UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 1 0 - Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 May 10, 2002: COMMON STOCK: $1.00 PAR VALUE - 3,633,642 SHARES 1
INDEX PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> Sequential Page Number - ----------- <S> <C> PAGE 3. Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 PAGE 4. Consolidated Statements of Income - Quarters ending March 31, 2002 and 2001 PAGE 5. Consolidated Statements of Comprehensive Income for the quarters ending March 31, 2002 and 2001 PAGE 6. Consolidated Statements of Cash Flows - three months ending March 31, 2002 and 2001 PAGE 7. Notes to Consolidated Financial Statements PAGE 8. Management's Discussion and Analysis of Financial Condition and Results of Operations PAGE 13. Quantitative and Qualitative Disclosures About Market Risk </TABLE> PART II. OTHER INFORMATION <TABLE> <S> <C> PAGE 14. ITEM 1. Legal Proceedings PAGE 14. ITEM 2. Changes in Securities and Use of Proceeds PAGE 14. ITEM 3. Defaults Upon Senior Securities PAGE 14. ITEM 4. Submission of Matters for Security Holders Vote PAGE 14. ITEM 5. Other Information PAGE 14. ITEM 6. Exhibits and Reports on Form 8-K PAGE 14. Signatures </TABLE> 2
CONSOLIDATED BALANCE SHEETS CNB FINANCIAL CORPORATION (Dollars in thousands) <TABLE> <CAPTION> March 31 Dec. 31, ASSETS 2002 2001 ------------ ------------- <S> <C> <C> Cash and due from banks............................................ $15,292 $17,350 Interest bearing deposits with other banks......................... 14,487 2,041 ------------ ------------- Total cash and cash equivalents.................................. 29,779 19,391 Securities available for sale...................................... 177,547 152,757 Loans held for sale................................................ 3,289 5,334 Loans and leases................................................... 394,409 388,455 Less: unearned discount......................................... 2,006 2,282 Less: allowance for loan and lease losses........................ 4,180 4,095 ------------ ------------- NET LOANS........................................................ 388,223 382,078 FHLB and Federal Reserve stock..................................... 3,560 1,932 Premises and equipment, net........................................ 12,328 12,485 Accrued interest receivable and other assets....................... 6,404 6,052 Intangible assets, net............................................. 12,352 12,765 ------------ ------------- TOTAL ASSETS..................................................... $633,482 $592,794 ============ ============= LIABILITIES Deposits: Non-interest bearing deposits.................................... $ 54,523 $ 60,241 Interest bearing deposits........................................ 472,861 446,399 ------------ ------------- TOTAL DEPOSITS................................................... 527,384 506,640 Other borrowings................................................... 43,025 23,268 Accrued interest and other liabilities............................. 8,371 7,992 ------------ ------------- TOTAL LIABILITIES................................................ 578,780 537,900 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....................................... 3,705 3,753 Retained earnings................................................ 48,436 47,731 Treasury stock, at cost.......................................... (1,362) (1,236) (61,655 shares for March 2002, and 53,568 for December 2001) Accumulated other comprehensive income........................... 229 952 ------------ ------------- TOTAL SHAREHOLDERS' EQUITY....................................... 54,702 54,894 ------------ ------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY......................... $633,482 $592,794 ============ ============= </TABLE> 3
CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> CNB FINANCIAL CORPORATION (Dollars in thousands, except per share data) Three Months Ended March 31, 2002 2001 ----------- ----------- <S> <C> <C> INTEREST AND DIVIDEND INCOME Loans including fees................................ $7,396 $ 7,964 Deposits with other banks........................... 15 54 Federal funds sold.................................. 75 103 Investment securities: Taxable.......................................... 1,603 1,641 Tax-exempt....................................... 470 432 Dividends........................................ 136 145 ---------- ----------- TOTAL INTEREST AND DIVIDEND INCOME............... 9,695 10,339 ---------- ----------- INTEREST EXPENSE Deposits............................................ 