10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 1 0 - Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission File Number 0-13396 CNB FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 25-1450605 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) County National Bank 1 South Second Street P.O. Box 42 Clearfield, Pennsylvania 16830 (Address of principal executive offices) Registrant's telephone number, including area code, (814) 765-9621 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the issuer's common stock as of May 9, 2001: COMMON STOCK: $1.00 PAR VALUE - 3,668,916 SHARES INDEX PART I. FINANCIAL INFORMATION Sequential Page Number ----------- PAGE 3. Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 PAGE 4. Consolidated Statements of Income - Quarters ending March 31, 2001 and 2000 PAGE 5. Consolidated Statements of Comprehensive Income for the quarters ending March 31, 2001 and 2000 PAGE 6. Consolidated Statements of Cash Flows - three months ending March 31, 2001 and 2000 PAGE 7. Notes to Consolidated Financial Statements PAGE 8. Management's Discussion and Analysis of Financial Condition and Results of Operations PAGE 11. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION PAGE 14. ITEM 1. Legal Proceedings PAGE 14. ITEM 2. Changes in Securities and Use of Proceeds PAGE 14. ITEM 3. Defaults Upon Senior Securities PAGE 14. ITEM 4. Submission of Matters for Security Holders Vote PAGE 14. ITEM 5. Other Information PAGE 14. ITEM 6. Exhibits and Reports on Form 8-K PAGE 14. Signatures 2 CONSOLIDATED BALANCE SHEETS CNB FINANCIAL CORPORATION
(Dollars in thousands) March 31 Dec. 31, ASSETS 2001 2000 ----------- ----------- Cash and due from banks........................................... $ 13,360 $ 15,711 Interest bearing deposits with other banks........................ 14,525 2,262 ----------- ----------- Total cash and cash equivalents................................. 27,885 17,973 Securities available for sale..................................... 149,435 136,250 Loans held for sale............................................... 3,868 2,494 Loans and leases.................................................. 364,298 369,878 Less: unearned discount........................................ 3,292 3,722 Less: allowance for loan and lease losses....................... 4,002 3,879 ----------- ----------- NET LOANS....................................................... 357,004 362,277 FHLB and Federal Reserve stock.................................... 3,020 3,025 Premises and equipment, net....................................... 12,963 12,805 Accrued interest receivable and other assets...................... 6,898 6,412 Intangible assets, net............................................ 13,968 14,129 ----------- ----------- TOTAL ASSETS.................................................... $575,041 $555,365 =========== =========== LIABILITIES Deposits: Non-interest bearing deposits................................... $ 52,835 $ 52,757 Interest bearing deposits....................................... 440,514 432,460 ----------- ----------- TOTAL DEPOSITS.................................................. 493,349 485,217 Other borrowings.................................................. 21,309 13,341 Accrued interest and other liabilities............................ 7,335 5,604 ----------- ----------- TOTAL LIABILITIES............................................... 521,993 504,162 SHAREHOLDERS' EQUITY Common stock $1.00 par value Authorized 10,000,000 shares Issued 3,693,500 shares......................................... 3,694 3,694 Additional paid in capital...................................... 3,757 3,742 Retained earnings............................................... 45,164 44,631 Treasury stock, at cost......................................... (670) (692) (24,623 shares for March 2001, and 26,862 for December 2000) Accumulated other comprehensive income.......................... 1,103 (172) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY...................................... 53,048 51,203 ----------- ----------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY........................ $575,041 $555,365 =========== ===========
3 CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION (Dollars in thousands, except per share data) Three Months Ended March 31, 2001 2000 --------- -------- INTEREST AND DIVIDEND INCOME Loans including fees................................. $ 7,964 $7,874 Deposits with other banks............................ 54 19 Federal funds sold................................... 103 6 Investment securities: Taxable........................................... 1,641 1,520 Tax-exempt........................................ 432 466 Dividends......................................... 145 84 --------- -------- TOTAL INTEREST AND DIVIDEND INCOME................ 10,339 9,969 --------- -------- INTEREST EXPENSE Deposits............................................. 4,850 4,474 Borrowed funds....................................... 294 208 --------- -------- TOTAL INTEREST EXPENSE............................ 5,144 4,682 --------- -------- Net interest income............................... 5,195 5,287 Provision for loan losses......................... 270 180 --------- -------- NET INTEREST INCOME AFTER PROVISION.................. 