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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 March 31, 2004

 

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

incorporation or organization)

  (I.R.S. Employer Identification No.)

 

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  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

 

The number of shares outstanding of the issuer’s common stock as of May 3, 2004:

 

COMMON STOCK: $1.00 PAR VALUE – 9,119,557 SHARES

 



INDEX

 

Sequential

Page Number


         

PART I.

FINANCIAL INFORMATION

ITEM 1. – Financial Statements

PAGE 3.

   Consolidated Balance Sheets – March 31, 2004 and December 31, 2003

PAGE 4.

   Consolidated Statements of Income - Quarters ending March 31, 2004 and 2003

PAGE 5.

   Consolidated Statements of Comprehensive Income for the three months ending March 31, 2004 and 2003

PAGE 6.

   Consolidated Statements of Cash Flows - three months ending March 31, 2004 and 2003

PAGE 7.

   Notes to Consolidated Financial Statements

ITEM 2 – Management’s Discussion and Analysis

PAGE 8.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 3 – Quantitative and Qualitative Disclosures

PAGE 14.

   Quantitative and Qualitative Disclosures About Market Risk

ITEM 4 - Controls and Procedures

PAGE 14.

   Controls and Procedures

PART II.

OTHER INFORMATION

PAGE 15.

   ITEM 1    Legal Proceedings

PAGE 15.

   ITEM 2    Changes in Securities and Use of Proceeds

PAGE 15.

   ITEM 3    Defaults Upon Senior Securities

PAGE 15.

   ITEM 4    Submission of Matters for Security Holders Vote

PAGE 15.

   ITEM 5    Other Information

PAGE 15.

   ITEM 6    Exhibits and Reports on Form 8-K

PAGE 16.

   Signatures

 

2


CONSOLIDATED BALANCE SHEETS

CNB FINANCIAL CORPORATION

 

(Dollars in thousands)


   March 31
2004


    Dec. 31,
2003


 

ASSETS

                

Cash and due from banks

   $ 13,856     $ 15,239  

Interest bearing deposits with other banks

     8,902       5,742  
    


 


Total cash and cash equivalents

     22,758       20,981  

Securities available for sale

     170,611       175,903  

Loans held for sale

     4,142       3,099  

Loans and leases

     471,075       458,660  

Less: unearned discount

     305       411  

Less: allowance for loan and lease losses

     5,855       5,764  
    


 


NET LOANS

     464,915       452,485  

FHLB and Federal Reserve stock

     4,697       5,032  

Premises and equipment, net

     12,814       12,934  

Bank owned life insurance

     12,807       12,682  

Accrued interest receivable and other assets

     7,398       6,388  

Mortgage servicing rights

     441       481  

Goodwill

     10,821       10,821  

Other intangible assets, net

     867       946  
    


 


TOTAL ASSETS

   $ 712,271     $ 701,752  
    


 


LIABILITIES

                

Deposits:

                

Non-interest bearing deposits

   $ 67,055     $ 63,297  

Interest bearing deposits

     517,629       512,141  
    


 


TOTAL DEPOSITS

     584,684       575,438  

Short-term borrowings

     1,993       1,313  

Federal Home Loan Bank advances

     40,000       40,000  

Accrued interest and other liabilities

     7,381       8,554  

Subordinated debentures

     10,000       10,000  
    


 


TOTAL LIABILITIES

     644,058       635,305  

SHAREHOLDERS’ EQUITY

                

Common stock $1.00 par value

                

Authorized 10,000,000 shares

                

Issued 9,233,750 shares

     9,234       9,234  

Additional paid in capital

     4,221       4,123  

Retained earnings

     52,082       51,247  

Treasury stock, at cost

     (1,224 )     (1,309 )

(82,284 shares for March 2004, and 93,974 for December 2003)

                

Accumulated other comprehensive income

     3,900       3,152  
    


 


TOTAL SHAREHOLDERS’ EQUITY

     68,213       66,447  
    


 


TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

   $ 712,271     $ 701,752  
    


 


 

3


CONSOLIDATED STATEMENTS OF INCOME

CNB FINANCIAL CORPORATION

 

     Three Months Ended March 31,

(Dollars in thousands, except per share data)