3,539 4,850 Borrowed funds...................................... 457 294 ---------- ----------- TOTAL INTEREST EXPENSE........................... 3,996 5,144 ---------- ----------- Net interest income.............................. 5,699 5,195 Provision for loan losses........................ 360 270 ---------- ----------- NET INTEREST INCOME AFTER PROVISION................. 5,339 4,925 ---------- ----------- NON-INTEREST INCOME Trust & asset management fees....................... 243 223 Service charges on deposit accounts................. 777 609 Other service charges and fees...................... 139 159 Securities gains(losses)............................ 0 0 Gains on sale of loans.............................. 43 8 Other income........................................ 234 158 ---------- ----------- TOTAL NON-INTEREST INCOME........................ 1,436 1,157 ---------- ----------- NON-INTEREST EXPENSES Salaries............................................ 1,568 1,479 Employee benefits................................... 582 520 Net occupancy expense of premises................... 610 633 Amortization of intangible.......................... 473 438 Other............................................... 1,404 1,200 ---------- ----------- TOTAL NON-INTEREST EXPENSES...................... 4,637 4,270 ---------- ----------- Income before income taxes.......................... 2,138 1,812 Applicable income taxes............................. 520 430 ---------- ----------- NET INCOME....................................... $1,618 $ 1,382 ========== =========== EARNINGS PER SHARE, BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING Net income, basic.............................. $0.45 $0.38 Net income, diluted............................ $0.44 $0.38 DIVIDENDS PER SHARE Cash dividends per share....................... $0.25 $0.23 </TABLE> 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CNB FINANCIAL CORPORATION (Dollars in thousands) <TABLE> <CAPTION> Three Months Ended March 31, --------------------- 2002 2001 --------------------- <S> <C> <C> Net income $ 1,618 $ 1,382 Other comprehensive income, net of tax Unrealized gains/(losses) on securities: Unrealized gains/(losses) arising during the period (723) 1,275 Reclassified adjustment for accumulated gains/(losses) included in net income, net of tax -- -- --------------------- Other comprehensive income (723) 1,275 --------------------- Comprehensive income $ 895 $ 2,657 ===================== </TABLE> 5
CONSOLIDATED STATEMENTS OF CASHFLOWS CNB FINANCIAL CORPORATION (Dollars in thousands) <TABLE> <CAPTION> Three Months Ended March 31, Cash flows from operating activities: 2002 2001 ------------- ------------- <S> <C> <C> Net Income $ 1,618 $ 1,382 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses 360 270 Depreciation and amortization 819 723 Amortization and accretion and deferred loan fees (50) (84) Deferred taxes (415) (258) Security (gains)/losses 0 0 Gain on sale of loans (43) (8) Net (gains)losses on dispositions of acquired property (8) 0 Proceeds from sale of loans 11,892 2,002 Origination of loans for sale (9,803) (3,368) Changes in: Interest receivable (116) 142 Other assets and intangible (2,198) (901) Interest payable (3) (39) Other liabilities 1,164 1,372 ------------- ------------- Net cash from operating activities 3,217 1,233 Cash flows from investing activities: Proceeds from maturities of: Securities available for sale 11,449 13,730 Proceeds from sales of securities available for sale 178 0 Purchase of: Securities available for sale (37,622) (25,012) Net principal disbursed on loans (6,339) 5,116 Purchase of premises and equipment (189) (443) Proceeds from the sale of foreclosed assets 278 0 ------------- ------------- Net cash from investing activities (32,245) (6,609) Cash flows from financing activities: Net change in: Checking, money market and savings accounts (3,833) 3,876 Certificates of deposit 24,577 4,256 Additional paid in capital (48) 0 Treasury stock (126) 31 Cash dividends paid (911) (843) Net advances from other borrowings 19,757 7,968 ------------- ------------- Net cash from financing activities 39,416 15,288 ------------- ------------- Net increase (decrease) in cash and cash equivalents 10,388 9,912 Cash and cash equivalents at beginning of year 19,391 17,973 ------------- ------------- Cash and cash equivalents at end of period $ 29,779 $ 27,885 ============= ============= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3,993 $ 5,183 Income Taxes $ 0 $ 0 </TABLE> 6
