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 September 30, 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 November 7, 2001: COMMON STOCK: $1.00 PAR VALUE - 3,675,221 SHARES 1 INDEX PART I. FINANCIAL INFORMATION Sequential Page Number ----------- ITEM 1. - Financial Statements PAGE 3. Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 PAGE 4. Consolidated Statements of Income - Quarters ending September 30, 2001 and 2000 PAGE 5. Consolidated Statements of Income - Nine months ending September 30, 2001 and 2000 PAGE 6. Consolidated Statements of Comprehensive Income for the quarters and nine months ending September 30, 2001 and 2000 PAGE 7. Consolidated Statements of Cash Flows - Nine months ending September 30, 2001 and 2000 PAGE 8. Notes to Consolidated Financial Statements ITEM 2 - Management's Discussion and Analysis PAGE 10. Management's Discussion and Analysis of Financial Condition and Results of Operations ITEM 3 - Quantitative and Qualitative Disclosures PAGE 15. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION PAGE 16. ITEM 1 Legal Proceedings PAGE 16. ITEM 2 Changes in Securities and Use of Proceeds PAGE 16. ITEM 3 Defaults Upon Senior Securities 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 CONSOLIDATED BALANCE SHEETS CNB FINANCIAL CORPORATION Consolidated Balance Sheets (unudited) (Dollars on thosands) September 30 Dec.31, ASSETS 2001 2000 -------- -------- Cash and due from banks............................... $ 17,808 $ 15,711 Interest bearing deposits with other banks............ 12,834 2,262 -------- -------- Total cash and cash equivalents .................... 30,642 17,973 Securities available for sale......................... 155,947 136,250 Loans held for sale................................... 3,070 2,494 Loans and leases...................................... 377,259 369,878 Less: unearned discount............................ 2,562 3,722 Less: allowance for loan losses..................... 4,001 3,879 -------- -------- NET LOANS........................................... 370,696 362,277 FHLB and Federal Reserve Stock........................ 1,911 3,025 Premises and equipment................................ 12,635 12,805 Accrued interest receivable and other assets.......... 6,427 6,412 Intangible assets, net................................ 13,130 14,129 -------- -------- TOTAL ASSETS........................................ $594,458 $555,365 ======== ======== LIABILITIES Deposits: Non-interest bearing deposits....................... $ 57,318 $ 52,757 Interest bearing deposits........................... 450,410 432,460 -------- -------- TOTAL DEPOSITS...................................... 507,728 485,217 Other borrowings...................................... 22,000 13,341 Accrued interest and other liabilities................ 9,163 5,604 -------- -------- TOTAL LIABILITIES................................... 538,891 504,162 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.......................... 3,782 3,742 Retained earnings................................... 46,714 44,631 Treasury stock, at cost............................. (657) (692) (22,598 shares for September 2001, and 26,862 for December 2000) Accumulated other comprehensive income (loss)....... 2,034 (172) -------- -------- TOTAL SHAREHOLDERS' EQUITY.......................... 55,567 51,203 -------- -------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............ $594,458 $555,365 ======== ======== 3 CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data) THREE MONTHS ENDED SEPTEMBER 30 INTEREST INCOME 2001 2000 ------------ --------- Loans including fees.............................................. $ 7,797 $ 7,991 Deposits with other banks......................................... 36 41 Federal funds sold................................................ 108 41 Securities: Taxable........................................................ 1,769 1,475 Tax-exempt..................................................... 366 446 Dividends...................................................... 144 162 ---------- --------- TOTAL INTEREST AND DIVIDEND INCOME............................. 10,220 10,156 INTEREST EXPENSE Deposits.......................................................... 4,477 4,790 Borrowed funds.................................................... 298 328 ---------- --------- TOTAL INTEREST EXPENSE......................................... 4,775 5,118 ---------- --------- Net interest and dividend income.................................. 5,445 5,038 Provision for loan losses...................................... 270 210 ---------- --------- NET INTEREST INCOME AFTER PROVISION............................... 5,175 4,828 NON-INTEREST INCOME Trust & asset management fees..................................... 258 235 Service charges on deposit accounts............................... 753 580 Other service charges and fees.................................... 120 154 Securities gains(losses).......................................... 