   2004

   2003

INTEREST AND DIVIDEND INCOME

             

Loans including fees

   $ 7,527    $ 7,595

Deposits with other banks

     12      12

Federal funds sold

     18      40

Investment securities:

             

Taxable

     1,065      1,282

Tax-exempt

     521      550

Dividends

     93      112
    

  

TOTAL INTEREST AND DIVIDEND INCOME

     9,236      9,591
    

  

INTEREST EXPENSE

             

Deposits

     2,628      2,771

Borrowed funds

     628      622
    

  

TOTAL INTEREST EXPENSE

     3,256      3,393
    

  

Net interest income

     5,980      6,198

Provision for loan losses

     300      540
    

  

NET INTEREST INCOME AFTER PROVISION

     5,680      5,658
    

  

NON-INTEREST INCOME

             

Trust & asset management fees

     248      218

Service charges on deposit accounts

     850      751

Other service charges and fees

     128      153

Securities gains

     169      150

Gains on sale of loans

     23      112

Bank owned life insurance earnings

     126      86

Other income

     166      129
    

  

TOTAL NON-INTEREST INCOME

     1,710      1,599
    

  

NON-INTEREST EXPENSES

             

Salaries

     1,817      1,702

Employee benefits

     710      628

Net occupancy expense of premises

     679      613

Amortization of intangible

     129      124

Other

     1,489      1,488
    

  

TOTAL NON-INTEREST EXPENSES

     4,824      4,555
    

  

Income before income taxes

     2,566      2,702

Applicable income taxes

     551      693
    

  

NET INCOME

   $ 2,015    $ 2,009
    

  

EARNINGS PER SHARE, BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING*

             

Net income, basic

   $ 0.22    $ 0.22

Net income, diluted

   $ 0.22    $ 0.22

DIVIDENDS PER SHARE

             

Cash dividends per share

   $ 0.128    $ 0.112

* Per share data are restated to reflect a 2 1/2 for 1 stock split announced April 13, 2004.

 

4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CNB FINANCIAL CORPORATION

 

     Three Months Ended
March 31,


 

(Dollars in thousands)


   2004

   2003

 

Net income

   $ 2,015    $ 2,009  

Other comprehensive income, net of tax

               

Unrealized gains/(losses) on securities:

               

Unrealized gains/(losses) arising during the period

     638      (761 )

Reclassified adjustment for accumulated gains included in net income, net of tax

     110      99  
    

  


Other comprehensive income/(loss)

     748      (662 )
    

  


Comprehensive income

   $ 2,763    $ 1,347  
    

  


 

5


CONSOLIDATED STATEMENTS OF CASHFLOWS

CNB FINANCIAL CORPORATION

 

 

     Three Months Ended
March 31,


 

(Dollars in thousands)


   2004

    2003

 

Cash flows from operating activities:

                

Net Income

   $ 2,015     $ 2,009  

Adjustments to reconcile net income to
net cash used by operations:

                

Provision for loan losses

     300       540  

Depreciation and amortization

     435       380  

Amortization and accretion and deferred loan fees

     58       153  

Deferred taxes

     (50 )     (30 )

Security (gains)/losses

     (169 )     (151 )

Gain on sale of loans

     (24 )     (112 )

Net (gains)losses on dispositions of acquired property

     (18 )     0  

Proceeds from sale of loans

     1,658       8,485  

Origination of loans for sale

     (2,677 )     (10,598 )

Increase in Bank Owned Life Insurance

     (126 )     (85 )

Changes in:

                

Interest receivable and other assets

     (1,160 )     (403 )

Interest payable and other liabilities

     (1,600 )     (1,438 )
    


 


Net cash used by operating activities

     (1,358 )     (1,250 )

Cash flows from investing activities:

                

Proceeds from maturities of:

                

Securities available for sale

     11,839       22,525  

Proceeds from sales of securities available for sale

     3,271       2,438  

Purchase of securities available for sale

     (8,613 )     (21,057 )

Loan origination and payments, net

     (12,598 )     (8,019 )

Purchase (Sale) of Federal Reserve Bank Stock and
Federal Home Loan Bank Stock

     334       (294 )