CNB FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and in compliance with accounting principles generally accepted in the United States of America. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of the Management of the registrant, the accompanying consolidated financial statements for the quarter ended March 31, 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-month period ended March 31, 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 (EPS) is calculated on the weighted average number of common shares outstanding during the year. The weighted average shares used in the calculation were 3,634,607 for basic and 3,643,236 diluted in 2002 and 3,667,014 for basic and diluted in 2001. RECENT ACCOUNTING PRONOUNCEMENTS NONE 7
MANAGEMENT'S DISCUSSION AND ANALYSIS CONSOLIDATED YIELD COMPARISONS CNB Financial Corporation Average Balances and Net Interest Margin (Dollars in thousands) <TABLE> <CAPTION> March 31, 2002 March 31, 2001 - ------------------------------------------------------------------------------------------------------------------- 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 $ 3,001 2.00% $ 15 $ 3,410 6.33% $ 54 Federal funds sold and securities purchased under agreements to resell 15,059 1.99% 75 7,761 5.31% 103 Investment Securities: Taxable 119,640 5.36% 1,603 103,433 6.35% 1,641 Tax-Exempt (1) 38,653 6.85% 662 35,130 6.73% 591 Equity Investments (1) 11,515 6.08% 175 10,210 7.05% 180 - ------------------------------------------------------------------------------------------------------------------- Total Investments 187,868 5.39% 2,530 159,944 6.42% 2,569 Loans Commercial (1) 94,990 6.80% 1,616 80,031 8.74% 1,749 Mortgage (1) 232,671 7.99% 4,646 221,033 8.72% 4,819 Installment 41,945 8.27% 867 41,762 9.26% 967 Leasing 19,030 7.08% 337 25,650 7.49% 480 - ------------------------------------------------------------------------------------------------------------------- Total loans (2) 388,636 7.68% 7,466 368,476 8.70% 8,015 Total earning assets 576,504 6.94% 9,996 528,420 8.01% 10,584 Non Interest Bearing Assets Cash & Due From Banks 13,356 -- 11,769 -- Premises & Equipment 12,444 -- 12,967 -- Other Assets 18,834 -- 20,642 -- Allowance for Possible Loan Losses (4,140) -- (3,958) -- - ------------------------------------------------------------------------------------------------------------------- Total Non-interest earning assets 40,494 -- -- 41,420 -- -- - ------------------------------------------------------------------------------------------------------------------- Total Assets $616,998 $9,996 $569,840 $10,584 =================================================================== Liabilities and Shareholders' Equity Interest-Bearing Deposits Demand - interest-bearing $132,495 1.09% $ 361 $117,811 2.29% $ 674 Savings 78,802 1.70% 334 73,554 3.78% 695 Time 249,118 4.57% 2,844 245,814 5.66% 3,481 - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 460,415 3.07% 3,539 437,179 4.44% 4,850 Short-term borrowings 2,536 2.05% 13 1,379 6.09% 21 Long-term borrowings 34,889 5.09% 444 19,889 5.49% 273 - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 497,840 3.21% 3,996 458,447 4.49% 5,144 Demand - non-interest-bearing 54,421 -- 51,008 -- Other liabilities 8,404 -- 7,294 -- - ------------------------------------------------------------------------------------------------------------------- Total Liabilities 560,665 3,996 516,749 5,144 Shareholders' equity 56,333 -- 53,091 -- - ------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $616,998 $3,996 $569,840 $ 5,144 =================================================================== Interest income/earning assets 6.94% $9,996 8.01% $10,584 Interest expense/interest bearing liabilities 3.21% 3,996 4.49% 5,144 - ------------------------------------------------------------------------------------------------------------------- Net Interest Spread 3.73% $6,000 3.52% $ 5,440 ======================== ===================== Interest Income/Interest Earning Assets 6.94% $9,996 8.01% $10,584 Interest expense/Interest Earning Assets 2.77% 3,996 3.89% 5,144 - ------------------------------------------------------------------------------------------------------------------- Net Interest Margin 4.17% $6,000 4.12% $ 5,440 ======================== ===================== </TABLE> (1) The amounts are reflected on a fully tax equivalent basis using the federal statutory rate of 34% in 2002 and 2001, adjusted for certain tax exemptions (2) Average outstanding includes the average balance outstanding of all non- accrual loans. Loans consist of the average of total loans less average unearned income. The amount of loan fees included in the interest income on loans in not material. 