-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IaGVv82M9Q/be8QSeRV1ztKpwh8LywHiCSFo82GEWXDqc8IzKhUSjgainZAnLTPZ V6SzeyLtWdoOP46dgRkVZw== 0000950132-02-000200.txt : 20020814 0000950132-02-000200.hdr.sgml : 20020814 20020814141133 ACCESSION NUMBER: 0000950132-02-000200 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNB FINANCIAL CORP/PA CENTRAL INDEX KEY: 0000736772 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 251450605 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13396 FILM NUMBER: 02734460 BUSINESS ADDRESS: STREET 1: 1 SOUTH SECOND STREET STREET 2: P.O. BOX 42 CITY: CLEARFIELD STATE: PA ZIP: 16830 BUSINESS PHONE: 8147659621 MAIL ADDRESS: STREET 1: 1 SOUTH SECOND STREET STREET 2: P.O. BOX 42 CITY: CLEARFIELD STATE: PA ZIP: 16830 10-Q 1 d10q.txt FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number 0-13396 CNB FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 25-1450605 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) County National Bank 1 South Second Street P.O. Box 42 Clearfield, Pennsylvania 16830 (Address of principal executive offices) Registrant's telephone number, including area code, (814) 765-9621 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____________ -------------- The number of shares outstanding of the issuer's common stock as of August 7, 2002: COMMON STOCK: $1.00 PAR VALUE - 3,639,324 SHARES 1 INDEX PART I. FINANCIAL INFORMATION
Sequential Page Number - ----------- ITEM 1. - Financial Statements PAGE 3. Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 PAGE 4. Consolidated Statements of Income - Quarter ending June 30, 2002 and 2001 PAGE 5. Consolidated Statements of Income - Six months ending June 30, 2002 and 2001 PAGE 6. Consolidated Statements of Comprehensive Income for the quarter and six months ending June 30, 2002 and 2001 PAGE 7. Consolidated Statements of Cash Flows - Six months ending June 30, 2002 and 2001 PAGE 8. Notes to Consolidated Financial Statements ITEM 2 - Management's Discussion and Analysis PAGE 12. Management's Discussion and Analysis of Financial Condition and Results of Operations ITEM 3 - Quantitative and Qualitative Disclosures PAGE 17. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION PAGE 18. ITEM 1 Legal Proceedings PAGE 18. ITEM 2 Changes in Securities and Use of Proceeds PAGE 18. ITEM 3 Defaults Upon Senior Securities PAGE 18. ITEM 4 Submission of Matters for Security Holders Vote PAGE 18. ITEM 5 Other Information PAGE 18. ITEM 6 Exhibits and Reports on Form 8-K PAGE 19. Signatures
2 CONSOLIDATED BALANCE SHEETS CNB FINANCIAL CORPORATION Consolidated Balance Sheets (unaudited) (Dollars in thousands)
June 30, Dec. 31, ASSETS 2002 2001 ------------- ------------- Cash and due from banks ....................................... $ 13,287 $ 17,350 Interest bearing deposits with other banks .................... 20,265 2,041 ------------- ------------- Total cash and cash equivalents ............................. 33,552 19,391 Securities available for sale ................................. 182,716 152,757 Loans held for sale ........................................... 1,601 5,334 Loans and leases .............................................. 402,866 388,455 Less: unearned discount .................................... 1,713 2,282 Less: allowance for loan losses ............................. 4,326 4,095 ------------- ------------- NET LOANS ................................................... 396,827 382,078 FHLB and Federal Reserve Stock ................................ 3,825 1,932 Premises and equipment ........................................ 12,165 12,485 Accrued interest receivable and other assets .................. 7,074 6,052 Intangible, net ............................................... 11,965 12,765 ------------- ------------- TOTAL ASSETS ................................................ $ 649,725 $ 592,794 ============= ============= LIABILITIES Deposits: Non-interest bearing deposits ............................... $ 55,113 $ 60,241 Interest bearing deposits ................................... 475,296 446,399 ------------- ------------- TOTAL DEPOSITS .............................................. 530,409 506,640 Other borrowings .............................................. 53,025 23,268 Accrued interest and other liabilities ........................ 8,477 7,992 ------------- ------------- TOTAL LIABILITIES ........................................... 591,911 537,900 SHAREHOLDERS' EQUITY Common stock $1.00 par value Authorized 10,000,000 shares Issued 3,693,500 shares ..................................... 3,694 3,694 Additional paid in capital .................................. 3,676 3,753 Retained earnings ........................................... 49,452 47,731 Treasury stock, at cost ..................................... (1,212) (1,236) (56,868 shares for June 2002, and 53,568 for December 2001) Accumulated other comprehensive income ...................... 2,204 952 ------------- ------------- TOTAL SHAREHOLDERS' EQUITY .................................. 57,814 54,894 ------------- ------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY .................... $ 649,725 $ 592,794 ============= =============
