UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 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, 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 August 7, 2001: COMMON STOCK: $1.00 PAR VALUE - 3,671,557 SHARES 1
INDEX PART I. FINANCIAL INFORMATION Sequential Page Number - ----------- ITEM 1. - Financial Statements PAGE 3. Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 PAGE 4. Consolidated Statements of Income - Quarter ending June 30, 2001 and 2000 PAGE 5. Consolidated Statements of Income - Six months ending June 30, 2001 and 2000 PAGE 6. Consolidated Statements of Comprehensive Income and 2000 for the quarter and six months ending June 30, 2001 PAGE 7. Consolidated Statements of Cash Flows - Six months ending June 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 12. 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 (unaudited) (Dollars in thousands) <TABLE> <CAPTION> June 30, Dec. 31, ASSETS 2001 2000 -------------- -------------- <S> <C> <C> Cash and due from banks............................................... $ 14,891 $ 15,711 Interest bearing deposits with other banks............................ 11,212 2,262 -------------- -------------- Total cash and cash equivalents..................................... 26,103 17,973 Securities available for sale......................................... 158,089 136,250 Loans held for sale................................................... 3,189 2,494 Loans and leases...................................................... 367,674 369,878 Less: unearned discount............................................ 2,936 3,722 Less: allowance for loan losses..................................... 4,066 3,879 -------------- -------------- NET LOANS........................................................... 360,672 362,277 FHLB and Federal Reserve Stock........................................ 1,920 3,025 Premises and equipment................................................ 12,832 12,805 Accrued interest receivable and other assets.......................... 7,201 6,412 Intangible, net....................................................... 13,537 14,129 -------------- -------------- TOTAL ASSETS........................................................ $583,543 $555,365 ============== ============== LIABILITIES Deposits: Non-interest bearing deposits....................................... $ 54,814 $ 52,757 Interest bearing deposits........................................... 444,592 432,460 -------------- -------------- TOTAL DEPOSITS...................................................... 499,406 485,217 Other borrowings...................................................... 22,000 13,341 Accrued interest and other liabilities................................ 8,211 5,604 -------------- -------------- TOTAL LIABILITIES................................................... 529,617 504,162 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.......................................... 3,758 3,742 Retained earnings................................................... 45,823 44,631 Treasury stock, at cost............................................. (670) (692) (24,584 shares for June 2001, and 26,862 for December 2000) Accumulated other comprehensive income (loss)....................... 1,321 (172) -------------- -------------- TOTAL SHAREHOLDERS' EQUITY.......................................... 53,926 51,203 -------------- -------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............................ $583,543 $555,365 ============== ============== </TABLE> 3
CONSOLIDATED STATEMENTS OF INCOME CNB FINANCIAL CORPORATION Consolidated Statements of Income (Unaudited) <TABLE> <CAPTION> (Dollars in thousands, except per share data) THREE MONTHS ENDED JUNE 30... INTEREST INCOME 2001 2000 ------------------------- ------------------- <S> <C> <C> Loans including fees......................................... $ 7,882 $ 8,138 Deposits with other banks.................................... 42 12 Federal funds sold........................................... 144 0 Securities: Taxable................................................... 1,671 1,464 Tax-exempt................................................ 421 461 Dividends................................................. 144 158 ------------------------- ------------------- TOTAL INTEREST AND DIVIDEND INCOME........................ 10,304 10,233 INTEREST EXPENSE Deposits..................................................... 4,690 4,481 Borrowed funds............................................... 291 442 ------------------------- ------------------- TOTAL INTEREST EXPENSE.................................... 4,981 4,923 ------------------------- ------------------- Net interest and dividend income............................. 5,323 5,310 Provision for possible loan losses........................ 270 207 ------------------------- ------------------- NET INTEREST INCOME AFTER PROVISION.......................... 5,053 5,103 OTHER INCOME Trust & asset management fees................................ 272 218 Service charges on deposit accounts.......................... 676 580 Other service charges and fees............................... 143 180 Securities gains(losses)..................................... (14) 6 Gains on sale of loans....................................... (4) 27 Other income................................................. 146 81 ------------------------- ------------------- TOTAL OTHER INCOME........................................ 1,219 1,092 OTHER EXPENSES Salaries..................................................... 1,494 1,630 Employee benefits............................................ 542 586 Net occupancy expense........................................ 