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management's assessment of financial results. The Corporation's subsidiary County National Bank (the "Bank") provides financial services to individuals and businesses within the Bank's market area made up of the west central Pennsylvania counties of Clearfield, Cambria, Centre, Elk, Jefferson, and McKean. County National Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency ("OCC"). The market area that County National Bank operates in is rural in nature. The customer makeup consists of small business and individuals. The health of the economy in the region has remained relatively stable. Unemployment in our region has run consistently higher than the state average over time. OVERVIEW OF BALANCE SHEET Total assets (shown in "Consolidated Balance Sheet") have increased 6.9% since year-end 2001 to $633.5 million. The increase has occurred primarily in cash and investments. The following comments will further explain the details of the asset fluctuation. CASH AND CASH EQUIVALENTS Cash and cash equivalents totaled $29,779,000 at March 31, 2002 compared to $19,391,000 on December 31, 2001. This increase resulted from a significant inflow of deposits mainly during March 2001. The Corporation will focus on decreasing the cash balance and investing funds in higher yielding earning assets during the second quarter. Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, and the portion of the securities and loan portfolios that mature within one year. These sources of funds will enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due. SECURITIES Securities increased $24.8 million (or 16.2%) since December 31, 2001. 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. Also aiding the increase was the deposit growth. The Corporation has been investing the dollars in prudent investments over time. The Corporation generally buys into the market over time and does not attempt to "time" its transactions. In doing this, the highs and lows of the market are averaged into the portfolio and minimizes the overall effect of different rate environments. Management monitors the earnings performance and the effectiveness of the liquidity of the securities portfolio on a regular basis through Asset/ Liability Committee ("ALCO") meetings. The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the securities portfolio, the Corporation maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers. LOANS The Corporation's loan demand was strong during the first quarter 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. 9
At March 31, 2002, the Corporation had $392,403,000 in loans and leases outstanding, net of unearned discount, up $6,230,000 (or 1.6%) since December 31, 2001. The increase was caused by demand in commercial loans including mortgages. While we remain dedicated to the success of commercial lending, as we see this as our competitive advantage, a stronger approach has been adopted toward secured consumer loans. This strategy is part of an overall initiative to increase our market share of households in loans and deposits. ALLOWANCE FOR LOAN AND LEASE LOSSES AND NONPERFORMING ASSETS The Allowance for Loan and Lease Losses as a percentage of loans increased from 1.06% at December 31, 2001 to 1.07% at March 31, 2002. The dollar amount of the reserve increased $85,000 since year-end 2001. The increase is a result of the provision of $360,000 expensed during the three months less net charge- offs. The gross charge-offs for the three months of 2002 were $324,000 while recoveries were $49,000. This level of charge-offs is an increase from the three months of 2001 when charge-offs were $193,000 with recoveries of $46,000. The economic downturn has caused consumers to slow in their payment stream. It does not appear that the situation is in a continuing downturn for our portfolio as the situation has appeared to stabilize. The adequacy of the allowance for loan and lease losses is subject to a formal analysis by an independent loan review analyst, as well as our internal credit administrator, and is deemed to be adequate to absorb probable losses in the portfolio as of March 31, 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 $2,619,000 or 0.67% of total loans on March 31, 2002 compared to $2,098,000 or 0.54% on 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 most significant source of funds for the Corporation at $527,384,000 at March 31, 2002. Deposit increase of 4.1% since year-end 2001 is a result of the previously mentioned strategy to focus on consumer households. The focus has included a low cost checking solution as well