UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 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 July 27, 2004:
COMMON STOCK: $1.00 PAR VALUE 9,102,536 SHARES
2
CNB FINANCIAL CORPORATION
| (Dollars in thousands) | (unaudited) June 30, 2004 |
Dec. 31, 2003 |
||||||
| ASSETS |
||||||||
| Cash and due from banks |
$ | 14,397 | $ | 15,239 | ||||
| Interest bearing deposits with other financial institutions |
3,369 | 5,742 | ||||||
| Total cash and cash equivalents |
17,766 | 20,981 | ||||||
| Securities available for sale |
159,185 | 175,903 | ||||||
| Loans held for sale |
4,038 | 3,099 | ||||||
| Loans and leases |
477,534 | 458,660 | ||||||
| Less: unearned discount |
222 | 411 | ||||||
| Less: allowance for loan losses |
5,989 | 5,764 | ||||||
| NET LOANS |
471,323 | 452,485 | ||||||
| FHLB and Federal Reserve Stock |
5,214 | 5,032 | ||||||
| Premises and equipment, net |
12,850 | 12,934 | ||||||
| Bank owned life insurance |
12,932 | 12,682 | ||||||
| Accrued interest receivable and other assets |
7,183 | 6,388 | ||||||
| Mortgage servicing rights |
404 | 481 | ||||||
| Goodwill |
10,821 | 10,821 | ||||||
| Intangible, net |
788 | 946 | ||||||
| TOTAL ASSETS |
$ | 702,504 | $ | 701,752 | ||||
| LIABILITIES |
||||||||
| Deposits: |
||||||||
| Non-interest bearing deposits |
$ | 67,430 | $ | 63,297 | ||||
| Interest bearing deposits |
509,746 | 512,141 | ||||||
| TOTAL DEPOSITS |
577,176 | 575,438 | ||||||
| Short-term borrowings |
3,341 | 1,313 | ||||||
| Federal Home Loan Bank advances |
40,000 | 40,000 | ||||||
| Accrued interest and other liabilities |
5,658 | 8,244 | ||||||
| Subordinated debentures |
10,310 | 10,310 | ||||||
| TOTAL LIABILITIES |
636,485 | 635,305 | ||||||
| SHAREHOLDERS’ EQUITY |
||||||||
| Common stock $1.00 par value Authorized 10,000,000 shares Issued 9,233,750 shares for June 2004 and 3,693,500 shares for December 2003 |
9,234 | 3,694 | ||||||
| Additional paid in capital |
4,294 | 4,123 | ||||||
| Retained earnings |
52,896 | 56,787 | ||||||
| Treasury stock, at cost |
(1,274 | ) | (1,309 | ) | ||||
| (80,206 shares for June 2004, and 93,974 for December 2003) |
||||||||
| Accumulated other comprehensive income |
869 | 3,152 | ||||||
| TOTAL SHAREHOLDERS’ EQUITY |
66,019 | 66,447 | ||||||
| TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY |
$ | 702,504 | $ | 701,752 | ||||
3
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
CNB FINANCIAL CORPORATION
| (Dollars in thousands, except per share data) | THREE MONTHS ENDED JUNE 30, | ||||||
| 2004 |
2003 | ||||||
| INTEREST INCOME |
|||||||
| Loans including fees |
$ | 7,683 | $ | 7,646 | |||
| Deposits with other financial institutions |
13 | 3 | |||||
| Federal funds sold |
5 | 50 | |||||
| Securities: |
|||||||
| Taxable |
967 | 1,147 | |||||
| Tax-exempt |
523 | 563 | |||||
| Dividends |
76 | 105 | |||||
| TOTAL INTEREST AND DIVIDEND INCOME |
9,267 | 9,514 | |||||
| INTEREST EXPENSE |
|||||||
| Deposits |
2,585 | 2,766 | |||||
| Borrowed funds |
637 | 629 | |||||
| TOTAL INTEREST EXPENSE |
3,222 | 3,395 | |||||
| Net interest and dividend income |
6,045 | 6,119 | |||||
| Provision for loan losses |
300 | 540 | |||||
| NET INTEREST INCOME AFTER PROVISION |
5,745 | 5,579 | |||||
| OTHER INCOME |
|||||||
| Trust & asset management fees |
218 | 225 | |||||
| Service charges on deposit accounts |
947 | 866 | |||||
| Other service charges and fees |
109 | 135 | |||||
| Securities gains |
(5 | ) | 0 | ||||
| Gains on sale of loans |
34 | 216 | |||||
| Bank owned life insurance earnings |
125 | 126 | |||||
| Other income |
124 | 241 | |||||
| TOTAL OTHER INCOME |
1,552 | 1,809 | |||||
| OTHER EXPENSES |
|||||||
| Salaries |
1,644 | 1,648 | |||||
| Employee benefits |
696 | 681 | |||||
| Net occupancy expense of premises |
633 | 601 | |||||
| Amortization of intangible |
127 | 126 | |||||
| Other |
1,522 | 1,317 | |||||
| TOTAL OTHER EXPENSES |