597 582 Amortization of intangible................................... 459 463 Other........................................................ 1,210 1,074 ------------------------- ------------------- TOTAL OTHER EXPENSES...................................... 4,302 4,335 ------------------------- ------------------- Income before income taxes................................... 1,970 1,860 Applicable income taxes...................................... 467 467 ------------------------- ------------------- NET INCOME................................................ $ 1,503 $ 1,393 ========================= =================== Earnings Per Share, Based on Weighted Average Shares Outstanding - ---------------------------------------------------------------- Net income, basic............................................ $ 0.41 $ 0.38 Net income, diluted......................................... $ 0.41 $ 0.38 Cash dividends per share..................................... $ 0.23 $ 0.21 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> 4
CONSOLIDATED STATEMENTS OF INCOME CNB FINANCIAL CORPORATION Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30... INTEREST AND DIVIDEND INCOME 2001 2000 ---------------- ---------------- <S> <C> <C> Loans including fees............................................................. $ 15,846 $ 16,012 Deposits with other banks........................................................ 96 31 Federal funds sold............................................................... 247 6 Securities: Taxable....................................................................... 3,312 2,984 Tax-exempt.................................................................... 853 927 Dividends..................................................................... 289 242 ---------------- ---------------- TOTAL INTEREST AND DIVIDEND INCOME............................................ 20,643 20,202 ---------------- ---------------- INTEREST EXPENSE Deposits......................................................................... 9,540 8,955 Borrowed funds................................................................... 585 650 ---------------- ---------------- TOTAL INTEREST EXPENSE........................................................ 10,125 9,605 ---------------- ---------------- Net interest income........................................................... 10,518 10,597 Provision for possible loan losses............................................ 540 387 ---------------- ---------------- NET INTEREST INCOME AFTER PROVISION.............................................. 9,978 10,210 ---------------- ---------------- OTHER INCOME Trust & asset management fees.................................................... 495 450 Service charges on deposit accounts.............................................. 1,285 1,111 Other service charges and fees................................................... 302 312 Securities gains(losses)......................................................... (14) (35) Gains on sale of loans........................................................... 4 34 Other............................................................................ 304 132 ---------------- ---------------- TOTAL OTHER INCOME............................................................ 2,376 2,004 ---------------- ---------------- OTHER EXPENSES Salaries......................................................................... 2,973 3,125 Employee benefits................................................................ 1,062 1,160 Net occupancy expense............................................................ 1,230 1,222 Amortization of intangible....................................................... 897 926 Other............................................................................ 2,410 2,234 ---------------- ---------------- TOTAL OTHER EXPENSES.......................................................... 8,572 8,667 ---------------- ---------------- Income before income taxes....................................................... 3,782 3,547 Applicable income taxes.......................................................... 897 907 ---------------- ---------------- NET INCOME.................................................................... $ 2,885 $ 2,640 ================ ================ Earnings Per Share, Based on Weighted Average Shares Outstanding - ---------------------------------------------------------------- Net income, basic................................................................ $ 0.79 $ 0.72 Net income, diluted.............................................................. $ 0.79 $ 0.72 Cash dividends per share......................................................... $ 0.46 $ 0.42 </TABLE> - -------------------------------------------------------------------------------- 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 Month Ended June 30, June 30, -------- -------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income $1,503 $1,393 $2,885 $2,640 Other comprehensive income, net to tax Unrealized gains/(losses) on securities: Unrealized gains/(losses) arising during the period 209 146 1,484 (468) Less: Reclassified adjustment for accumulated gains/(losses) included in net income (9) 4 (9) (23) -------------- --------------- Unrealized gains/(losses) on securities 218 142 1,493 (445) -------------- --------------- Comprehensive income $1,721 $1,535 $4,378 $2,195 -------------- --------------- 6