4,925 5,107 --------- -------- NON-INTEREST INCOME Trust & asset management fees........................ 223 232 Service charges on deposit accounts.................. 609 531 Other service charges and fees....................... 159 132 Securities gains(losses)............................. 0 (41) Gains on sale of loans............................... 8 7 Other income......................................... 158 51 --------- -------- TOTAL NON-INTEREST INCOME......................... 1,157 912 --------- -------- NON-INTEREST EXPENSES Salaries............................................. 1,479 1,495 Employee benefits.................................... 520 574 Net occupancy expense of premises.................... 633 640 Amortization of intangible........................... 438 463 Other................................................ 1,200 1,160 --------- -------- TOTAL NON-INTEREST EXPENSES....................... 4,270 4,332 --------- -------- Income before income taxes........................... 1,812 1,687 Applicable income taxes.............................. 430 440 --------- -------- NET INCOME........................................ $ 1,382 $1,247 ========= ======== EARNINGS PER SHARE, BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING Net income, basic............................... $0.38 $0.34 Net income, diluted............................ $0.38 $0.34 DIVIDENDS PER SHARE Cash dividends per share $0.23 $0.21
4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CNB FINANCIAL CORPORATION
(Dollars in thousands) Three Months Ended March 31, ------------------- 2001 2000 ------------------- Net income $ 1,382 $ 1,247 Other comprehensive income, net of tax Unrealized gains/(losses) on securities: Unrealized gains/(losses) arising during the period 1,275 (560) Reclassified adjustment for accumulated gains/(losses) included in net income, net of tax - 27 ------------------- Other comprehensive income 1,275 (533) ------------------- Comprehensive income $ 2,657 $ 714 ===================
5 CONSOLIDATED STATEMENTS OF CASHFLOWS CNB FINANCIAL CORPORATION
(Dollars in thousands) Three Months Ended March 31, Cash flows from operating activities: 2000 2000 --------- --------- Net Income $ 1,382 $ 1,247 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses 270 180 Depreciation and amortization 723 733 Amortization and accretion and deferred loan fees (84) (100) Deferred taxes (258) (219) Security (gains)/losses 0 41 Gain on sale of loans (8) (7) Proceeds from sale of loans 2,002 1,926 Origination of loans for sale. (3,368) (2,356) Changes in: Interest receivable and other assets (759) 692 Interest payable and other liabilities 1,333 (293) -------- -------- Net cash from operating activities 1,233 1,844 Cash flows from investing activities: Proceeds from maturities of: Securities held to maturity 0 305 Securities available for sale 13,730 3,876 Proceeds from sales of securities available for sale 0 2,475 Purchase of: Securities available for sale (25,012) (6,004) Net principal disbursed on loans 5,116 (10,586) Purchase of premises and equipment (443) (323) Proceeds from the sale of foreclosed assets 0 165 -------- -------- Net cash from investing activities (6,609) (10,092) Cash flows from financing activities: Net change in: Checking, money market and savings accounts 3,876 (6,899) Certificates of deposit 4,256 (10,550) Treasury stock 31 10 Cash dividends paid (843) (770) Net advances from other borrowings 7,968 20,815 -------- -------- Net cash from financing activities 15,288 2,606 -------- -------- Net increase (decrease) in cash and cash equivalents 9,912 (5,642) Cash and cash equivalents at beginning of year 17,973 21,214 -------- -------- Cash and cash equivalents at end of period $ 27,885 $ 15,572 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 5,183 $ 4,749 Income Taxes $0 $0
6 CNB FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and in compliance with generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of the Management of the registrant, the accompanying consolidated financial statements for the quarter ended March 31, 2001 and 2000 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the period. The financial performance reported for the Corporation for the three-month period ended March 31, 2001 is not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Corporation's Annual Report to shareholders and Form 10-K for the period ended December 31, 2000. COMMON STOCK PLAN The Corporation has a common stock plan for key employees and independent directors. The Stock Incentive Plan, which is administered by a disinterested committee of the Board of Directors, provides for 250,000 shares of common stock in the form of qualified options, nonqualified options, stock appreciation rights or restrictive stock. The Corporation applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its common stock plan. Accordingly, no compensation expense has been recognized for the plans. EARNINGS PER SHARE Earnings per share (EPS) is calculated on the weighted average number of common shares outstanding during the year. The weighted average shares used in the calculation were 3,667,014 for basic and diluted in 2001 and 3,664,314 for basic and diluted in 2000. RECENT ACCOUNTING PRONOUNCEMENTS Accounting for Transfer and Servicing of Financial Assets and Extinguishments of -------------------------------------------------------------------------------- Liabilities ----------- In September 2000, the FASB issued statement No. 140, which replaces FASB statement No.125, issued in June 1996. FAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of FAS No. 125. The statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. FAS No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for years ending after December 15, 2000. Implementation of FAS No. 140 will not have a material impact on the Corporation's financial condition or results of operations. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS CONSOLIDATED YIELD COMPARISONS CNB Financial Corporation Average Balances and Net Interest Margin (Dollars in thousands)