258 2 Gains on sale of loans............................................ 19 6 Other income...................................................... 268 262 ---------- --------- TOTAL NON-INTEREST INCOME...................................... 1,676 1,239 NON-INTEREST EXPENSES Salaries.......................................................... 1,529 1,520 Employee benefits................................................. 500 549 Net occupancy expense............................................. 590 570 Amortization of intangible........................................ 462 463 Other............................................................. 1,408 1,122 ---------- --------- TOTAL NON-INTEREST EXPENSES.................................... 4,489 4,224 ---------- --------- Income before income taxes........................................ 2,362 1,843 Applicable income taxes........................................... 627 450 ---------- --------- NET INCOME..................................................... $ 1,735 $ 1,393 ========== ========= Earnings Per Share, Based on Weighted Average Shares Outstanding ---------------------------------------------------------------- Net income, basic................................................. $ 0.47 $ 0.38 Net income, diluted............................................... $ 0.47 $ 0.38 Cash dividends per share.......................................... $ 0.23 $ 0.21 ------------------------------------------------------------------------------------------------------
4 CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data) NINE MONTHS ENDED SEPTEMBER 30 INTEREST AND DIVIDEND INCOME 2001 2000 ----------- --------- Loans including fees................................................ $ 23,643 $ 24,003 Deposits with other banks........................................... 132 72 Federal funds sold.................................................. 355 47 Securities: Taxable.......................................................... 5,081 4,459 Tax-exempt....................................................... 1,219 1,373 Dividends........................................................ 433 404 ----------- --------- TOTAL INTEREST AND DIVIDEND INCOME............................... 30,863 30,358 ----------- --------- INTEREST EXPENSE Deposits............................................................ 14,017 13,745 Borrowed funds...................................................... 883 978 ----------- --------- TOTAL INTEREST EXPENSE........................................... 14,900 14,723 ----------- --------- Net interest income.............................................. 15,963 15,635 Provision for loan losses........................................ 810 597 ----------- --------- NET INTEREST INCOME AFTER PROVISION................................. 15,153 15,038 ----------- --------- NON-INTEREST INCOME Trust & asset management fees....................................... 753 685 Service charges on deposit accounts................................. 2,038 1,691 Other service charges and fees...................................... 422 466 Securities gains(losses)............................................ 244 (33) Gains on sale of loans.............................................. 23 40 Other............................................................... 572 394 ----------- --------- TOTAL NON-INTEREST INCOME........................................ 4,052 3,243 ----------- --------- NON-INTEREST EXPENSES Salaries............................................................ 4,502 4,645 Employee benefits................................................... 1,562 1,709 Net occupancy expense............................................... 1,820 1,792 Amortization of intangible.......................................... 1,359 1,389 Other............................................................... 3,818 3,356 ----------- --------- TOTAL NON-INTEREST EXPENSES...................................... 13,061 12,891 ----------- --------- Income before income taxes.......................................... 6,144 5,390 Applicable income taxes............................................. 1,524 1,357 ----------- --------- NET INCOME....................................................... $ 4,620 $ 4,033 =========== ========= Earnings Per Share, Based on Weighted Average Shares Outstanding ---------------------------------------------------------------- Net income, basic................................................... $ 1.26 $ 1.10 Net income, diluted................................................. $ 1.26 $ 1.10 Cash dividends per share............................................ $ 0.69 $ 0.63 ------------------------------------------------------------------------------------------------------------