as several certificate of deposit promotions. Also adding to the increase is the decline in value of the stock market which continues to draw investors back to bank deposits. The Corporation utilizes term borrowings from the Federal Home Loan Bank (FHLB) to meet funding needs not accommodated by deposit growth. During 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. SHAREHOLDERS' EQUITY The Corporation's capital continues to provide a base for profitable growth. Total Shareholders' Equity was $54,702,000 at March 31, 2002 compared to $54,894,000 at December 31, 2001 a decrease of $192,000 (or -0.3%). In the first three months of 2002, the Corporation earned $1,618,000 and declared dividends of $906,000, a dividend payout ratio of 56.0% of net income. The investment securities in the Corporation's portfolio are classified as available-for-sale making this portion of the Corporation's balance sheet more sensitive to the changing market value of investments. Interest rates in the first quarter of 2002 have risen in the shorter maturities. This situation has caused a decrease in accumulated other comprehensive income which is included in stockholders' equity of $723,000 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 10.51% at March 31, 2002 is above the well-capitalized standard of 10%. The Corporation's Tier 1 capital ratio of 9.56% is above the well-capitalized minimum of 6%. The leverage ratio at March 31, 2002 was 6.99%, 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. 10
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 6 of the accompanying financial statements provides analysis of the Corporation's cash and cash equivalents. Additionally, management considers that portion of the loan and investment portfolio that matures within one year as part of the Corporation's liquid assets. The Corporation's liquidity is monitored by the ALCO Committee, which establishes and monitors ranges of acceptable liquidity. Management feels the Corporation's current liquidity position is acceptable. 11
RESULTS OF OPERATIONS OVERVIEW OF THE INCOME STATEMENT The Corporation had net income of $1,618,000 for the first quarter of 2002. The earnings per diluted share for the period was $0.44. Net income was $1,382,000 for the first quarter of 2001, which equated to earnings per diluted share of $0.38. INTEREST INCOME AND EXPENSE Net interest income totaled $5,699,000 in the first quarter, an increase of 9.7% over the first quarter of 2001. Total interest income decreased during the quarter by $644,000 or -6.2% while interest expense decreased by $1,148,000 or 22.3% when compared to the first quarter of 2001. Our cost of funds decreased faster than the yield on assets. The main cause of this was the rapid decline in interest rates throughout 2001 allowing for a more rapid repricing in our liabilities than occurred in the loan and securities portfolios. PROVISION FOR LOAN LOSSES The Corporation recorded a provision for loan and lease losses in the first quarter of $360,000 compared to the first quarter of 2001 at $270,000. Based on managements' evaluation of problem loans, increased charge-offs, expected growth in the loan portfolio, and the overall effects of the economy managements' analysis indicates the allowance provision appears to be adequate. NON-INTEREST INCOME Non-interest income increased $279,000 (or 24.1%) in the first quarter of 2002 when compared to the same period in 2001. Increased deposit account service charges have been the primary source of the growth in non-interest income. In the three months, account service charges totaled $777,000 up $168,000 (or 27.6%) over last year. The increases in fee income were mainly derived from a new service that began in April 2001. This service provided customers with the comfort of having their checks paid and not returned as insufficient. Also during 2002, income derived from the sale of mortgages was high due to low interest rates and a wave of refinancing. NON-INTEREST EXPENSE Non-interest expense increased $367,000 or 8.6% during the first quarter of 2002 when compared to the same period in 2001. The increase occurred across all areas without any single category being significantly different. RETURN ON ASSETS For the three months ended March 31, 2002, the Corporation's annualized return on average assets ("ROA") totaled 1.06% up from the 0.97% recorded in 2001. Operating cash earnings ROA, which represents earnings excluding one-time merger related costs, if applicable, and amortization expense, for the three months of 2002 was 1.27% as compared to 1.17% in the same period for 2001. RETURN ON EQUITY The Corporation's annualized return on average shareholder's equity ("ROE") in the first quarter was 11.91% compared to 10.47% for 2001. The increase can be attributed to both increased earnings and controlled levels of capital through dividends and stock repurchase into Treasury shares. Operating cash earnings ROE for the first quarter was 14.21% compared to 12.66% in 2001. FEDERAL INCOME TAX EXPENSE Federal income tax expense was $520,000 in the first quarter of 2002 compared to $430,000 in the first quarter of 2001. The increase reflects a higher level of overall income in the period when compared to the same period in the prior year. 12
