
Cumulative Effect of Change in Accounting Principle..................................... 0.00 0.09
------------- --------------
Net Income.............................................................................. $1.76 $1.94
Cash Dividends Per Share................................................................ $1.02 $0.93
* Sept. 1996 amounts have been restated to reflect the cumulative effect of the
change in accounting for trust fee income.
14
TABLE 4
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation
Average Balances and Net Interest Margin
(Dollars in thousands)
September 30, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest
Balance Rate Inc./Exp. Balance Rate Inc./Exp.
- -------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits with
banks $14 0.00% $0 $14 0.00% $0
Federal funds sold and securities
purchased under agreements
to resell 3,856 5.33% 154 1,597 5.45% 87
Investment Securities:
Taxable 52,717 6.08% 2,405 55,861 6.17% 3,445
Tax-Exempt (1) 25,022 7.49% 1,477 24,740 7.92% 1,962
- -------------------------------------------------------------------------------------------------------------------
Total Investments 81,609 6.48% 4,036 82,212 6.68% 5,494
Loans
Commercial 56,856 8.14% 3,472 47,679 8.14% 3,882
Mortgage 134,603 8.73% 8,810 116,233 8.96% 10,415
Installment 50,130 9.20% 3,460 42,009 9.36% 3,934
- -------------------------------------------------------------------------------------------------------------------
Total loans (2) 241,589 8.69% 15,742 205,921 8.85% 18,231
Total earning assets 323,198 8.16% 19,778 288,133 8.23% 23,725
Non Interest Bearing Assets
Cash & Due From Banks 9,596 0 8,579 0
Premises & Equipment 9,234 0 8,297 0
Other Assets 6,247 0 2,965 0
Allowance for Possible Loan
Losses (2,517) 0 (2,301) 0
- -------------------------------------------------------------------------------------------------------------------
Total Non-interest earning
assets 22,560 -- 0 17,540 -- 0
- -------------------------------------------------------------------------------------------------------------------
Total Assets $345,758 $19,778 $305,673 $23,725
==================================================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing $ 83,440 2.96% $ 1,850 $ 76,496 3.13% $ 2,397
Savings 35,635 1.71% 457 36,266 1.66% 601
Time 145,801 5.46% 5,971 117,339 5.47% 6,423
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 264,876 4.17% 8,278 230,101 4.09% 9,421
Short-term borrowings 4,058 5.09% 155 7,186 5.23% 376
Long-term borrowings 3,461 6.20% 161 0 0
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 272,395 4.21% 8,594 237,287 4.13% 9,797
Demand - non-interest-bearing 30,141 -- 0 27,852 -- 0
Other liabilities 2,803 -- 0 2,054 -- 0
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 305,339 3.75% 8,594 267,193 3.67% 9,797
Shareholders' equity 40,419 -- 0 38,480 -- 0
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $345,758 $ 8,594 $305,673 $ 9,797
==================================================================================
Interest income/earning assets 8.16% $19,778 8.23% $23,725
Interest expense/interest
bearing liabilities 4.21% 8,594 4.13% 9,797
- -------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.95% $11,184 4.10% $13,928
======================= ======================
Interest Income/Interest
Earning Assets 8.16% $19,778 8.23% $23,725
Interest expense/Interest
Earning Assets 3.55% 8,594 3.40% 9,797
- -------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.61% $11,184 4.83% $13,928
======================= ======================
September 30, 1996
- -----------------------------------------------------------------------
Average Annual Interest
Balance Rate Inc./Exp.
- -----------------------------------------------------------------------
Assets
Interest-bearing deposits with
banks $14 0.00% $1
Federal funds sold and securities
purchased under agreements
to resell 1,977 5.53% 82
Investment Securities:
Taxable 55,891 6.15% 2,576
Tax-Exempt (1) 24,612 7.94% 1,465
- -----------------------------------------------------------------------
Total Investments 82,494 6.67% 4,124
Loans
Commercial 47,567 8.13% 2,900
Mortgage 113,508 8.98% 7,644
Installment 41,218 9.49% 2,936
- -----------------------------------------------------------------------
Total loans (2) 202,293 8.88% 13,480
Total earning assets 284,787 8.24% 17,604
Non Interest Bearing Assets
Cash & Due From Banks 8,268 0
Premises & Equipment 8,080 0
Other Assets 2,943 0
Allowance for Possible Loan
Losses (2,270) 0
- -----------------------------------------------------------------------
Total Non-interest earning
assets 17,021 -- 0
- -----------------------------------------------------------------------
Total Assets $301,808 $17,604
=======================================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing $ 75,930 3.13% $ 1,782
Savings 36,391 1.65% 450
Time 117,452 5.49% 4,838
- -----------------------------------------------------------------------
Total interest-bearing
deposits 229,773 4.10% 7,070
Short-term borrowings 4,680 4.59% 161
Long-term borrowings 0 0
- -----------------------------------------------------------------------
Total interest-bearing
liabilities 234,453 4.11% 7,231
Demand - non-interest-bearing 27,076 -- 0
Other liabilities 2,107 -- 0
- -----------------------------------------------------------------------
Total Liabilities 263,636 3.66% 7,231
Shareholders' equity 38,172 -- 0
- -----------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $301,808 $ 7,231
=======================================================================
Interest income/earning assets 8.24% $17,604
Interest expense/interest
bearing liabilities 4.11% 7,231
- -----------------------------------------------------------------------
Net Interest Spread 4.13% $10,373
==========================
Interest Income/Interest
Earning Assets 8.24% $17,604
Interest expense/Interest
Earning Assets 3.39% 7,231
- -----------------------------------------------------------------------
Net Interest Margin 4.85% $10,373
===========================
(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.
15
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDERS VOTE
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports for the period ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB FINANCIAL CORPORATION
(Registrant)
DATE: November 12, 1997 /s/ James P. Moore
---------------------------- ----------------------------
James P. Moore
President and Director
(Principal Executive Officer)
DATE: November 12, 1997 /s/ William F. Falger
------------------------------ -----------------------------
William F. Falger
Executive Vice President and Director
(Principal Financial Officer)
(Principal Accounting Officer)
16