3 CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data) THREE MONTHS ENDED JUNE 30, INTEREST INCOME 2002 2001 -------- -------- Loans including fees .................................................................... $ 7,529 $ 7,882 Deposits with other banks ............................................................... 32 42 Federal funds sold ...................................................................... 64 144 Securities: Taxable .............................................................................. 1,692 1,671 Tax-exempt ........................................................................... 551 421 Dividends ............................................................................ 99 144 -------- -------- TOTAL INTEREST AND DIVIDEND INCOME ................................................... 9,967 10,304 INTEREST EXPENSE Deposits ................................................................................ 3,411 4,690 Borrowed funds .......................................................................... 516 291 -------- -------- TOTAL INTEREST EXPENSE ............................................................... 3,927 4,981 -------- -------- Net interest and dividend income ........................................................ 6,040 5,323 Provision for loan losses ............................................................ 360 270 -------- -------- NET INTEREST INCOME AFTER PROVISION ..................................................... 5,680 5,053 OTHER INCOME Trust & asset management fees ........................................................... 217 272 Service charges on deposit accounts ..................................................... 855 676 Other service charges and fees .......................................................... 127 143 Securities gains(losses) ................................................................ 12 (14) Gains (losses) on sale of loans ......................................................... 44 (4) Other income ............................................................................ 304 146 -------- -------- TOTAL OTHER INCOME ................................................................... 1,559 1,219 OTHER EXPENSES Salaries ................................................................................ 1,705 1,494 Employee benefits ....................................................................... 556 542 Net occupancy expense ................................................................... 575 597 Amortization of intangible .............................................................. 468 459 Other ................................................................................... 1,355 1,210 -------- -------- TOTAL OTHER EXPENSES ................................................................. 4,659 4,302 -------- -------- Income before income taxes .............................................................. 2,580 1,970 Applicable income taxes ................................................................. 654 467 -------- -------- NET INCOME ........................................................................... $ 1,926 $ 1,503 ======== ======== Earnings Per Share, Based on Weighted Average Shares Outstanding Net income, basic ....................................................................... $ 0.53 $ 0.41 Net income, diluted .................................................................... $ 0.53 $ 0.41 Cash dividends per share ................................................................ $ 0.25 $ 0.23
4 CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data) SIX MONTHS ENDED JUNE 30, INTEREST AND DIVIDEND INCOME 2002 2001 ---------- ---------- Loans including fees ........................................... $ 14,925 $ 15,846 Deposits with other banks ...................................... 47 96 Federal funds sold ............................................. 139 247 Securities: Taxable ..................................................... 3,295 3,312 Tax-exempt .................................................. 1,021 853 Dividends ................................................... 235 289 -------- -------- TOTAL INTEREST AND DIVIDEND INCOME .......................... 19,662 20,643 -------- -------- INTEREST EXPENSE Deposits ....................................................... 6,950 9,540 Borrowed funds ................................................. 973 585 -------- -------- TOTAL INTEREST EXPENSE ...................................... 7,923 10,125 -------- -------- Net interest income 11,739 10,518 Provision for loan losses ................................... 720 540 -------- -------- NET INTEREST INCOME AFTER PROVISION ............................ 11,019 9,978 -------- -------- OTHER INCOME Trust & asset management fees .................................. 460 495 Service charges on deposit accounts ............................ 1,632 1,285 Other service charges and fees ................................. 266 302 Securities gains(losses) ....................................... 12 (14) Gains on sale of loans ......................................... 87 4 Other .......................................................... 538 304 -------- -------- TOTAL OTHER INCOME .......................................... 2,995 2,376 -------- -------- OTHER EXPENSES Salaries ....................................................... 3,273 2,973 Employee benefits .............................................. 1,138 1,062 Net occupancy expense .......................................... 1,185 1,230 Amortization of intangible ..................................... 941 897 Other .......................................................... 2,759 2,410 -------- -------- TOTAL OTHER EXPENSES ........................................ 9,296 8,572 -------- -------- Income before income taxes ..................................... 4,718 3,782 Applicable income taxes ........................................ 1,174 897 -------- -------- NET INCOME .................................................. $ 3,544 $ 2,885 ======== ======== Earnings Per Share, Based on Weighted Average Shares Outstanding Net income, basic .............................................. $ 0.98 $ 0.79 Net income, diluted ............................................ $ 0.97 $ 0.79 Cash dividends per share ....................................... $ 0.50 $ 0.46