5 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CNB FINANCIAL CORPORATION Consolidated statements of Comprehensive Income (Unaudited) (Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income $ 1,735 $ 1,393 $ 4,620 $ 4,033 Other comprehensive income, net of tax Unrealized gains/(losses) on securities: Unrealized gains/(losses) arising during the period 884 832 2,367 364 Less: Reclassified adjustment for accumulated gains/(losses) included in net income 171 1 161 (22) ---------------------- ----------------------- Other comprehensive income 713 831 2,206 386 ---------------------- ----------------------- Comprehensive income $ 2,448 $ 2,224 $ 6,826 $ 4,419 ====================== =======================
6 CONSOLIDATED STATEMENTS OF CASHFLOWS CNB FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30... CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000 --------------- ------------------ Net Income................................................................... $ 4,620 $ 4,033 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses................................................ 810 597 Depreciation and amortization............................................ 2,243 2,211 Amortization and accretion and deferred loan fees ....................... (407) (350) Deferred taxes........................................................... (469) 434 Security (gains) losses.................................................. (244) 33 Gain on sale of loans.................................................... (23) (40) Proceeds from sale of loans............................................... 17,117 7,723 Origination of loans for sale............................................. (17,670) (7,737) Net (gains) losses on dispositions of acquired property................... 48 4 Changes in: Interest receivable...................................................... 367 (343) Other assets............................................................. (104) 310 Interest payable......................................................... (142) (29) Other liabilities........................................................ 3,035 (37) --------------- ------------------ Net cash provided by operating activities.................................... 9,181 6,809 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of: Securities held to maturity............................................ 0 310 Securities available for sale.......................................... 37,926 16,651 Proceeds from sales of securities available for............................ 17,250 6,421 sale....................... Purchase of securities available for....................................... (71,414) (20,038) sale............................ Loan originations and payments, net........................................ (8,695) 685 Purchase of premises and equipment......................................... (714) (785) Proceeds from the sale of foreclosed assets................................ 427 269 --------------- ------------------ Net cash provided by (used in) investing activities.......................... (25,220) 3,513 CASH FLOWS FROM FINANCING ACTIVITIES: Net change in: Checking, money market and savings accounts............................ 17,990 (9,630) Certificates of deposit................................................ 4,521 (7,917) Proceeds from sale of treasury stock....................................... 70 32 Cash dividends paid........................................................ (2,532) (2,309) Net advances from other borrowings......................................... 8,659 5,875 --------------- ------------------ Net cash provided by (used in) financing activities.......................... 28,708 (13,949) --------------- ------------------ Net increase (decrease) in cash and cash equivalents........................ 12,669 (3,627) Cash and cash equivalents at beginning of year............................... 17,973 21,214 --------------- ------------------ Cash and cash equivalents at end of period................................... $ 30,642 $ 17,587 =============== ================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (including amount credited directly to certificate accounts)... $ 15,042 $ 14,755 Income Taxes............................................................ $ 1,770 $ 1,000
7 CNB FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and in compliance with generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of Management of the registrant, the accompanying consolidated financial statements for the quarter and nine month periods ended September 30, 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 and nine-month periods ended September 30, 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 is calculated on the weighted average number of common shares outstanding during the year. The number of shares used for basic and diluted was 3,669,184. Stock options for 47,500 shares of common stock were not considered in computing diluted earnings per common share because they were anti-dilutive. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. The new statement changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this Statement. At September 30, 2001, the Corporation has approximately $12.8 million of intangibles resulting from the purchase of loans, deposits and banking facilities from other financial institutions. Management expects no effect from the adoption of Statement No. 142 on the Corporation's financial position or results of operations. However, there remains some uncertainty in the interpretation of some sections within statement 142, which could have a positive impact to the Corporation. 8 CONSOLIDATED YIELD COMPARISONS CNB Financial Corporation Average Balances and Net Interest Margin (Dollars in thousands)