Net, purchase of premises and equipment

     (186 )     (662 )

Proceeds from the sale of foreclosed assets

     159       50  
    


 


Net cash used in investing activities

     (5,794 )     (5,019 )

Cash flows from financing activities:

                

Net change in:

                

Checking, money market and savings accounts

     3,070       6,882  

Certificates of deposit

     6,176       7,149  

Treasury stock purchased

     (29 )     (177 )

Proceeds from sale of treasury stock

     212       164  

Cash dividends paid

     (1,180 )     (1,028 )

Net advances (repayments) from short-term borrowings

     680       (96 )
    


 


Net cash provided by financing activities

     8,929       12,894  
    


 


Net increase in cash and cash equivalents

     1,777       6,625  

Cash and cash equivalents at beginning of year

     20,981       22,527  
    


 


Cash and cash equivalents at end of period

   $ 22,758     $ 29,152  
    


 


Supplemental disclosures of cash flow information:

                

Cash paid during the period for:

                

Interest

   $ 3,154     $ 3,431  

Income Taxes

   $ 1,050     $ 1,500  

Loans transferred to other real estate owned

   $ 125     $ 79  

 

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 accounting principles generally accepted in the United States have been condensed or omitted.

 

In the opinion of Management of the registrant, the accompanying consolidated financial statements for the quarters ended March 31, 2004 and 2003 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, 2004 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, 2003.

 

COMMON STOCK PLAN

 

The Corporation has a common stock plan for key employees and independent directors. The Stock Incentive Plan, which is administered by the Executive Compensation and Personnel Committee, comprised of independent members of the Board of Directors, provides for the issuance of up to 625,000 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. No stock options were granted during the first quarter of 2004 or 2003.

 

EARNINGS PER SHARE

 

Earnings-per-share is calculated on the weighted average number of common shares outstanding during the period. For the period ended March 31, 2004, 56,250 shares of common stock were not considered in computing diluted earnings per common share because they were antidilutive. There were no antidilutive shares at March 31, 2003. Earnings per share for the periods ended March 31, 2003 and 2004 are restated to reflect a 2 1/2 for 1 stock split announced April 13, 2004.

 

The computation of basic and diluted EPS is shown below (in thousands) except per share data:

 

     Period Ended

     Mar 31,2004

   Mar 31, 2003

Net Income

   $ 2,015    $ 2,009

Weighted-Average common shares outstanding

     9,147      9,087
    

  

Basic earnings per share

   $ 0.22    $ 0.22
    

  

Net Income

   $ 2,015    $ 2,009
    

  

Weighted-Average common shares outstanding

     9,147      9,087

Dilutive effects of assumed exercise of stock options

     67      77
    

  

Total weighted average shares and equivalents

     9,214      9,164
    

  

Diluted earnings per share

   $ 0.22    $ 0.22
    

  

 

RECENT ACCOUNTING PRONOUNCEMENT

 

None

 

7


MANAGEMENT’S DISCUSSION AND ANALYSIS

CONSOLIDATED YIELD COMPARISONS

 

CNB Financial Corporation

 

    Average Balances and Net Interest Margin

 

     March 31, 2004

   March 31, 2003

(Dollars in thousands)


   Average
Balance


    Annual
Rate


    Interest
Inc./Exp.


   Average
Balance


    Annual
Rate


    Interest
Inc./Exp.


Assets

                                         

Interest-bearing deposits with banks

   $ 1,754     2.75 %   $ 12    $ 2,032     2.40 %   $ 12

Federal funds sold and securities
purchased under agreements to resell

     6,686     1.08 %     18      13,246     1.22 %     40

Investment Securities:

                                         

Taxable

     113,959     3.76 %     1,065      120,153     4.33 %     1,282

Tax-Exempt (1)

     43,733     6.97 %     758      46,074     6.94 %     788

Equity Investments (1)

     13,600     3.52 %     119      13,319     4.32 %     142
    


 

 

  


 

 

Total Investments

     179,732     4.41 %     1,972      194,824     4.71 %     2,264

Loans

                                         

Commercial (1)

     172,575     5.99 %     2,569      132,617     6.49 %     2,123

Mortgage (1)