5 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CNB FINANCIAL CORPORATION Consolidated Statements of Comprehensive Income (unaudited) (dollars in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2002 2001 2002 2001 ---- ---- ---- ---- Net Income $ 1,926 $ 1,503 $ 3,544 $ 2,885 Other comprehensive income, net of tax Unrealized gains/(losses)on securities: Unrealized gains/(losses) arising during the period 1,983 209 1,260 1,484 Reclassified adjustment for accumulated gains/(losses) included in net income, net of tax 8 (9) 8 (9) ----------------- ----------------- Other comprehensive income 1,975 218 1,252 1,493 ----------------- ----------------- Comprehensive income $ 3,901 $ 1,721 $ 4,796 $ 4,378 ================= =================
6 CONSOLIDATED STATEMENTS OF CASHFLOWS CNB FINANCIAL CORPORATION Consolidated Statements of Cash Flows (unaudited) (Dollars in thousands)
Six Months Ended June 30, Cash flows from operating activities: 2002 2001 ---------- ---------- Net Income ................................................................... $ 3,544 $ 2,885 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses ................................................ 720 540 Depreciation and amortization ............................................ 1,533 1,478 Amortization and accretion and deferred loan fees ........................ (160) (245) Deferred taxes ........................................................... (796) (486) Security (gains) losses .................................................. (12) 14 Gain on sale of loans .................................................... (87) (4) Proceeds from sale of loans ............................................... 16,804 10,331 Origination of loans for sale ............................................. (12,983) (11,021) Net (gains) on dispositions of acquired property .......................... (10) (5) Changes in: Interest receivable ...................................................... (403) 5 Other assets and intangibles ............................................. (2,926) (214) Interest payable ......................................................... (167) (147) Other liabilities ........................................................ 798 2,472 -------- -------- Net cash provided by operating activities .................................... 5,855 5,603 Cash flows from investing activities: Proceeds from maturities of: Securities available for sale .......................................... 21,806 24,787 Proceeds from sales of securities available for sale ....................... 227 60 Purchase of securities available for sale .................................. (50,299) (44,513) Net principal disbursed on loans ........................................... (15,087) 1,384 Purchase of premises and equipment ......................................... (272) (608) Proceeds from the sale of foreclosed assets ................................ 280 224 -------- -------- Net cash used in investing activities ........................................ (43,345) (18,666) Cash flows from financing activities: Net change in: Checking, money market and savings accounts ............................ (4,324) 12,842 Certificates of deposit ................................................ 28,093 1,347 Additional paid in capital ............................................. (77) 32 Cash dividends paid .................................................... (1,820) (1,687) Short term borrowings .................................................. (243) (1,341) Proceeds from sale of treasury stock ....................................... 349 0 Treasury stock purchased ................................................... (327) 0 Advances from long term borrowings ......................................... 30,000 10,000 Repayments of long term borrowings ......................................... 0 0 -------- -------- Net cash provided by financing activities .................................... 51,651 21,193 -------- -------- Net increase (decrease) in cash and cash equivalents ......................... 14,161 8,130 Cash and cash equivalents at beginning of year ............................... 19,391 17,973 -------- -------- Cash and cash equivalents at end of period ................................... $ 33,552 $ 26,103 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (including amount credited directly to certificate accounts) ............................................................ $ 7,926 $ 10,272 Income Taxes ............................................................ $ 1,660 $ 1,120
7 CNB FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and in compliance with generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of Management of the registrant, the accompanying consolidated financial statements for the quarter and six month periods ended June 30, 2002 and 2001 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the period. The financial performance reported for the Corporation for the three and six-month periods ended June 30, 2002 is not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Corporation's Annual Report to shareholders and Form 10-K for the period ended December 31, 2001. COMMON STOCK PLAN The Corporation has a common stock plan for key employees and independent directors. The Stock Incentive Plan, which is administered by a disinterested committee of the Board of Directors, provides for 250,000 shares of common stock in the form of qualified options, nonqualified options, stock appreciation rights or restrictive stock. The Corporation applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its common stock plan. Accordingly, no compensation expense has been recognized for the plans. EARNINGS PER SHARE Earnings-per-share is calculated on the weighted average number of common shares outstanding during the year. The number of shares used for basic and diluted was 3,634,625 and 3,643,254 for the three and six month periods ended June 30, 2002 and 3,667,970 for basic and diluted for the three and six month periods ended June 30,2001. Stock options for 69,000 shares of common stock were considered in computing diluted earnings per common share. 8 SECURITIES Securities available for sale at:
June 30, 2002 December 31, 2001 Amortized Unrealized Market Amortized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value --------- -------- -------- -------- --------- -------- -------- -------- U.S. Treasury $ 11,060 $ 159 $ (0) $ 11,219 $ 14,046 $ 263 $ (1) $ 14,308 U.S. Government agencies and corporations: 27,102 409 (0) 27,511 24,073 503 (7) 24,569 Obligations of States and Political Subdivisions 47,331 1,577 (103) 48,805 25,450 478 (175) 25,753 Mortgage-backed Securities 41,898 624 (16) 42,506 39,073 238 (308) 39,003 Corporate Notes and Bonds 43,350 1440 (527) 44,263 40,563 967 (514) 41,016 Marketable equity Securities 8,635 250 (473) 8,412 8,115 97 (104) 8,108 -------- -------- -------- -------- -------- -------- -------- -------- Total securities available for sale $179,376 $ 4,459 $ (1,119) $182,716 $151,320 $ 2,546 $ (1,109) $152,757 ======== ======== ======== ======== ======== ======== ======== ========
On June 30, 2002 investment securities carried at $31,638 were pledged to secure public deposits and for other purposes provided by law. The following is a schedule of the contractual maturity of investments excluding equity securities, at June 30, 2002: Available for Sale Amortized Cost Market Value -------------- -------------- 1 year or less ................... $ 28,576 $ 29,116 1 year-5 years ................... 40,322 41,163 5 years-10 years ................. 20,916 22,045 After 10 years ................... 39,029 39,474 --------- -------- 128,843 131,798 Mortgage-backed securities ....... 41,898 42,506 --------- -------- Total securities ................. $ 170,741 $174,304 ========= ======== Collateralized mortgage obligations and other asset-backed securities are not due at a single date; periodic payments are received based on the payment patterns of the underlying collateral. OTHER BORROWINGS Other borrowings include $2,000 and $308 of demand notes payable to the US Treasury Department at June 30, 2002 and December 31, 2001. These notes are issued under the US Treasury Department's program of investing the treasury tax and loan account balances in interest bearing demand notes insured by depository institutions. These notes bear interest at a rate of .25 percent less than the average Federal funds rate as computed by the Federal Reserve Bank. The Corporation has available a $5 million line of credit with an unaffiliated institution. Terms of the line are floating at 30 day LIBOR plus 180 basis points, which equates to a rate of 3.64% at June 30, 2002. The outstanding balance on the loan at 9 June 30 was $1,025 and $710 at year end 2001. The Corporation issued $10 million of trust-preferred securities. The issue is callable on June 25, 2007 in whole or in part and matures on June 25, 2032. Interest is variable and adjusts quarterly based on the 3 month LIBOR plus 345 basis points. The interest rate at June 30, 2002 was 5.3369%. At June 30, 2002, the Bank had remaining borrowing capacity with the Federal Home Loan Bank of Pittsburgh (FHLB) of $144 million. Borrowings with the FHLB are secured by a blanket pledge of selected securities in the amount of $76,974 and certain mortgage loans with a value of $162,964. Also other borrowings include advances from the FHLB at June 30, 2002 and December 31, 2001 as follows:
June 30, December 31, Interest Rate Maturity 2002 2001 ----------------------------------------------------------------- Variable Overnight Daily $ -- $ 2,250 [a] 3/1/10 10,000 10,000 [b] 1/3/11 10,000 10,000 [c] 1/24/12 20,000 -- -------- -------- Total borrowed funds $ 40,000 $ 22,250 ======== ========
[a] Interest rate is fixed for one year at which time FHLB has option to float the interest rate based on the 3 month LIBOR + .16, the interest rate was 6.09% at June 30, 2002. [b] Interest rate is fixed for one year at which time FHLB has option to float the interest rate based on the 3 month LIBOR + .20, the interest rate was 4.95% at June 30, 2002. [c] Interest rate is fixed until 1/26/04 at which time FHLB has option to float the interest rate based on the 3 month LIBOR + .18, the interest rate was 4.52% at June 30, 2002. Following are maturities of borrowed funds as of June 30, 2002: 2002 $ 3,025 2003 -- 2004 -- 2005 -- 2006 -- Thereafter 50,000 -------- Total Borrowed Funds $ 53,025 ======== RECENT ACCOUNTING PRONOUNCEMENTS None. 10 CONSOLIDATED YIELD COMPARISONS CNB Financial Corporation Average Balances and Net Interest Margin (Dollars in thousands)
June 30, 2002 June 30, 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Average Annual Interest Average Annual Interest Balance Rate Inc./Exp. Balance Rate Inc./Exp. - ------------------------------------------------------------------------------------------------------------------------------------ Assets Interest-bearing deposits with banks $ 4,600 2.04% 47 3,600 5.33% 96 Federal funds sold and securities purchased under agreements to resell 13,703 2.03% 139 10,715 4.61% 247 Investment Securities: Taxable 121,925 5.40% 3,295 106,304 6.23% 3,312 Tax-Exempt(1) 41,860 7.39% 1,547 34,677 6.75% 1,171 Equity Investments(1) 12,166 4.98% 303 10,238 7.03% 360 - ------------------------------------------------------------------------------------------------------------------------------------ Total Investments 194,254 5.49% 5,331 165,534 6.27% 5,186 Loans Commercial(1) 100,457 6.90% 3,464 81,389 8.55% 3,480 Mortgage(1) 235,771 7.90% 9,313 223,489 8.66% 9,675 Installment 