4,622 | 4,373 | |||||
| Income before income taxes |
2,675 | 3,015 | |||||
| Applicable income taxes |
660 | 731 | |||||
| NET INCOME |
$ | 2,015 | $ | 2,284 | |||
| EARNINGS PER SHARE, BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING |
|||||||
| Net income, basic |
$ | 0.22 | $ | 0.25 | |||
| Net income, diluted |
$ | 0.22 | $ | 0.25 | |||
| DIVIDENDS PER SHARE |
|||||||
| Cash dividends per share |
$ | 0.13 | $ | 0.11 | |||
4
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
CNB FINANCIAL CORPORATION
| (Dollars in thousands, except per share data) | SIX MONTHS ENDED JUNE 30, | |||||
| 2004 |
2003 | |||||
| INTEREST AND DIVIDEND INCOME |
||||||
| Loans including fees |
$ | 15,210 | $ | 15,242 | ||
| Deposits with other financial institutions |
25 | 15 | ||||
| Federal funds sold |
23 | 91 | ||||
| Securities: |
||||||
| Taxable |
2,032 | 2,430 | ||||
| Tax-exempt |
1,044 | 1,113 | ||||
| Dividends |
169 | 216 | ||||
| TOTAL INTEREST AND DIVIDEND INCOME |
18,503 | 19,107 | ||||
| INTEREST EXPENSE |
||||||
| Deposits |
5,213 | 5,536 | ||||
| Borrowed funds |
1,265 | 1,251 | ||||
| TOTAL INTEREST EXPENSE |
6,478 | 6,787 | ||||
| Net interest income |
12,025 | 12,320 | ||||
| Provision for loan losses |
600 | 1,080 | ||||
| NET INTEREST INCOME AFTER PROVISION |
11,425 | 11,240 | ||||
| OTHER INCOME |
||||||
| Trust & asset management fees |
466 | 444 | ||||
| Service charges on deposit accounts |
1,797 | 1,616 | ||||
| Other service charges and fees |
237 | 288 | ||||
| Securities gains |
164 | 151 | ||||
| Gains on sale of loans |
57 | 328 | ||||
| Bank owned life insurance earnings |
251 | 212 | ||||
| Other |
290 | 369 | ||||
| TOTAL OTHER INCOME |
3,262 | 3,408 | ||||
| OTHER EXPENSES |
||||||
| Salaries. |
3,461 | 3,350 | ||||
| Employee benefits |
1,406 | 1,309 | ||||
| Net occupancy expense of premises |
1,312 | 1,214 | ||||
| Amortization of intangible |
256 | 250 | ||||
| Other |
3,011 | 2,807 | ||||
| TOTAL OTHER EXPENSES |
9,446 | 8,930 | ||||
| Income before income taxes |
5,241 | 5,718 | ||||
| Applicable income taxes |
1,211 | 1,426 | ||||
| NET INCOME |
$ | 4,030 | $ | 4,292 | ||
| EARNINGS PER SHARE, BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING |
||||||
| Net income, basic |
$ | 0.44 | $ | 0.47 | ||
| Net income, diluted |
$ | 0.44 | $ | 0.47 | ||
| DIVIDENDS PER SHARE |
||||||
| Cash dividends per share |
$ | 0.26 | $ | 0.22 | ||
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 June 30, |
Six Months Ended June 30, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 | |||||||||||
| Net Income |
$ | 2,015 | $ | 2,284 | $ | 4,030 | $ | 4,292 | ||||||
| Other comprehensive income, net of tax Unrealized gains/(losses)on securities: Unrealized gains/(losses) arising during the period |
(3,028 | ) | 1,745 | (2,390 | ) | 984 | ||||||||
| Reclassified adjustment for accumulated gains/(losses) included in net income, net of tax |
(3 | ) | — | 107 | 99 | |||||||||
| Other comprehensive income (loss) |
(3,031 | ) | 1,745 | (2,283 | ) | 1,083 | ||||||||
| Comprehensive income (loss) |
$ | (1,016 | ) | $ | 4,029 | $ | 1,747 | $ | 5,375 | |||||
6
CONSOLIDATED STATEMENTS OF CASHFLOWS
CNB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (unaudited)
| Six Months Ended June 30, |
||||||||
| (Dollars in thousands) | 2004 |
2003 |
||||||
| Cash flows from operating activities: |
||||||||
| Net Income |
$ | 4,030 | $ | 4,292 | ||||
| Adjustments to reconcile net income to net cash provided by operations: |
||||||||
| Provision for loan losses |
600 | 1,080 | ||||||
| Depreciation and amortization |
868 | 799 | ||||||
| Amortization and accretion and deferred loan fees |
29 | 235 | ||||||
| Deferred taxes |
(83 | ) | (74 | ) | ||||
| Security gains |
(164 | ) | (151 | ) | ||||
| Gain on sale of loans |
(57 | ) | (328 | ) | ||||
| Net gains on dispositions of acquired property |
(18 | ) | — | |||||