     258,790     6.70 %     4,310      241,567     7.67 %     4,571

Installment

     31,573     8.57 %     673      36,355     8.77 %     786

Leasing

     5,214     6.87 %     89      11,475     7.03 %     199
    


 

 

  


 

 

Total loans (2)

     468,152     6.56 %     7,641      422,014     7.38 %     7,679

Total earning assets

     647,884     5.97 %     9,613      616,838     6.54 %     9,943

Non Interest Bearing Assets

                                         

Cash & Due From Banks

     13,879             —        13,854             —  

Premises & Equipment

     12,863             —        12,431             —  

Other Assets

     41,504             —        35,231             —  

Allowance for Possible Loan Losses

     (5,840 )           —        (5,248 )           —  
    


 

 

  


 

 

Total Non-interest earning assets

     62,406     —         —        56,268     —         —  
    


 

 

  


 

 

Total Assets

   $ 710,290           $ 9,613    $ 673,106           $ 9,943
    


 

 

  


 

 

Liabilities and Shareholders’ Equity

                                         

Interest-Bearing Deposits

                                         

Demand - interest-bearing

   $ 126,382     0.28 %   $ 88    $ 129,574     0.60 %   $ 192

Savings

     77,163     0.63 %     120      76,223     1.10 %     207

Time

     313,261     3.11 %     2,420      290,166     3.32 %     2,372
    


 

 

  


 

 

Total interest-bearing deposits

     516,806     2.05 %     2,628      495,963     2.27 %     2,771

Short-term borrowings

     1,860     0.86 %     4      1,134     1.07 %     3

Long-term borrowings

     40,000     5.09 %     506      40,000     5.05 %     498

Subordinated debentures

     10,000     4.75 %     118      10,000     4.91 %     121
    


 

 

  


 

 

Total interest-bearing liabilities

     568,666     2.30 %     3,256      547,097     2.52 %     3,393

Demand - non-interest-bearing

     65,389             —        55,452             —  

Other liabilities

     8,149             —        7,846             —  
    


 

 

  


 

 

Total Liabilities

     642,204             3,256      610,395             3,393

Shareholders’ equity

     68,086             —        62,711             —  
    


 

 

  


 

 

Total Liabilities and Shareholders’ Equity

   $ 710,290           $ 3,256    $ 673,106           $ 3,393
    


 

 

  


 

 

Interest income/earning assets

           5.97 %   $ 9,613            6.54 %   $ 9,943

Interest expense/interest bearing liabilities

           2.30 %     3,256            2.52 %     3,393
            

 

          

 

Net Interest Spread

           3.66 %   $ 6,357            4.02 %   $ 6,550
            

 

          

 

Interest Income/Interest Earning Assets

           5.97 %   $ 9,613            6.54 %   $ 9,943

Interest expense/Interest Earning Assets

           2.02 %     3,256            2.23 %     3,393
            

 

          

 

Net Interest Margin

           3.95 %   $ 6,357            4.31 %   $ 6,550
            

 

          

 


(1) The amounts are reflected on a fully tax equivalent basis using the federal statutory rate of 35% in 2004 and 2003, 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 primary market area made up of the west central Pennsylvania counties of Clearfield, Cambria, Centre, Elk, Jefferson, McKean and Warren. 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 state of the economy in the region is mixed with unemployment rates running high in our market area except Centre County. Unemployment in our region has run consistently higher than the state average over time.

 

OVERVIEW OF BALANCE SHEET

 

Total assets have increased 1.5% since year-end 2003 to $712,271,000. The following comments will further explain the details of the asset fluctuation.

 

CASH AND CASH EQUIVALENTS

 

Cash and cash equivalents totaled $22,758,000 at March 31, 2004 compared to $20,981,000 on December 31, 2003. This increase resulted from the continued runoff of our securities portfolio during the quarter. The position in cash and cash equivalents will fluctuate during the quarter depending on the liquidity demands of the Corporation. Currently, the Corporation has experienced strong loan growth requiring the Bank to use the securities prepayments and maturities to fund the growth.