40,859 8.29% 1,693 39,167 9.61% 1,882 Leasing 18,155 7.12% 646 24,758 7.38% 914 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans(2) 395,242 7.65% 15,116 368,803 8.65% 15,951 ---------------------------- ---------- ------------------------------------- Total earning assets 589,496 6.94% 20,447 534,337 7.91% 21,137 Non Interest Bearing Assets Cash & Due From Banks 13,283 -- 12,823 -- Premises & Equipment 12,359 -- 12,930 -- Other Assets 17,102 -- 19,533 -- Allowance for Possible Loan Losses (4,191) -- (4,015) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Non-interest earning assets 38,553 -- 41,271 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $ 628,049 $ 20,447 $ 575,608 $ 21,137 ================================================================================ Liabilities and Shareholders' Equity Interest-Bearing Deposits Demand - interest-bearing 133,176 0.97% 648 119,744 2.12% 1,270 Savings 78,689 1.64% 647 75,295 3.48% 1,310 Time 256,278 4.41% 5,654 245,858 5.66% 6,960 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 468,143 2.97% 6,949 440,897 4.33% 9,540 Short-term borrowings 2,282 2.28% 26 1,259 5.08% 32 Long-term borrowings 37,459 5.06% 948 19,945 5.55% 553 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 507,884 3.12% 7,923 462,101 4.38% 10,125 Demand - non-interest-bearing 55,456 -- 52,283 -- -- Other liabilities 9,221 -- 7,605 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 572,561 7,923 521,989 3.88% 10,125 Shareholders' equity 55,488 -- 53,619 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity 628,049 7,923 575,608 10,125 ================================================================================ Interest income/earning assets 6.94% 20,447 7.91% $ 21,137 Interest expense/interest bearing liabilities 3.12% 7,923 4.38% 10,125 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Spread 3.82% $ 12,524 3.53% $ 11,012 ==================== ===================== Interest Income/Interest Earning Assets 6.94% $ 20,447 7.91% $ 21,137 Interest expense/Interest Earning Assets 2.69% 7,923 3.79% 10,125 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Margin 4.25% $ 12,524 4.12% $ 11,012 ==================== =====================
(1) The amounts are reflected on a fully tax equity basis using the federal statutory rate of 34% in 2002 and 2001, adjusted for certain tax preferences (2) Average outstanding includes the average balance outstanding of all non-accrual loans. Loans consist of the average of total loans less average unearned income. The amount of loan fees included in the interest income on loans in not material. 11 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management's assessment of financial results. The Corporation's primary subsidiary County National Bank (the "Bank") provides financial services to individuals and businesses within the Bank's market area made up of the west central Pennsylvania counties of Clearfield, Cambria, Centre, Elk, Jefferson, and McKean. County National Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency ("OCC"). The market area that County National Bank operates in is rural in nature. The customer makeup consists of small business and individuals. The health of the economy in the region is mixed with unemployment rates running high in most of our market areas except Centre County. OVERVIEW OF BALANCE SHEET Total assets have grown 9.6% since year-end 2001 to $649.7 million. The growth has occurred in all areas of the balance sheet. The following comments will further explain the details of the asset fluctuation. CASH AND CASH EQUIVALENTS Cash and cash equivalents totaled $33,552,000 at June 30, 2002 compared to $19,391,000 on December 31, 2001. This increase resulted primarily from an inflow of capital from the issuance of a $10 million Trust Preferred Security on June 26, 2002. The timing of the event left the cash uninvested at month end. The Corporation continues to focus on reducing the cash balance into higher yielding earning assets during the year. Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due. SECURITIES Securities increased $30.0 million or 19.6% since December 31, 2001. A major portion of the increase resulted from an opportunity to borrow money from the Federal Home Loan Bank and invest in $20 million of state and municipal bonds having similar duration. As previously mentioned, the increase in cash has been fairly dramatic during 2002. The focus has been to get these cash equivalents into higher yielding assets as opportunities are defined. In addition to the $20.0 million borrowed, approximately $10.0 million of cash equivalents have been placed into the securities portfolio. Also, contributing to the increase was a change in the fair market valuation of the bond portfolio. In a declining interest rate environment, bond prices generally increase. This increase gave the Corporation an unrealized gain of $3.3 million, an increase of $1.9 million over year-end. The Corporation generally buys into the market over time and does not attempt to "time" its transactions. In using this approach, the highs and lows of the market are averaged into the portfolio and minimize the overall effect of different rate environments. Management monitors the earnings performance and the effectiveness of the liquidity of the securities portfolio on a regular basis through Asset / Liability Committee ("ALCO') meetings. The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management 12 and analysis of the securities portfolio, the Corporation maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers. LOANS The Corporation's loan demand was strong during the first six months of 2002. The Corporation's lending is focused in the west central Pennsylvania market and consists principally of retail lending, which includes single-family residential mortgages and other consumer lending, and commercial lending primarily to locally owned small businesses. At June 30, 2002, the Corporation had $401,153,000 in loans and leases outstanding, net of unearned discount, an increase of $14,980,000 or 3.9% since December 31, 2001. The increase was caused by demand in commercial loans, including commercial mortgages. While we remain dedicated to the success of commercial lending, as we see this as our competitive advantage, a concentrated effort toward increased secured consumer lending has begun. This strategy is part of an overall initiative to increase our market share of households in loans and deposits. ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses as a percentage of loans increased from 1.06% at December 31, 2001 to 1.08% at June 30, 2002. The dollar amount of the reserve increased $231,000 since year-end 2001. The increase is a result of the provision of $720,000 expensed during the six months less net charge-offs. The net charge-offs for the first six months of 2002 totaled $489,000 compared to $353,000 for the same period of 2001. The most significant cause for this increase was a higher level of losses related to auto leasing. As a result of a changing market, the Bank suspended origination of new leases at the end of the second quarter of 2002 and will allow its current portfolio of leases to runoff. The adequacy of the allowance for loan and lease losses is subject to a formal analysis by the loan review staff of the Bank and is deemed to be adequate to absorb probable losses in the portfolio as of June 30, 2002. The Corporation has disclosed in its annual report on Form 10-K the process and methodology supporting the loan loss provision. Management continues to closely monitor loan delinquency and loan losses. Non-performing assets, which include loans 90 or more days past due, non-accrual loans, and other real estate owned were $2,715,000 or 0.69% of total loans on June 30, 2002 compared to $2,098,000 or 0.54% on December 31, 2001. While total non-performing assets increased from year end, total delinquency of loans 30 or more days past due declined to $7,798,000 or 1.94% of total loans at June 30, 2002 from $9,564,000 or 2.46% at December 31, 2001. FUNDING SOURCES The Corporation considers deposits, short-term borrowings, and term debt when evaluating funding sources. Traditional deposits continue to be the main focus for source of funds in the Corporation reaching $530,409,000 at June 30, 2002. Deposits increased 4.7% since year-end 2001 primarily resulting from a major marketing strategy focusing on retail consumer customers as well as a general lack of consumer confidence in the economy. This strategy includes direct mailing offering consumers a free checking product and the offering of several new certificate of deposit products. The Corporation utilizes term borrowings from the Federal Home Loan Bank (FHLB) to meet funding needs not accommodated by deposit growth. During 2002, the Corporation borrowed $20 million to take advantage of opportunities existing in the bond market. Management plans to maintain access to short and long-term FHLB borrowings as an appropriate funding source. In addition, the Corporation issued $10,000,000 as part of a pooled trust preferred security. This debt issuance allowed the Corporation to provide additional capital to its subsidiary, County National Bank. The Bank needed the capital to fund its strong growth in recent periods as well as expected growth over the next several years. 13 SHAREHOLDERS' EQUITY The Corporation's capital continues to provide a base for profitable growth. Total shareholders' equity was $57,814,000 at June 30, 2002 compared to $54,894,000 at December 31, 2001 an increase of $2,920,000 or 5.3%. In the first six months of 2002, the Corporation earned $3,544,000 and declared dividends of $1,820,000, a dividend payout ratio of 51.4% of net income. The securities in the Corporation's portfolio are classified as available for sale making the Corporation's balance sheet more sensitive to the changing market value of investments. Interest rates in the first six months of 2002 have continued to decline. This situation has caused a fairly significant increase in accumulated other comprehensive income, included in stockholders' equity of $1,252,000 since December 31, 2001. The Corporation has also complied with the standards of capital adequacy mandated by the banking regulators. Bank regulators have established "risk-based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets), is assigned to each asset on the balance sheet. The Corporation's total risk-based capital ratio of 12.93% at June 30, 2002 is above the well-capitalized standard of 10%. The Corporation's Tier 1 capital ratio of 11.97% is above the well-capitalized minimum of 6%. The leverage ratio at June 30, 2002 was 8.59%, also above the well-capitalized standard of 5%. The Corporation is well capitalized as measured by the federal regulatory agencies. The ratios provide quantitative data demonstrating the strength and future opportunities for use of the Corporation's capital base. Management continues to evaluate risk-based capital ratios and the capital position of the Corporation as part of its strategic decision making process. LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity measures an organizations' ability to meet cash obligations as they come due. The Consolidated Statement of Cash Flows presented on page 7 of the accompanying financial statements provides analysis of the Corporation's cash and cash equivalents. Additionally, management considers that portion of the loan and investment portfolio that matures within one year as part of the Corporation's liquid assets. The Corporation's liquidity is monitored by the ALCO Committee, which establishes and monitors ranges of acceptable liquidity. Management feels the Corporation's current liquidity position is acceptable. 