March 31, 2001 March 31, 2000 ---------------------------------------------------------------------------------------------------------------------------- Average Annual Interest Average Annual Interest Balance Rate Inc./Exp. Balance Rate Inc./Exp. Assets Interest-bearing deposits with banks $ 3,410 6.33% $ 54 $ 1,340 5.67% $ 19 Federal funds sold and securities purchased under agreements to resell 7,761 5.31% 103 445 5.39% 6 Investment Securities: Taxable 103,433 6.35% 1,641 98,496 6.17% 1,520 Tax-Exempt(1) 35,130 6.73% 591 37,485 6.88% 645 Equity Investments(1) 10,210 7.05% 180 6,755 5.86% 99 ---------------------------------------------------------------------------------------------------------------------------- Total Investments 159,944 6.42% 2,569 144,521 6.34% 2,289 Loans Commercial(1) 80,031 8.74% 1,749 75,262 8.72% 1,640 Mortgage(1) 221,033 8.72% 4,819 214,701 8.58% 4,603 Installment 41,762 9.26% 967 48,233 9.29% 1,120 Leasing 25,650 7.49% 480 31,118 7.30% 568 ---------------------------------------------------------------------------------------------------------------------------- Total loans(2) 368,476 8.70% 8,015 369,314 8.59% 7,931 Total earning assets 528,420 8.01% 10,584 513,835 7.96% 10,220 Non Interest Bearing Assets Cash & Due From Banks 11,769 - 13,040 - Premises & Equipment 12,967 - 12,939 - Other Assets 20,642 - 20,998 - Allowance for Possible Loan Losses (3,958) - (3,735) - ---------------------------------------------------------------------------------------------------------------------------- Total Non-interest earning assets 41,420 -- - 43,242 -- - ---------------------------------------------------------------------------------------------------------------------------- Total Assets $569,840 $10,584 $557,077 $10,220 ========================================================================== Liabilities and Shareholders' Equity Interest-Bearing Deposits Demand - interest-bearing $117,811 2.29% $ 674 $118,526 2.46% $ 730 Savings 73,554 3.78% 695 72,610 3.64% 660 Time 245,814 5.66% 3,481 246,617 5.00% 3,084 ---------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 437,179 4.44% 4,850 437,753 4.09% 4,474 Short-term borrowings 1,379 6.09% 21 8,546 5.85% 125 Long-term borrowings 19,889 5.49% 273 5,769 5.75% 83 ---------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 458,447 4.49% 5,144 452,068 4.14% 4,682 Demand - non-interest-bearing 51,008 - 49,822 - Other liabilities 7,294 - 5,114 - ---------------------------------------------------------------------------------------------------------------------------- Total Liabilities 516,749 5,144 507,004 4,682 Shareholders' equity 53,091 - 50,073 - ---------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $569,840 $ 5,144 $557,077 $ 4,682 ========================================================================== Interest income/earning assets 8.01% $10,584 7.96% $10,220 Interest expense/interest bearing liabilities 4.49% 5,144 4.14% 4,682 ---------------------------------------------------------------------------------------------------------------------------- Net Interest Spread 3.52% $ 5,440 3.81% $ 5,538 ===================== =================== Interest Income/Interest Earning Assets 8.01% $10,584 7.96% $10,220 Interest expense/Interest Earning Assets 3.89% 5,144 3.64% 4,682 ---------------------------------------------------------------------------------------------------------------------------- Net Interest Margin 4.12% $ 5,440 4.31% $ 5,538 ===================== =================== ----------------------------------------------------------------------------------------------------------------------------
(1) The amounts are reflected on a fully tax equivalent basis using the federal statutory rate of 34% in 2001 and 2000, adjusted for certain tax exemptions (2) Average outstanding includes the average balance outstanding of all non- accrual loans. Loans consist of the average of total loans less average unearned income. The amount of loan fees included in the interest income on loans is not material. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management's assessment of financial results. The Corporation's subsidiary County National Bank (the "Bank") provides financial services to individuals and businesses within the Bank's market area made up of the west central Pennsylvania counties of Clearfield, Cambria, Centre, Elk, Jefferson, and McKean. County National Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency ("OCC"). The market area that County National Bank operates in is rural in nature. The customer makeup consists of small business and individuals. The health of the economy in the region has remained relatively stable. Unemployment in our region has run consistently higher than the state average over time. OVERVIEW OF BALANCE SHEET Total assets (shown in "Consolidated Balance Sheet") have increased 3.5% since year-end 2000 to $575.0 million. The increase has occurred primarily in cash and investments. The following comments will further explain the details of the asset fluctuation. CASH AND CASH EQUIVALENTS Cash and cash equivalents totaled $27,855,000 at March 31, 2001 compared to $17,973,000 on December 31, 2000. This increase resulted from a significant inflow of deposits mainly during March 2001. The Corporation will focus on decreasing the cash balance and investing funds in higher yielding earning assets during the second quarter. Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, and the portion of the securities and loan portfolios that mature within one year. These sources of funds will enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due. SECURITIES Securities increased $13.2 million (or 9.7%) since December 31, 2000. The increase resulted from an opportunity to borrow money from the Federal Home Loan Bank and invest in $10 million of Corporate notes having the same duration. Also aiding the increase was a change in the fair market valuation of the bond portfolio. In a declining interest rate environment, bond prices generally increase. This increase gave the Corporation an unrealized gain of $1,103,000, an increase over year-end of $1.3 million. The Corporation generally buys into the market over time and does not attempt to "time" its transactions. In doing this, the highs and lows of the market are averaged into the portfolio and minimizes the overall effect of different rate environments. Management monitors the earnings performance and the effectiveness of the liquidity of the securities portfolio on a regular basis through Asset/ Liability Committee ("ALCO") meetings. The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the securities portfolio, the Corporation maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers. LOANS The Corporation's loan demand was weak during the first quarter of 2001. The Corporation's lending is focused in the west central Pennsylvania market and consists principally of retail lending, which includes single-family residential mortgages and other consumer lending, and commercial lending primarily to locally-owned small businesses. 9 At March 31, 2001, the Corporation had $361,006,000 in loans and leases outstanding, net of unearned discount, down $5,150,000 (or -1.4%) since December 31, 2000. The decrease was caused by a general decline in demand across all categories of loans. While we remain dedicated to the success of commercial lending, a stronger approach has been adopted toward secured consumer loans. This strategy is part of an overall initiative to increase our market share of households in loans and deposits. ALLOWANCE FOR LOAN AND LEASE LOSSES AND NONPERFORMING ASSETS The Allowance for Loan and Lease Losses as a percentage of loans increased from 1.06% at December 31, 2000 to 1.11% at March 31, 2001. The dollar amount of the reserve increased $123,000 since year-end 2000. The increase is a result of the provision of $270,000 expensed during the three months less net charge- offs. The gross charge-offs for the three months of 2001 were $193,000 while recoveries were $46,000. This level of charge-offs is a decrease from the three months of 2000 when charge-offs were $210,000 with recoveries of $25,000. The adequacy of the allowance for loan and lease losses is subject to a formal analysis by an independent loan review analyst, as well as our internal credit administrator, and is deemed to be adequate to absorb probable losses in the portfolio as of March 31, 2001. The Corporation has disclosed in its annual report on Form 10-K the process and methodology supporting the loan loss provision. Management continues to closely monitor loan delinquency and loan losses. Non-performing assets, which include loans 90 or more days past due, non-accrual loans and other real estate owned were $2,355,000 or 0.65% of total loans on March 31, 2001 compared to $2,571,000 or 0.70% on December 31, 2000. FUNDING SOURCES The Corporation considers deposits, short-term borrowings, and term debt when evaluating funding sources. Traditional deposits continue to be the most significant source of funds for the Corporation at $493,349,000 at March 31, 2001. Deposit increase of 1.7% since year-end 2000 is a result of the previously mentioned strategy to focus on consumer households. Also adding to the increase is the decline in value of the stock market which has appeared to force some investors back to bank deposits. The Corporation utilizes term borrowings from the Federal Home Loan Bank (FHLB) to meet funding needs not accommodated by deposit growth. During 2001, the Corporation borrowed $10 million to take advantage of opportunities existing in the bond market. Management plans to maintain access to short and long-term FHLB borrowings as an appropriate funding source. SHAREHOLDERS' EQUITY The Corporation's capital continues to provide a strong base for profitable