| Proceeds from sale of loans |
4,897 | 15,542 | ||||||
| Origination of loans for sale |
(5,779 | ) | (14,546 | ) | ||||
| Increase in bank owned life insurance |
(250 | ) | (212 | ) | ||||
| Changes in: |
||||||||
| Interest receivable and other assets |
(1,013 | ) | (470 | ) | ||||
| Interest payable and other liabilities |
(1,348 | ) | (355 | ) | ||||
| Net cash provided by (used in) operating activities |
1,712 | 5,812 | ||||||
| Cash flows from investing activities: |
||||||||
| Proceeds from maturities of: |
||||||||
| Securities available for sale |
24,870 | 39,229 | ||||||
| Proceeds from sales of securities available for sale |
6,061 | 2,438 | ||||||
| Purchase of securities available for sale |
(17,855 | ) | (32,354 | ) | ||||
| Loan origination and payments, net |
(19,099 | ) | (15,517 | ) | ||||
| Purchase of Federal Reserve Bank Stock and Federal Home Loan Bank Stock |
(182 | ) | (100 | ) | ||||
| Purchase of bank owned life insurance |
— | (6,000 | ) | |||||
| Net, purchase of premises and equipment |
(528 | ) | (1,244 | ) | ||||
| Proceeds from the sale of foreclosed assets |
215 | 128 | ||||||
| Net cash used in investing activities |
(6,518 | ) | (13,420 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Net change in: |
||||||||
| Checking, money market and savings accounts |
2,581 | 9,407 | ||||||
| Certificates of deposit |
(843 | ) | 24,449 | |||||
| Treasury stock purchased |
(278 | ) | (976 | ) | ||||
| Proceeds from sale of treasury stock |
484 | 733 | ||||||
| Cash dividends paid |
(2,381 | ) | (2,055 | ) | ||||
| Advances from other borrowings |
1,400 | — | ||||||
| Net advances from short-term borrowings |
628 | — | ||||||
| Net cash provided by financing activities |
1,591 | 31,558 | ||||||
| Net (decrease) increase in cash and cash equivalents |
(3,215 | ) | 23,950 | |||||
| Cash and cash equivalents at beginning of year |
20,981 | 22,527 | ||||||
| Cash and cash equivalents at end of period |
$ | 17,766 | $ | 46,477 | ||||
| Supplemental disclosures of cash flow information: |
||||||||
| Cash paid during the period for: |
||||||||
| Interest |
$ | 6,327 | $ | 6,780 | ||||
| Income Taxes |
$ | 1,600 | $ | 2,050 | ||||
| Supplemental non cash disclosures: |
||||||||
| Loans transferred to other real estate owned |
$ | 320 | $ | 150 | ||||
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 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 of America 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, 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 and six-month periods ended June 30, 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 second quarter of 2004 or 2003.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares issuable under stock options. For the three and six month periods ended June 30, 2004, 56,250 weighted average shares under option were excluded from the diluted earnings per share calculation as they were anti-dilutive. There were no anti-dilutive shares for the three and six month periods ended June 30, 2003. Earnings per share calculations for all prior periods presented were restated to reflect a 2½ for 1 stock split for shares owned and recorded on April 21, 2004.
8
The computation of basic and diluted EPS is shown below (in thousands) except per share data:
| Three Months Ended June 30, |
Six Months Ended June 30, | |||||||||||
| 2004 |
2003 |
2004 |
2003 | |||||||||
| Net income |
$ | 2,015 | $ | 2,284 | $ | 4,030 | $ | 4,292 | ||||
| Weighted-average common shares outstanding (basic) |
9,174 | 9,140 | 9,160 | 9,155 | ||||||||
| Effect of stock options |
60 | 68 | 64 | 68 | ||||||||
| Weighted-average common shares outstanding (diluted) |
9,234 | 9,208 | 9,224 | 9,223 | ||||||||
| Earnings per share: |
||||||||||||
| Basic |
$ | 0.22 | $ | 0.25 | $ | 0.44 | $ | 0.47 | ||||
| Diluted |
0.22 | 0.25 | 0.44 | 0.47 | ||||||||
RECENT ACCOUNTING PRONOUNCEMENTS
None.