14 RESULTS OF OPERATIONS OVERVIEW OF THE INCOME STATEMENT The Corporation had net income of $1,926,000 and $3,544,000 for the second quarter and first six months of 2002, respectively. The earnings per diluted share for the respective periods were $0.53 and $0.97. Net income was $1,503,000 and $2,885,000 for the second quarter and first six months of 2001, which equates to earnings per diluted share of $0.41 and $0.79, respectively. The return on assets and the return on equity for the six months of 2002 are 1.13% and 13.18%. INTEREST INCOME AND EXPENSE Net interest income totaled $6,040,000 in the second quarter, an increase of 13.5% over the second quarter of 2001 and totaled $11,739,000 for the six months of 2002, an increase of 11.6% compared to the prior year. Total interest income decreased during the quarter by $337,000 or 3.3% while interest expense decreased by $1,054,000 or 21.2% when compared to the second quarter of 2001. The decrease in interest income is a result of lower yields on earning assets caused by an overall decline in interest rates in the United States since June of 2001. As mentioned earlier, the rapid growth in deposits has not all been placed into higher yielding assets. Thus much of these funds are in lower yielding federal funds. Interest expense has declined significantly since the Corporation has adjusted deposit pricing to reflect the declining market rates. PROVISION FOR LOAN LOSSES The Corporation recorded a provision for loan and lease losses in the second quarter of $360,000 compared to the second quarter of 2001 of $270,000 and $720,000 for the six months of 2002 compared to $540,000 in 2001. Based on managements' evaluation of problem loans, increased charge-offs, expected growth in the loan portfolio and the overall effects of the economy, management's analysis indicates that the allowance provision appears to be adequate. NON-INTEREST INCOME Non-interest income increased $340,000 (27.9%) and $619,000 (26.1%) in the second quarter and six months of 2002, respectively, when compared to the same periods in 2001. Increased deposit account service charges have been the primary source of the growth in non-interest income. In the six months, account service charges totaled $1,632,000 up $347,000 or 27.0% over last year. The increases in fee income were mainly derived from a new service that began in April 2001 and took approximately eight months to mature. This service provides customers with the assurance of having their checks paid and not returned when funds are not sufficient in their account. Also during 2002, income derived from the sale of mortgages is higher due to continued low mortgage rates. NON-INTEREST EXPENSE Non-interest expense increased $357,000 or 8.3% during the second quarter of 2002 and $723,000 or 8.4% in the six months of 2002 when compared to the same periods in 2002. The increase can be attributed to rising salary and benefit costs of $376,000 and increased advertising and promotion expense of $100,000 over the first six months compared to 2001. RETURN ON ASSETS For the six months ended June 30, 2002, the Corporation's return on average assets ("ROA") totaled 1.13% up from the 1.00% recorded in 2001. RETURN ON EQUITY The Corporation's return on average shareholder's equity ("ROE") in the first six months was 13.18% compared to 10.86% for 2001. The increase can be attributed to the Corporation's improvement in core earnings. The continued increase in assets without adding additional capital will provide the shareholders more earnings from virtually the same capital base. 15 Management expects improvement in ROE during 2002 and anticipates further increases with earnings growth. The Corporation is currently well capitalized under regulatory industry standards. FEDERAL INCOME TAX EXPENSE Federal income tax expense was $654,000 in the second quarter of 2002 compared to $467,000 in the second quarter of 2001. For the six-month period comparisons, the federal tax expense was $1,174,000 in 2002 and $897,000 in 2001. These increases are the result of higher taxable earnings in both the second quarter and first six months of 2002 FUTURE OUTLOOK Year-to-date results improved when compared to the prior year and were consistent with management's expectations. Management continues to focus on strong internal growth generated by increased market share. The objective of this growth in earning assets and net income is increased shareholder value from future dividends and capital accumulation from retained earnings. Loan demand was strong during the first six months of 2002 and is anticipated to continue through the remainder of the year. Loan growth for the full year of 2002 is anticipated to be 4% over the yearend 2001. While loan growth is expected to continue, it may not keep pace with deposit growth, which increased at an annualized rate of 9.4% during the first half of 2002. As a result, we have implemented a plan to expand our commercial loan market into additional counties to help deploy these additional funds. Consumer loan charge-offs in the second quarter continued to comprise the majority of the Corporation's recent charge-offs. In the first six months, total net charge-offs were $489,000 of which consumer net charge-offs totaled $388,000. The charge-off level for the remainder of 2002 is expected to remain constant when compared to the first six months of 2002. Enhanced non-interest income and controlled non-interest expense are important factors in the success of the Corporation and is measured in the financial services industry by the efficiency ratio, calculated according to the following: non-interest expense (less amortization of intangibles) as a