 

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 decreased $5,292,000 (or 3.0%) since December 31, 2003. The decrease resulted primarily from payments received from our mortgage-backed securities. The Corporation has been reinvesting the proceeds mainly in the loan portfolio over the quarter. 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 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 lending consists principally of retail lending, which includes single-family residential mortgages and other consumer lending, and commercial lending primarily to locally owned small businesses. The Corporation’s loan demand was strong during the first quarter of 2004. At March 31, 2004, the Corporation had $470,770,000 in loans and leases outstanding, net of unearned discount, up $12,521,000 (or 2.7%) since December 31, 2003. The increase was caused by demand in commercial loans including commercial mortgages. While we see commercial lending as a strong competitive advantage, a more focused approach has been adopted toward secured consumer

 

9


loans mainly in the form of home equity loans and lines of credit. This strategy is part of an overall initiative to increase our market share of consumer customers in loans and deposits. The Corporation has continued to use direct marketing to aggressively grow the number of customers we have relationships with in our market area.

 

ALLOWANCE FOR LOAN AND LEASE LOSSES AND NONPERFORMING ASSETS

 

The allowance for loan and lease losses is established by provisions for losses in the loan and lease portfolio. These provisions are charged against current income. Loans deemed not collectible are charged-off against the allowance while any subsequent collections are recorded as recoveries and increase the allowance.

 

The table below shows activity within the allowance account:

 

     Periods Ending

 

($’s in thousands)


   Mar 31,2004

    Dec. 31, 2003

    Mar 31, 2003

 

Balance at beginning of Period

   $ 5,764     $ 5,036     $ 5,036  

Charge-offs:

                        

Commercial and financial

     —         19       4  

Commercial mortgages

     40       174       69  

Residential mortgages

     94       109       1  

Installment

     86       511       91  

Lease receivables

     12       111       13  
    


 


 


       232       924       178  

Recoveries:

                        

Commercial and financial

     —         1       —    

Commercial mortgages

     12       2       1  

Residential mortgages

     —         —         —    

Installment

     10       80       29  

Lease receivables

     1       34       2  
    


 


 


       23       117       32  
    


 


 


Net charge-offs:

     (209 )     (807 )     (146 )

Provision for possible loan losses

     300       1,535       540  
    


 


 


Balance at end-of-period

   $ 5,855     $ 5,764     $ 5,430  
    


 


 


Loans, net of unearned

   $ 470,770     $ 458,249     $ 428,351  

Allowance to net loans

     1.24 %     1.26 %     1.27 %

Net charge-offs to average loans

     0.12 %     0.18 %     0.03 %

 

The adequacy of the allowance for loan and lease losses is subject to a formal analysis by the credit administrator of the Bank. As part of the formal analysis, delinquencies and losses are monitored monthly. The loan portfolio is divided into several categories in order to better analyze the entire pool. First is a selection of criticized loans that is given a specific allowance. The remaining loans are pooled, by category, into these segments:

 

Reviewed

 

  Commercial and financial

 

  Commercial mortgages

 

Homogeneous

 

  Residential real estate

 

  Installment

 

  Lease receivables

 

The reviewed loan pools are further segregated into three categories: substandard, doubtful and unclassified. Historical loss factors are calculated for each pool based on the previous eight quarters of experience. The homogeneous pools are evaluated by analyzing the historical loss factors from the most previous quarter end and the two most recent year ends. The historical loss factors for both the reviewed and homogeneous pools are adjusted based on these six qualitative factors:

 

  Levels of and trends in delinquencies and non-accruals

 

  Trends in volume and terms of loans

 

  Effects of any changes in lending policies and procedures

 

  Experience, ability and depth of management

 

  National and local economic trends and conditions

 

  Concentrations of credit

 

10


The methodology described above was created using the experience of our credit administrator, guidance from the regulatory agencies, expertise of our loan review partner, and discussions with our peers. The resulting factors are applied to the pool balances in order to estimate the inherent risk of loss within each pool.

 

The increase in the overall allowance during the quarter is deemed necessary to cover the increases in loans mainly in the commercial loan area, which increased $15,268,000 in the first three months of 2004. 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 by management to be adequate to absorb probable losses in the portfolio as of March 31, 2004.