growth. Total Shareholders' Equity was $53,048,000 at March 31, 2001 compared to $51,203,000 at December 31, 2000 an increase of $1,845,000 (or 3.6%). In the first three months of 2001, the Corporation earned $1,382,000 and declared dividends of $843,000, a dividend payout ratio of 61.0% of net income. The investment securities in the Corporation's portfolio are classified as available-for-sale making this portion of the Corporation's balance sheet more sensitive to the changing market value of investments. Interest rates in the first quarter of 2001 have been on a downward trend. This situation has caused an increase in accumulated other comprehensive income which is included in stockholders' equity of $1,275,000 since December 31, 2000. The Corporation has also complied with the standards of capital adequacy mandated by the banking regulators. Bank regulators have established "risk- based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets), is assigned to each asset on the balance sheet. The Corporation's total risk-based capital ratio of 11.57% at March 31, 2001 is above the well-capitalized standard of 10%. The Corporation's Tier 1 capital ratio of 10.48% is above the well-capitalized minimum of 6%. The leverage ratio at March 31, 2001 was 6.95%, also above the well-capitalized standard of 5%. The Corporation is well capitalized as measured by the federal regulatory agencies. The ratios provide quantitative data demonstrating the strength and future opportunities for use of the Corporation's capital base. Management continues to evaluate risk-based capital ratios and the capital position of the Corporation as part of its strategic decision making process. 10 LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity measures an organizations' ability to meet cash obligations as they come due. The Consolidated Statement of Cash Flows presented on page 6 of the accompanying financial statements provides analysis of the Corporation's cash and cash equivalents. Additionally, management considers that portion of the loan and investment portfolio that matures within one year as part of the Corporation's liquid assets. The Corporation's liquidity is monitored by the ALCO Committee, which establishes and monitors ranges of acceptable liquidity. Management feels the Corporation's current liquidity position is acceptable. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the course of conducting business activities, the Corporation is exposed to market risk, principally interest rate risk, through the operation of the Bank. Interest rate risk arises from market driven fluctuations in interest rates, which affect cash flows, income, expense and values of all financial instruments. Management and the ALCO Committee of the Board monitor the Corporation's interest rate risk position. No material changes have occurred during the period in the Bank's market risk strategy or position, a discussion of which can be found in the SEC Form-10K filed for the period ended December 31, 2000. 11 RESULTS OF OPERATIONS OVERVIEW OF THE INCOME STATEMENT The Corporation had net income of $1,382,000 for the first quarter of 2001. The earnings per diluted share for the period was $0.38. Net income was $1,247,000 for the first quarter of 2000, which equated to earnings per diluted share of $0.34. INTEREST INCOME AND EXPENSE Net interest income totaled $5,195,000 in the first quarter, a decrease of 1.7% over the first quarter of 2000. Total interest income increased during the quarter by $370,000 or 3.7% while interest expense increased by $462,000 or 9.9% when compared to the first quarter of 2000. Our cost of funds increased greater than the yield on assets. The main cause of this is the growth in interest bearing deposit accounts through the first quarter of 2001. The Corporation expects to place these deposits dollars into higher yielding assets throughout the second quarter. PROVISION FOR LOAN LOSSES The Corporation recorded a provision for loan and lease losses in the first quarter of $270,000 compared to the first quarter of 2000 at $180,000. Based on managements' evaluation of problem loans, increased charge-offs, expected growth in the loan portfolio, and the overall effects of the economy managements' analysis indicates the allowance provision appears to be adequate. NON-INTEREST INCOME Non-interest income increased $245,000 (or 26.9%) in the first quarter of 2001 when compared to the same period in 2000. Increased deposit account service charges have been the primary source of the growth in non-interest income. In the three months, account service charges totaled $609,000 up $78,000 (or 14.7%) over last year. These increases in fee income were mainly the result of growth in the number of customers and related deposit accounts over the past twelve months. Also during 2000, there were $41,000 in security losses compared to no securities gains or losses in 2001. NON-INTEREST EXPENSE Non-interest expense decreased $62,000 or 1.4% during the first quarter of 2001 when compared to the same period in 2000. This decreased level of non- interest expense is attributable to adjustments made to our staffing levels that occurred in the fourth quarter of 2000. These adjustments resulted in a reduction of $70,000 in salary and benefit costs for the quarter compared to the