percentage of fully tax equivalent net interest income and non-interest income (less non-recurring income). For the six months ended June 30, 2002, the Corporation's efficiency ratio was 53.39% compared to 55.92% for the same period last year. The efficiency ratio improved as the level of non-interest income has increased and non-interest expense has decreased over the year. Management believes controlling the operating costs of the Corporation is imperative to the future increased profitability derived from core earnings. A strong focus by management continues to be placed on non-interest expenses during the remainder of 2002. The interest rate environment will continue to play an important role in the future earnings of the Corporation. The net interest margin has remained the central focus of management as competitive pressures in the form of reduced lending rates along with the search for low cost deposits has created pressure to the margin for the industry. The Corporation has been able to increase the margin slightly. This occurrence has been aided by the sharp steepening in the yield curve. Management expects further growth in interest income coupled with managed interest costs to provide the Corporation with improved net interest income for the remainder of 2002. Management concentrates on return on average equity and earnings per share valuations, plus other methods, to measure and direct the performance of the Corporation. While past results are not an indication of future earnings, management feels the Corporation is positioned to enhance performance of normal operations through the remainder of 2002. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in the report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," 16 "plans," "expects," "believes," "estimate" or "projected" and similar expressions as they relate to CNB Financial Corporation or its management are intended to identify such forward looking statements. CNB Financial Corporation's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. ITEM 3 QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the course of conducting business activities, the Corporation is exposed to market risk, principally interest rate risk, through the operation of the Bank. Interest rate risk arises from market driven fluctuations in interest rates, which affect cash flows, income, expense and values of all financial instruments. Management and the ALCO Committee of the Board monitor the Corporation's interest rate risk position. No material changes have occurred during the period in the Bank's market risk strategy or position, a discussion of which can be found in the SEC Form-10K filed for the period ended December 31, 2001. 17 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS CNB Financial Corporation and its subsidiary County Nation Bank were named codefendants with six other parties in a civil action for monetary damages in excess of $25,000. The suit claims civil conspiracy and intentional interference with contractual relations. Further proceedings in that case were stayed by order entered September 24, 2001. The stay was entered because plaintiffs initiated a federal case with the claims of civil conspiracy and intentional interference with contractual relations and a violation of Section 1 of the Sherman Act. The complaint seeks unspecified treble damages plus costs and attorney fees. The corporation and the other defendants denied any wrongdoing or injury to the plaintiffs whatsoever. All defendants have filed Motions to Dismiss the federal action. The motions to dismiss the federal action were granted. The plaintiff can appeal the dismissal of its federal case to the US Court of Appeals for the Third Circuit. If it does not, it will then be left to resume its state action. While the outcome of litigation is never certain, CNB Financial Corporation and its counsel believe that they will succeed in defending against these claims. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDERS VOTE CNB Financial Corporation held its Annual Meeting of Shareholders on April 16, 2002, for the purpose of electing four directors and to transact such other business as would properly come before the meeting. Results of shareholder voting on these individuals were as follows: Election of Directors
William F. Falger James J. Leitzinger Jeffrey S. Powell Peter F. Smith James B. Ryan For 2,787,425 2,745,662 2,790,795 2,790,603 2,787,447
The total shares voted at the annual meeting were 2,876,080. ITEM 5. OTHER INFORMATION - None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - A Form 8-K was filed on July 3, 2002 announcing the sale of $10,000,000 in trust preferred securities in a pooled offering underwritten by FTN Financial and Keefe Bruyette & Woods Inc. The Corporation will use the proceeds to support the company's growth. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CNB FINANCIAL CORPORATION (Registrant) DATE: August 7, 2002 /s/ William F. Falger ---------------------- ------------------------------ William F. Falger President and Director (Principal Executive Officer) DATE: August 7, 2002 /s/ Joseph B. Bower, Jr. ----------------------- ------------------------------ Joseph B. Bower, Jr. Treasurer (Principal Financial Officer) (Principal Accounting Officer) CERTIFICATE As required by 18 U.S.C. 1350, the undersigned certify that this Report on Form 10-Q fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended, and that the information contained in this Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the registrant. /s/ William F. Falger ------------------------------ William F. Falger Chief Executive Officer /s/ Joseph B. Bower, Jr. ------------------------------ Joseph B. Bower, Jr. Chief Financial Officer Dated: August 7, 2002 19 -----END PRIVACY-ENHANCED MESSAGE-----