 

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 $3,386,000 or 0.48% of total assets on March 31, 2004 compared to $3,235,000 or 0.46% on December 31, 2003.

 

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 $584,684,000 at March 31, 2004. Deposit increase of 1.6% since year-end 2003 is a result of the previously mentioned strategy to focus on consumer households. The focus includes a low cost checking solution.

 

The Corporation utilizes term borrowings from the Federal Home Loan Bank (FHLB) to meet funding needs not accommodated by deposit growth and securities runoff. 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 $68,213,000 at March 31, 2004 compared to $66,447,000 at December 31, 2003 an increase of $1,766,000 (or 2.7%). In the first three months of 2004, the Corporation earned $2,015,000 and declared dividends of $1,180,000, a dividend payout ratio of 58.6% of net income.

 

The 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. This situation has caused an increase in accumulated other comprehensive income which is included in shareholders’ equity of $748,000 since December 31, 2003.

 

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 12.97% at March 31, 2004 is above the well-capitalized standard of 10%. The Corporation’s Tier 1 capital ratio of 11.87% is above the well-capitalized minimum of 6%. The leverage ratio at March 31, 2004 was 9.04%, 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 organization’s ability to meet cash obligations as they come due. The Consolidated Statement of Cash Flows presented on page six of the accompanying financial statements provides analysis of the Corporation’s cash and cash equivalents. Additionally, management considers that portion of the loan and security portfolio that matures within one year as part of the Corporation’s liquid assets. The Corporation’s liquidity and interest rate sensitivity is monitored by the ALCO Committee, which establishes and monitors ranges of acceptability. Management feels the Corporation’s current liquidity and interest rate positions are acceptable.

 

11


OFF BALANCE SHEET ACTIVITIES

 

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customer financing needs. The contractual amount of financial instruments with off-balance sheet risk was as follows at March 31, 2004:

 

Commitments to extend credit

   $ 104,900

Standby letters of credit

     9,361
    

     $ 114,261
    

 

RESULTS OF OPERATIONS

 

OVERVIEW OF THE INCOME STATEMENT

 

The Corporation had net income of $2,015,000 for the first quarter of 2004. The earnings per diluted share for the period was $0.22. Net income was $2,009,000 for the first quarter of 2003, which equated to earnings per diluted share of $0.22.

 

INTEREST INCOME AND EXPENSE

 

Net interest income totaled $5,980,000 in the first quarter, a decrease of 3.5% over the first quarter of 2003. Total interest income decreased during the quarter by $355,000 or (3.7%) while interest expense decreased by $137,000 or (4.0%) when compared to the first quarter of 2003. Interest income continues to be negatively impacted by lower interest rates as earning assets continue to reprice at lower rates. Should rates remain low or go lower, the Bank will see further decline in the net interest margin throughout the year. The overall effect should be somewhat mitigated with continued growth in earning assets.

 

PROVISION FOR LOAN LOSSES

 

The Corporation recorded a provision for loan and lease losses in the first quarter of $300,000 compared to the first quarter of 2003 at $540,000. Based on managements’ evaluation of problem loans, growth in the loan portfolio and the overall effects of the economy, management’s analysis indicates the allowance provision appears to be adequate. See the “Allowance for Loan and Lease Losses” section for further discussion.

 

NON-INTEREST INCOME

 

Non-interest income increased $111,000 (or 6.9%) in the first quarter of 2004 when compared to the same period in 2003. The increase was mainly in service charges on deposit accounts due to an increase in the number of checking accounts. All other categories were relatively stable except for gain on sale of loans from our secondary mortgage operation. This income decreased 79.5% as mortgage refinancing slowed dramatically during the quarter.

 

NON-INTEREST EXPENSE

 

Non-interest expense increased $269,000 or 5.9% during the first quarter of 2004 when compared to the same period in 2003. The increase was primarily in salaries and benefits expense which increased 8.5% over the prior year. With the opening of our loan production office during the fourth quarter of 2003, additional personnel have been added providing for most of this increase.

 

12


RETURN ON ASSETS

 

For the three months ended March 31, 2004, the Corporation’s annualized return on average assets (“ROA”) totaled 1.16% compared to 1.21% recorded in 2003.