prior period. RETURN ON ASSETS For the three months ended March 31, 2001, the Corporation's annualized return on average assets ("ROA") totaled 0.97% up from the 0.90% recorded in 2000. Operating cash earnings ROA, which represents earnings excluding one-time merger related costs and amortization expense, for the three months of 2001 was 1.17% as compared to 1.12% in the same period for 2000. RETURN ON EQUITY The Corporation's annualized return on average shareholder's equity ("ROE") in the first quarter was 10.47% compared to 10.34% for 2000. The decrease can be attributed to the increase in equity as described in the shareholders'equity section on page 11. Operating cash earnings ROE for the first quarter was 12.66% compared to 13.01% in 2000. FEDERAL INCOME TAX EXPENSE Federal income tax expense was $430,000 in the first quarter of 2001 compared to $440,000 in the first quarter of 2000. The decrease reflects a managed tax expense through lower taxable income in the period when compared to the same period in the prior year. 12 FUTURE OUTLOOK Year-to-date results improved when compared to the prior year and were consistent with management's expectations. Management continues to focus on growth from increased market share. The goal of growth is to increase shareholder value as well as provide favorable results in the long-term profitability of the Corporation. Loan demand was weak during the first quarter. Loan growth is expected to provide for an increase in the range of 1% to 3% for the year over year-end 2000. The Corporation's loan to deposit ratio has decreased through the first quarter to 72.36% compared to 74.66% at year-end 2000 as deposit growth has been very good during the first quarter and is expected to remain strong throughout 2001. Consumer loan charge-offs in the first quarter continued to comprise the majority of the Corporation's recent charge-offs. In the first three months, total net charge-offs were $147,000 of which consumer net charge-offs totaled $81,000. Management believes that the increased efforts of loan review and collections and our high underwriting standards will give the Bank favorable charge-off history when compared to peer institutions. Enhanced non-interest income and controlled non-interest expense are important factors in the success of the Corporation and is measured in the financial services industry by the efficiency ratio, calculated according to the following: non-interest expense (less amortization of intangibles) as a percentage of fully tax equivalent net interest income and non-interest income (less non-recurring income). For the three months ended March 31, 2001, the Corporation's efficiency ratio was 56.66% compared to 58.16% for the same period last year. The efficiency ratio improved as the level of non-interest income has increased and the non-interest expense has declined over the year. Management believes controlling the operating costs of the Corporation is imperative to the future increased profitability derived from core earnings. A strong focus by management continues to be placed on controlling non-interest expenses during the remainder of 2001. Through the use of technology and more efficient processes, our non-interest costs have been reduced to date and should remain lower than 2000 throughout this year. The interest rate environment will continue to play an important role in the future earnings of the Corporation. The net interest margin has remained the central focus of management as competitive pressures in the form of reduced lending rates coupled with higher cost of funds has created pressure to the margin. Overall interest income continues to increase due to growth in average interest earning assets. Management expects further growth in interest income coupled with reduced interest costs to provide the Corporation with improved net interest income for the remainder of 2001. Management concentrates on return on average equity and earnings per share evaluations, plus other methods, to measure and direct the performance of the Corporation. While past results are not an indication of future earnings, management feels the Corporation is positioned to enhance performance of normal operations through the remainder of 2001. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in this Form 10-Q which are not historical fact are forward looking statements that involve risks and uncertainties, including, but not limited to, the interest rate environment, the effect of federal and state banking and tax regulations, the effect of economic conditions, the impact of competitive products and pricing, and other risks detailed in the Corporation's Securities and Exchange Commission filings. 13 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDERS VOTE None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K There were no reports for the period ended March 31, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CNB FINANCIAL CORPORATION (Registrant) DATE: May 10, 2001 /s/ William F. Falger ---------------------- ---------------------------- William F. Falger President and Director (Principal Executive Officer) DATE: May 10, 2001 /s/ Joseph B. Bower, Jr. --------------- ----------------------------- Joseph B. Bower, Jr. Treasurer (Principal Financial Officer) (Principal Accounting Officer) 14