September 30, 2001 September 30, 2000 ----------------------------------------------------------------------------------------------------------------------------- Average ANNUAL Interest Average ANNUAL INTEREST Balance RATE Inc./Exp. Balance RATE INC./EXP. ----------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits with banks $ 3,650 4.82% 132 1,536 6.25% 72 Federal funds sold and securities purchased under agreements to resell 11,593 4.08% 355 981 6.39% 47 Securities: Taxable 110,255 6.14% 5,081 96,422 6.17% 4,459 Tax-Exempt (1) 33,045 6.77% 1,679 36,903 6.83% 1,890 Equity (1) 10,280 7.06% 544 9,692 6.78% 493 ----------------------------------------------------------------------------------------------------------------------------- Total Investments 168,823 6.15% 7,791 145,534 6.38% 6,961 LOANS Commercial (1) 83,078 8.28% 5,158 78,247 8.84% 5,186 Mortgage (1) 223,528 8.66% 14,526 219,736 8.63% 14,216 Installment 39,939 9.36% 2,804 45,811 9.10% 3,126 Leasing 23,941 7.31% 1,313 30,159 7.22% 1,634 ----------------------------------------------------------------------------------------------------------------------------- Total loans (2) 370,486 8.57% 23,801 373,953 8.61% 24,162 ------------------------------------------------------------------------ Total earning assets 539,309 7.81% 31,592 519,487 7.99% 31,123 NON INTEREST BEARING ASSETS Cash & Due From Banks 13,354 - 13,764 - Premises & Equipment 12,872 - 12,935 - Other Assets 19,973 - 18,575 - Allowance for Possible Loan Losses (4,023) - (3,857) - ----------------------------------------------------------------------------------------------------------------------------- Total Non-interest earning assets 42,176 -- - 41,417 -- - ----------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $581,485 $31,592 $560,904 $31,123 ====================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST-BEARING DEPOSITS Demand - interest-bearing 121,162 1.98% 1,798 117,763 2.48% 2,188 Savings 76,465 3.23% 1,852 72,232 3.73% 2,023 Time 246,809 5.60% 10,368 242,404 5.24% 9,533 ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 444,436 4.21% 14,018 432,399 4.24% 13,744 Short-term borrowings 1,277 4.39% 42 6,413 5.86% 282 Long-term borrowings 19,963 5.61% 840 14,872 6.25% 697 ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 465,676 4.27% 14,900 453,684 4.33% 14,723 Demand - non-interest-bearing 53,372 52,004 Other liabilities 8,175 7,043 ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities 527,223 14,900 512,731 14,723 Shareholders' equity 54,262 48,173 ----------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 581,485 14,900 560,904 14,723 ====================================================================== Interest income/earning assets 7.81% 31,592 7.99% $31,123 Interest expense/interest bearing liabilities 4.27% 14,900 4.33% 14,723 ----------------------------------------------------------------------------------------------------------------------------- NET INTEREST SPREAD 3.54% $16,692 3.66% $16,400 ==================== ===================== Interest Income/Interest Earning Assets 7.81% $31,592 7.99% $31,123 Interest expense/Interest Earning Assets 3.68% 14,900 3.78% 14,723 ----------------------------------------------------------------------------------------------------------------------------- NET INTEREST MARGIN 4.13% $16,692 4.21% $16,400 ==================== ===================== -----------------------------------------------------------------------------------------------------------------------------
(1) The amounts are reflected on a fully tax equity basis using the federal statutory rate of 34% in 2001 and 2000, adjusted for certain tax preferences (2) Average outstanding includes the average balance outstanding of all non- accrual loans. Loans consist of the average of total loans less average unearned income. The amount of loan fees included in the interest income on loans in not material. ____________________ 9 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management's assessment of financial results. The Corporation's primary subsidiary County National Bank (the "Bank") provides financial services to individuals and businesses within the Bank's market area made up of the west central Pennsylvania counties of Clearfield, Cambria, Centre, Elk, Jefferson, and McKean. County National Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency ("OCC"). The market area that County National Bank operates in is rural in nature. The customer makeup consists of small business and individuals. The health of the economy in the region is mixed with unemployment rates running high in most of our market areas except Centre County. OVERVIEW OF BALANCE SHEET Total assets (shown in the Consolidated Balance Sheet) have grown 7.0% since year-end 2000 to $594.5 million. The growth has occurred in securities, loans and cash equivalents. The following comments will further explain the details of the asset fluctuation. CASH AND CASH EQUIVALENTS Cash and cash equivalents totaled $30,642,000 at September 30, 2001 compared to $17,973,000 on December 31, 2000. The increase resulted from a significant inflow of deposits during 2001. The Corporation will continue to focus on redeploying the cash balance by buying in higher yielding earning assets during the fourth 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 investment and loan portfolios that mature within one year. These sources of funds will enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due. SECURITIES Securities increased $19.7 million (or 14.5%) since December 31, 2000. Ten million dollars of the increase is from purchasing corporate notes utilizing borrowed funds from the Federal Home Loan Bank of similar maturity. As previously mentioned, the increase in cash has been fairly dramatic during 2001. The focus has been to get these cash equivalents into higher yielding assets as opportunities are defined. In addition to the $10.0 million borrowed, approximately $10.0 million of cash equivalents have been placed into the securities portfolio. Also, contributing to the increase was a change in the fair market valuation of the bond portfolio. In a declining interest rate environment, bond prices generally increase. This increase gave the Corporation an unrealized gain of $2.2 million, an increase of $2.4 million over year-end. The Corporation generally buys into the market over time and does not attempt to "time" its transactions. In using this approach, the highs and lows of the market are averaged into the portfolio and minimize the overall effect of different rate environments. Management monitors the earnings performance and the effectiveness of the liquidity of the securities portfolio on a regular basis through Asset / Liability Committee ("ALCO') meetings. The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the securities portfolio, the Corporation maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers. 10 LOANS The Corporation's loan demand improved during the third 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. A September 30, 2001, the Corporation had $374,697,000 in loans and leases outstanding, net of unearned discount, up $8,541,000 (or 2.3%) since December 31, 2000. The increase has mainly occurred in commercial and mortgage loans. The increase has been mitigated by significant decreases in auto loans and leases that occurred during 2001. The auto financing market is currently very competitive and the Corporation has elected to maintain acceptable margins rather than compete at reduced margins. This strategy has the effect of reducing new auto loan and lease originations. ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses as a percentage of loans increased from 1.06% at December 31, 2000 to 1.07% at September 30, 2001. The dollar amount of the reserve increased $122,000 since year-end 2000. The increase is a result of the provision of $810,000 expensed during the nine months less net charge-offs. The gross charge-offs for the nine months of 2001 were $803,000 while recoveries were $115,000. This level of net charge-offs is an increase from the nine months of 2000 when charge-offs were $617,000 with recoveries of $117,000. The adequacy of the allowance for loan and lease losses is subject to a formal analysis by the credit administration staff of the Bank and is deemed to be adequate to absorb probable losses in the portfolio as of September 30, 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 were $2,449,000 or 0.65% of total loans on September 30, 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 main focus for source of funds in the Corporation reaching $507,728,000 at September 30, 2001. Deposits have increased 4.6% since year-end 2000 primarily as a result of a major marketing strategy focusing on consumer customers. The principal component of this strategy has been the introduction of free checking accounts promoted by a direct mail campaign offering a premium item for account opening. 