CONSOLIDATED STATEMENTS OF CASHFLOWS CNB FINANCIAL CORPORATION Consolidated Statements of Cash Flows (unaudited) (Dollars in thousands) <TABLE> <CAPTION> Six Months Ended June 30... Cash flows from operating activities: 2001 2000 --------------- -------------- <S> <C> <C> Net Income $ 2,885 $ 2,640 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses............................................... 540 387 Depreciation and amortization........................................... 1,478 1,470 Amortization and accretion and deferred loan fees....................... (245) (237) Deferred taxes.......................................................... (486) 478 Security losses......................................................... 14 35 Gain on sale of loans................................................... (4) (34) Proceeds from sale of loans.............................................. 10,331 5,618 Origination of loans for sale............................................ (11,021) (4,500) Net (gains) losses on dispositions of acquired property.................. (5) 0 Changes in: Interest receivable..................................................... 5 (65) Other assets and intangibles............................................ (214) 684 Interest payable........................................................ (147) (161) Other liabilities....................................................... 2,472 177 --------------- -------------- Net cash provided by operating activities................................... 5,603 6,492 Cash flows from investing activities: Proceeds from maturities of: Securities held to maturity........................................... 0 310 Securities available for sale......................................... 24,787 8,197 Proceeds from sales of securities available for sale...................... 60 4,934 Purchase of securities available for sale................................. (44,513) (9,924) Loan originations and payments, net....................................... 1,384 (14,861) Purchase of premises and equipment........................................ (608) (640) Proceeds from the sale of foreclosed assets............................... 224 165 --------------- -------------- Net cash used in investing activities....................................... (18,666) (11,819) Cash flows from financing activities: Net change in: Checking, money market and savings accounts........................... 12,842 (4,203) Certificates of deposit............................................... 1,347 (9,707) Proceeds from sale of treasury stock.................................. 32 23 Cash dividends paid................................................... (1,687) (1,539) Net advances from other borrowings........................................ 8,659 16,440 --------------- -------------- Net cash provided by financing activities................................... 21,193 1,014 --------------- -------------- Net increase (decrease) in cash and cash equivalents....................... 8,130 (4,313) Cash and cash equivalents at beginning of year.............................. 17,973 21,214 --------------- -------------- Cash and cash equivalents at end of period.................................. $ 26,103 $ 16,901 =============== ============== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (including amount credited directly to certificate accounts).. $ 10,272 $ 9,444 Income Taxes........................................................... $ 1,120 $ 540 </TABLE> 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, 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 six-month periods ended June 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 3,667,970. 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 Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations, effective for all business combinations initiated after June 30, 2001, as well as all business combinations accounted for by the purchase method that are completed after June 30, 2001. The new statement requires that the purchase method of accounting be used for all business combinations and prohibits the use of the pooling-of-interests method. The adoption of Statement No. 141 is not expected to have a material effect on the Corporation's financial position or results of operations. 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 June 30, 2001, the Corporation has approximately$13.5 million of intangibles resulting from the purchase of loans, deposits and banking facilities from other financial institutions. Currently management is evaluating what effect the adoption of Statement No. 142 will have on the Corporation's financial position or results of operations. 8
CONSOLIDATED YIELD COMPARISONS <TABLE> <CAPTION> CNB Financial Corporation Average Balances and Net Interest Margin (Dollars in thousands) June 30, 2001 June 30, 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Average Annual Interest Average Annual Interest Balance Rate Inc./Exp. Balance Rate Inc./Exp. - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Assets Interest-bearing deposits with banks $ 3,600 5.33% 96 1,101 5.63% 31 Federal funds sold and securities purchased under agreements to resell 10,715 4.61% 247 222 5.41% 6 Investment Securities: Taxable 106,304 6.23% 3,312 97,271 6.14% 2,984 Tax-Exempt (1) 34,677 6.75% 1,171 36,169 7.08% 1,280 Equity Investments (1) 10,238 7.03% 360 8,973 6.58% 295 - ----------------------------------------------------------------------------------------------------------------------------------- Total Investments 165,534 6.27% 5,186 143,736 6.40% 4,596 Loans Commercial (1) 81,389 8.55% 3,480 77,323 8.78% 3,395 Mortgage (1) 223,489 8.66% 9,675 218,830 8.57% 9,381 Installment 39,167 9.61% 1,882 46,957 9.47% 2,223 Leasing 24,758 7.38% 914 30,802 7.29% 1,123 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans (2) 368,803 8.65% 