FUTURE OUTLOOK Year-to-date results improved when compared to the prior year and were consistent with management's expectations. Management continues to focus on growth from increased market share especially in transactional deposit accounts. 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 strong during the first quarter. Loan growth is expected to provide for an increase of over 3% for the year over year-end 2001. The Corporation's loan to deposit ratio has decreased through the first quarter to 73.61% compared to 75.43% at year-end 2001 as deposit growth has been very good during the first quarter and is expected to remain strong throughout 2002. A plan to expand our commercial lending niche into surrounding market areas should help to stabilize the loan to deposit ratio. Consumer loan charge-offs in the first quarter continued to comprise the majority of the Corporation's recent charge-offs. In the first three months, total net charge-offs were $275,000 of which consumer net charge-offs totaled $173,000. Management believes that the loan review and collections procedures as well as our underwriting standards will give the Bank favorable charge-off history when compared to peer institutions. Enhanced non-interest income and controlled non-interest expense are important factors in the success of the Corporation and is measured in the financial services industry by the efficiency ratio, calculated according to the following: non-interest expense (less amortization of intangibles) as a percentage of fully tax equivalent net interest income and non-interest income (less non-recurring income). For the three months ended March 31, 2002, the Corporation's efficiency ratio was 54.97% compared to 56.66% for the same period last year. The efficiency ratio improved as the level of non-interest income has increased at a faster rate and higher dollar amount than non-interest expense. Management believes controlling the operating costs of the Corporation is imperative to the future increased profitability derived from core earnings. A strong focus by management continues to be placed on controlling non-interest expenses. Through the use of technology and more efficient processes, our non- interest costs have shown modest increases throughout the first quarter of 2002 and is expected to assist us throughout 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 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 2002. 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. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in this Form 10-Q which are not historical fact are forward looking statements that involve risks and uncertainties, including, but not limited to, the interest rate environment, the effect of federal and state banking and tax regulations, the effect of economic conditions, the impact of competitive products and pricing, and other risks detailed in the Corporation's Securities and Exchange Commission filings. 13
PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS CNB Financial Corporation and its subsidiary County National 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 attorney fees. The Corporation and the other defendants have denied any wrongdoing or injury to the plaintiffs whatsoever. All defendants have filed Motions to Dismiss the federal action. Those motions are currently under consideration by the court. 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 None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K There were no reports for the period ended March 31, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CNB FINANCIAL CORPORATION (Registrant) DATE: May 10, 2002 /s/ William F. Falger ---------------------- ----------------------------- William F. Falger President and Director (Principal Executive Officer) DATE: May 10, 2002 /s/ Joseph B. Bower, Jr. ---------------------- ----------------------------- Joseph B. Bower, Jr. Treasurer (Principal Financial Officer) (Principal Accounting Officer) 14