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 $55,567,000 at September 30, 2001 compared to $51,203,000 at December 31, 2000 an increase of $4,364,000 (or 8.5%). In the first nine months of 2001, the Corporation earned $4,620,000 and declared dividends of $2,532,000, a dividend payout ratio of 54.8% of net income. The securities in the Corporation's portfolio are classified as available for sale making the Corporation's balance sheet more sensitive to the changing market value of investments. Interest rates in the first nine months of 2001 have declined dramatically. This situation has caused a significant increase in 11 accumulated other comprehensive income, included in stockholders' equity of $2,206,000 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 10.88% at September 30, 2001 is above the well-capitalized standard of 10%. The Corporation's Tier 1 capital ratio of 9.87% is above the well-capitalized minimum of 6%. The leverage ratio at September 30, 2001 was 7.13%, also above the well-capitalized standard of 5%. The Corporation is well capitalized as measured by the federal regulatory agencies. The ratios provide quantitative data demonstrating the strength and future opportunities for use of the Corporation's capital base. Management continues to evaluate risk-based capital ratios and the capital position of the Corporation as part of its strategic decision making process. LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity measures an organizations' ability to meet cash obligations as they come due. The Consolidated Statement of Cash Flows presented on page 7 of the accompanying financial statements provides analysis of the Corporation's cash and cash equivalents. Additionally, management considers that portion of the loan and investment portfolio that matures within one year as part of the Corporation's liquid assets. The Corporation's liquidity is monitored by the ALCO Committee, which establishes and monitors ranges of acceptable liquidity. Management feels the Corporation's current liquidity position is acceptable. 12 RESULTS OF OPERATIONS OVERVIEW OF THE INCOME STATEMENT The Corporation had net income of $1,735,000 and $4,620,000 for the third quarter and first nine months of 2001, respectively. The earnings per diluted share for the respective periods were $0.47 and $1.26. Net income was $1,393,000 and $4,033,000 for the third quarter and first nine months of 2000, which equates to earnings per diluted share of $0.38 and $1.10, respectively. The return on assets and the return on equity for the nine months of 2001 are 1.06% and 11.54%. INTEREST INCOME AND EXPENSE Net interest income totaled $5,445,000 in the third quarter, an increase of 8.1% over the third quarter of 2000 and totaled $15,963,000 for the nine months of 2001, an increase of 2.1% compared to the prior year. Total interest income increased during the quarter by $64,000 or 0.6% while interest expense decreased by $343,000 or 6.7% when compared to the third quarter of 2000. The relatively nominal increase in interest income is a result of a lower yield on earning assets. As mentioned earlier, the rapid growth in deposits has not all been placed into higher yielding assets. Thus much of these funds are in lower yielding federal funds. Interest expense began to decline during the quarter since the Corporation has adjusted deposit pricing to reflect the declining market rates. PROVISION FOR LOAN LOSSES The Corporation recorded a provision for loan and lease losses in the third quarter of $270,000 compared to the third quarter of 2000 at $210,000 and $810,000 for the nine months of 2001 compared to $597,000 in 2000. Based on managements' evaluation of problem loans, increased charge-offs and the overall effects of the economy, management's analysis indicates that the allowance provision appears to be adequate. NON-INTEREST INCOME Non-interest income increased $437,000 (35.3%) and $809,000 (24.9%) in the third quarter and the first nine months of 2001, respectively, when compared to the same periods in 2000. Increased deposit account related charges have been the primary source of the growth in non-interest income. In the nine months, deposit account charges totaled $2,038,000 up $347,000 (or 20.5%) over last year. This increase in fee income was mainly the result of growth in the number of customers and related deposit accounts over the past twelve months. Also, the Corporation has done some restructuring within the securities portfolio that resulted in realized gains of $214,000. Total security gains reflected during the nine months have increased $277,000 compared to the prior year. NON-INTEREST EXPENSE Non-interest expense increased $265,000 or 6.3% during the third quarter of 2001 and $170,000 or 1.32% in the nine months of 2001 when compared to the same periods in 2000. The increase can be attributed mainly to the cost of the direct mailing and premiums associated with the free checking promotion. In addition, costs of foreclosure on assets have increased throughout the year. These increases have been mitigated by adjustments made to our staffing levels as well as a change in our health care provider, both of which occurred in the fourth quarter of 2000. These adjustments have resulted in a reduction of $290,000 in salaries and benefits during the first nine months of 2001 as compared to 2000. RETURN ON ASSETS For the nine months ended September 30, 2001, the Corporation's annualized return on average assets ("ROA") totaled 1.06% up from the 0.96% recorded in 2000. Operating cash earnings ROA, which represents earnings excluding acquisition related amortization expense, for the nine months of 2001 was 1.27% as compared to 1.18% in the same period for 2000. 