15,951 373,912 8.62% 16,122 ----------------------------------------------------------------------------------- Total earning assets 534,337 7.91% 21,137 517,648 8.00% 20,718 Non Interest Bearing Assets Cash & Due From Banks 12,823 - 13,840 - Premises & Equipment 12,930 - 12,936 - Other Assets 19,533 - 20,162 - Allowance for Possible Loan Losses (4,015) - (3,816) - - ----------------------------------------------------------------------------------------------------------------------------------- Total Non-interest earning assets 41,271 -- - 43,122 -- - - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $575,608 $21,137 $560,770 $20,718 =================================================================================== Liabilities and Shareholders' Equity Interest-Bearing Deposits Demand - interest-bearing 119,744 2.12% 1,270 118,340 2.44% 1,443 Savings 75,295 3.48% 1,310 72,839 3.68% 1,341 Time 245,858 5.66% 6,960 242,328 5.09% 6,171 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 440,897 4.33% 9,540 433,507 4.13% 8,955 Short-term borrowings 1,259 5.08% 32 8,510 5.92% 252 Long-term borrowings 19,945 5.55% 553 12,885 6.18% 398 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 462,101 4.38% 10,125 454,902 4.22% 9,605 Demand - non-interest-bearing 52,283 - 51,525 - - Other liabilities 7,605 - 5,262 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 521,989 10,125 511,689 3.75% 9,605 Shareholders' equity 53,619 - 49,081 -- - - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity 575,608 10,125 560,770 9,605 =================================================================================== Interest income/earning assets 7.91% 21,137 8.00% $20,718 Interest expense/interest bearing liabilities 4.38% 10,125 4.22% 9,605 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Spread 3.53% $11,012 3.78% $11,113 ============================== ============================ Interest Income/Interest Earning Assets 7.91% $21,137 8.00% $20,718 Interest expense/Interest Earning Assets 3.79% 10,125 3.71% 9,605 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Margin 4.12% $11,012 4.29% $11,113 ---------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> (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 5.1% since year-end 2000 to $583.5 million. The growth has occurred primarily in cash equivalents and securities. The following comments will further explain the details of the asset fluctuation. CASH AND CASH EQUIVALENTS Cash and cash equivalents totaled $26,103,000 at June 30, 2001 compared to $17,973,000 on December 31, 2000. This increase resulted from a significant inflow of deposits during the first half of 2001. The Corporation will continue 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 $21.8 million (or 16.0%) since December 31, 2000. Ten million dollars of the increase is from purchasing corporate notes against a borrowing 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 $2.0 million, an increase of $2.2 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 10
high and lows of the market are average 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. LOANS The Corporation's loan demand was weak during the first six months 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 June 30, 2001, the Corporation had $364,738,000 in loans and leases outstanding, net of unearned discount, down $1,418,000 (or -0.4%) since December 31, 2000. This decline has mainly occurred in auto loans and leases. These markets are very competitive currently and the Corporation has made a decision not to stress interest margins in this area. 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 1.11% at June 30, 2001. The dollar amount of the reserve increased $187,000 since year-end 2000. The increase is a result of the provision of $540,000 expensed during the six months less net charge-offs. The gross charge-offs for the six months of 2001 were $434,000 while recoveries were $81,000. This level of net charge-offs is a slight decrease from the six months of 2000 when charge-offs were $421,000 with recoveries of $57,000 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, 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 $2,471,000 or 0.68% of total loans on June 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 $499,406,000 at June 30, 2001. Deposit increase of 2.9% since year-end 2000 is from a major marketing strategy focusing on retail consumer customers. This strategy includes direct mailing offering consumers a free checking product. The Corporation utilizes term borrowings from the Federal Home Loan Bank (FHLB) to meet funding needs not accommodated by deposit growth. During 2001, the Corporation borrowed $10 million to take advantage of opportunities existing in the bond market. Management plans to maintain access to short and long-term FHLB borrowings as an appropriate funding source. SHAREHOLDERS' EQUITY The Corporation's capital continues to provide a strong base for profitable growth. Total shareholders' equity was $53,926,000 at June 30, 2001 compared to $51,203,000 at December 31, 2000 an 11