 

RETURN ON EQUITY

 

The Corporation’s annualized return on average shareholder’s equity (“ROE”) in the first quarter was 13.09% compared to 13.63% for 2003.

 

FEDERAL INCOME TAX EXPENSE

 

Federal income tax expense was $551,000 in the first quarter of 2004 compared to $693,000 in the first quarter of 2003. The effective tax rate for 2004 was 21.5% compared to 25.6% in 2003.

 

FUTURE OUTLOOK

 

With interest rates at historically low levels, the Corporation is beginning to experience pressure on earnings resulting from a lower net interest margin when compared to 2003. Net interest income could show little or no growth in the remainder of 2004 if interest rates remain at present levels or move even lower. Management continues to focus on growth from increased market share utilizing checking accounts and mortgage lending as core banking services augmented by the sale of other income producing products and services. The Bank has introduced fixed annuities to its product mix and their sale will generate additional non-interest income over the remainder of the year. Management also continues to focus on loan growth with the generation of commercial loans throughout its market. It is anticipated that the loan production office opened in Warren will produce growth in the new market.

 

Loan demand was strong during the first quarter. Management expects loan growth for the year to be between 5 and 8 percent. The Corporation’s loan to deposit ratio has increased through the first quarter to 79.52% compared to 78.63% at year-end 2003 as deposit growth has been very good during the first quarter and is expected to remain favorable throughout 2003. Overall, deposits are expected to grow approximately 6% for the year.

 

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 $209,000 of which consumer net charge-offs totaled $87,000 with residential mortgage net charge-offs totaling $94,000. The collection efforts in the bank have been increased to begin addressing problem consumer loans prior to the loans going past due 90 days. With this effort, more rapid repossession of collateral can occur. As the Corporation’s loan mix has changed to a more commercial portfolio, the credit review focus has increased. Procedures have been established to monitor our larger borrowers to more closely track any potential charge-offs. In this way, management believes problem situations can be addressed more timely thus reducing any negative impacts.

 

Enhancing non-interest income and controlling 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, 2004, the Corporation’s efficiency ratio was 58.68% compared to 54.75% for the same period last year. The increase is caused in large part to the reduction in net interest income without a corresponding decrease in expenses.

 

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 2004.

 

“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.

 

13


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, 2003.

 

ITEM 4

 

CONTROLS AND PROCEDURES

 

Within the 90-day period prior to the filing date of this report, an evaluation was carried out under the supervision and with the participation of the Corporation’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in the Corporation’s internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

14


PART II OTHER INFORMATION

 

ITEM 1.

   LEGAL PROCEEDINGS - None

ITEM 2.

   CHANGES IN SECURITIES AND USE OF PROCEEDS

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period


  

Total Number

of Shares (or

Units)

Purchased


  

Average

Price Paid

per Share

(or Unit)


  

Total Number of

Shares (or Units)

Purchased as Part

of Publicly

Announced Plans

or Programs


  

Maximum Number (or

Approximate Dollar

Value) of Shares (or

Units) that May Yet Be

Purchased Under the

Plans or Programs


1/1/04 to

1/31/04

   —        —      —      —  

2/1/04 to

2/29/04

   825    $ 16.55    —      —  

3/1/04 to

3/31/04

   250    $ 17.55    —      —  
    
  

  
  

Total

   1075    $ 16.78    —      —  
    
  

  
  

 

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

 

A Form 8-K was filed on January 26, 2004 announcing the fourth quarter and year end 2003 earnings. A Form 8-K was filed on February 12, 2004 announcing the first quarter dividend of 32 cents per share.

 

EXHIBIT 31.1

   CEO Certification

EXHIBIT 31.2

   CFO Certification

EXHIBIT 32

   Certifications

 

15


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 7, 2004


     

/s/ William F. Falger


           

William F. Falger

           

President and Director

           

(Principal Executive Officer)

DATE:

 

May 7, 2004


     

/s/ Joseph B. Bower, Jr.


           

Joseph B. Bower, Jr.

           

Treasurer

           

(Principal Financial Officer)

           

(Principal Accounting Officer)

 

16