13 RETURN ON EQUITY The Corporation's annualized return on average shareholder's equity ("ROE") in the first nine months was 11.54% compared to 10.80% for 2000. The increase can be attributed to the Corporation's improvement in core earnings. The continued increase in assets without adding additional capital will provide the shareholders more earnings from virtually the same capital base. Operating cash earnings ROE for the first nine months was 13.79% compared to 13.26% in 2000. FEDERAL INCOME TAX EXPENSE Federal income tax expense was $627,000 in the third quarter of 2001 compared to $450,000 in the third quarter of 2000. For the nine-month period comparisons, the federal tax expense was $1,524,000 in 2001 and $1,357,000 in 2000. This increase in tax expense is the result of taxable income in 2001 compared to 2000. 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 improved during the third quarter of 2001, however the Corporation's loan to deposit ratio has decreased through the first nine months to 73.0% compared to 74.7% at year-end 2000. The decline in this ratio is the result in a faster rate of growth in deposits versus loans during the year. Consumer loan charge-offs in the third quarter continued to comprise the majority of the Corporation's recent charge-offs. In the first nine months, total net charge-offs were $688,000 of which consumer net charge-offs totaled $413,000. The charge-off level for the fourth quarter of 2001 is expected to be comparable with the third quarter. 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 nine months ended September 30, 2001, the Corporation's efficiency ratio was 55.84% compared to 58.45% for the same period last year. The efficiency ratio improved as the level of non-interest income has increased at a higher rate than non-interest expense over the year. Management believes controlling the operating costs of the Corporation is imperative to the future increased profitability derived from core earnings. A strong focus by management continues to be placed on non-interest expenses. Also, the Bank expects to see continued improvement in non-interest income as the result of several initiatives that are taking place in 2001. Since year end 2000, short term interest rates such as the Federal Funds Rate and the Prime Lending Rate have declined by 400 basis points, resulting in a more rapidly declining yield on earning assets compared to the more slowly declining cost of funds. This downward movement in interest rates has therefore created compression to the net interest margin. Overall interest income continues to increase due to the growth in the amount of interest earning assets. Management expects further growth in interest earning assets 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. 14 "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in the report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "expects," "believes," "estimate" or "projected" and similar expressions as they relate to CNB Financial Corporation or its management are intended to identify such forward looking statements. CNB Financial Corporation's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. ITEM 3 QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the course of conducting business activities, the Corporation is exposed to market risk, principally interest rate risk, through the operation of the Bank. Interest rate risk arises from market driven fluctuations in interest rates, which affect cash flows, income, expense and values of all financial instruments. Management and the ALCO Committee of the Board monitor the Corporation's interest rate risk position. No material changes have occurred during the period in the Bank's market risk strategy or position, a discussion of which can be found in the SEC Form-10K filed for the period ended December 31, 2000. 15 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 - August 17, 2001 On August 15, 2001 CNB Financial Corporation announced the approval of a plan to repurchase up to 180,000 shares of its common stock. The plan for repurchase will expire on August 14, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CNB FINANCIAL CORPORATION (Registrant) DATE: November 9, 2001 /s/ William F. Falger --------------------- ---------------------- William F. Falger President and Director (Principal Executive Officer) DATE: November 9, 2001 /s/ Joseph B. Bower, Jr. --------------------- ------------------------- Joseph B. Bower, Jr. Treasurer (Principal Financial Officer) (Principal Accounting Officer) 16