increase of $2,723,000 (or 5.3%). In the first six months of 2001, the Corporation earned $2,885,000 and declared dividends of $1,687,000, a dividend payout ratio of 58.5% 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 2001 have declined dramatically. This situation has caused a fairly significant increase in accumulated other comprehensive income, included in stockholders' equity of $1,493,000 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 10.82% at June 30, 2001 is above the well-capitalized standard of 10%. The Corporation's Tier 1 capital ratio of 9.79% is above the well-capitalized minimum of 6%. The leverage ratio at June 30, 2001 was 7.11%, 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 $1,503,000 and $2,885,000 for the second quarter and first six months of 2001, respectively. The earnings per diluted share for the respective periods were $0.41 and $0.79. Net income was $1,393,000 and $2,640,000 for the second quarter and first six months of 2000, which equates to earnings per diluted share of $0.38 and $0.72, respectively. The return on assets and the return on equity for the six months of 2001 are 1.00% and 10.86%. INTEREST INCOME AND EXPENSE Net interest income totaled $5,323,000 in the second quarter, an increase of 0.2% over the second quarter of 2000 and totaled $10,518,000 for the six months of 2001, a decrease of 0.7% compared to the prior year. Total interest income increased during the quarter by $71,000 or 0.7% while interest expense increased by $58,000 or 1.2% when compared to the second 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. In addition, loans have decreased $5.1 million on average since the prior year. Interest expense has been flat 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 $270,000 compared to the second quarter of 2000 at $207,000 and $540,000 for the six months of 2001 compared to $387,000 in 2000. 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 $127,000 (11.6%) and $372,000 (18.6%) in the second quarter and six months of 2001, respectively, when compared to the same periods in 2000. 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 $1,285,000 up $174,000 (or 15.7%) over last year. These increases in fee income were mainly the result of growth in the number of customers and related deposit accounts over the past twelve months. Also, trust and asset management fees continue to improve as they increased 10.0% over 2000 to $495,000. NON-INTEREST EXPENSE Non-interest expense decreased $33,000 or 0.8% during the second quarter of 2001 and $95,000 1.1% in the six months of 2001 when compared to the same periods in 2000. The decrease can be attributed to 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 resulted in a reduction of $250,000 in salaries and benefits during the first six months of 2001 as compared to 2000. RETURN ON ASSETS For the six months ended June 30, 2001, the Corporation's return on average assets ("ROA") totaled 1.00% up from the 0.94% recorded in 2000. Operating cash earnings ROA, which represents 13
earnings excluding one-time merger related costs and amortization expense, for the six months of 2001 was 1.21% as compared to 1.16% in the same period for 2000. RETURN ON EQUITY The Corporation's return on average shareholder's equity ("ROE") in the first six months was 10.86% compared to 10.79% 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 six months was 13.09% compared to 13.29% in 2000. Management expects improvement in ROE during 2001 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 $467,000 in the second quarter of 2001 compared to $467,000 in the second quarter of 2000. For the six-month period comparisons, the federal tax expense was $897,000 in 2001 and $907,000 in 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 was weak during the first six months. Loan growth is expected to provide an increase of 1% to 3% for the year over year-end 2000. The Corporation's loan to deposit ratio has decreased through the first six months to 72.2% compared to 74.7% at year-end 2000. Deposit growth has continued to be much stronger than loan activity with this trend expected to continue throughout the remainder of the year. 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 $353,000 of which consumer net charge-offs totaled $203,000. The charge-off level for the remainder of 2001 is expected to increase slightly when compared to the first six months due to a commercial loan foreclosure that could reflect a one-time loss of approximately $100,000. 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, 2001, the Corporation's efficiency ratio was 55.92% compared to 57.43% 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 2001. 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 250basis 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 14
therefore created some 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 income coupled with reduced interest costs to provide the Corporation with improved net interest income for the remainder of 2001. Management concentrates on return on average equity and earnings per share evaluations, plus other methods, to measure and direct the performance of the Corporation. While past results are not an indication of future earnings, management feels the Corporation is positioned to enhance performance of normal operations through the remainder of 2001. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 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 CNB Financial Corporation held its Annual Meeting of Shareholders on April 17, 2001, 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 <TABLE> <S> <C> <C> <C> William A. Franson Richard D. Gathagan Dennis L. Merrey William R. Owens For 2,700,897 2,753,400 2,719,007 2,698,497 </TABLE> The total shares voted at the annual meeting were 2,850,174. ITEM 5. OTHER INFORMATION - None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - None 16
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: August7,2001 /s/ William F. Falger ------------------- ----------------------------- William F. Falger President and Director (Principal Executive Officer) DATE: August 7,2001 /s/ Joseph B. Bower, Jr. -------------------- ----------------------------- Joseph B. Bower, Jr. Treasurer (Principal Financial Officer) (Principal Accounting Officer) 17