9
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation Average Balances and Net Interest Margin
| June 30, 2004 |
June 30, 2003 | |||||||||||||||||||
| (Dollars in thousands) | Average Balance |
Annual Rate |
Interest Inc./Exp. |
Average Balance |
Annual Rate |
Interest Inc./Exp. | ||||||||||||||
| Assets |
||||||||||||||||||||
| Interest-bearing deposits with banks |
$ | 2,028 | 2.47 | % | $ | 25 | $ | 1,858 | 1.61 | % | $ | 15 | ||||||||
| Federal funds sold and securities purchased under agreements to resell |
3,432 | 1.34 | % | 23 | 16,050 | 1.13 | % | 91 | ||||||||||||
| Investment Securities: |
||||||||||||||||||||
| Taxable |
112,336 | 3.62 | % | 2,032 | 121,358 | 4.00 | % | 2,430 | ||||||||||||
| Tax-Exempt (1) |
42,778 | 6.98 | % | 1,492 | 48,887 | 6.53 | % | 1,596 | ||||||||||||
| Equity Investments (1) |
13,759 | 3.17 | % | 218 | 12,930 | 3.34 | % | 216 | ||||||||||||
| Total Investments |
174,333 | 4.35 | % | 3,790 | 201,083 | 4.32 | % | 4,348 | ||||||||||||
| Loans |
||||||||||||||||||||
| Commercial (1) |
178,459 | 5.97 | % | 5,331 | 135,763 | 6.36 | % | 4,314 | ||||||||||||
| Mortgage (1) |
260,706 | 6.64 | % | 8,651 | 243,862 | 7.53 | % | 9,180 | ||||||||||||
| Installment |
30,868 | 8.60 | % | 1,327 | 35,723 | 8.63 | % | 1,542 | ||||||||||||
| Leasing |
4,612 | 6.85 | % | 158 | 10,574 | 6.92 | % | 366 | ||||||||||||
| Total loans (2) |
474,645 | 6.52 | % | 15,467 | 425,922 | 7.23 | % | 15,402 | ||||||||||||
| Total earning assets |
648,978 | 5.93 | % | 19,257 | 627,005 | 6.30 | % | 19,750 | ||||||||||||
| Non Interest Bearing Assets |
||||||||||||||||||||
| Cash & Due From Banks |
14,107 | — | 15,117 | — | ||||||||||||||||
| Premises & Equipment |
12,821 | — | 12,639 | — | ||||||||||||||||
| Other Assets |
39,952 | — | 37,388 | — | ||||||||||||||||
| Allowance for Possible Loan Losses |
(5,891 | ) | — | (5,543 | ) | — | ||||||||||||||
| Total Non-interest earning assets |
60,989 | — | — | 59,601 | — | — | ||||||||||||||
| Total Assets |
$ | 709,967 | $ | 19,257 | $ | 686,606 | $ | 19,750 | ||||||||||||
| Liabilities and Shareholders’ Equity |
||||||||||||||||||||
| Interest-Bearing Deposits |
||||||||||||||||||||
| Demand - interest-bearing |
$ | 127,269 | 0.28 | % | $ | 178 | $ | 128,583 | 0.55 | % | $ | 351 | ||||||||
| Savings |
77,371 | 0.62 | % | 240 | 77,546 | 1.02 | % | 395 | ||||||||||||
| Time |
310,329 | 3.09 | % | 4,795 | 297,582 | 3.22 | % | 4,790 | ||||||||||||
| Total interest-bearing deposits |
514,969 | 2.02 | % | 5,213 | 503,711 | 2.20 | % | 5,536 | ||||||||||||
| Short-term borrowings |
2,665 | 0.98 | % | 13 | 1,568 | 0.64 | % | 5 | ||||||||||||
| Long-term borrowings |
40,000 | 5.09 | % | 1,018 | 40,000 | 5.06 | % | 1,012 | ||||||||||||
| Trust Preferred Securities |
10,000 | 4.68 | % | 234 | 10,000 | 4.68 | % | 234 | ||||||||||||
| Total interest-bearing liabilities |
567,634 | 2.28 | % | 6,478 | 555,279 | 2.44 | % | 6,787 | ||||||||||||
| Demand - non-interest-bearing |
66,306 | — | 58,434 | — | — | |||||||||||||||
| Other liabilities |
8,674 | — | 8,681 | — | — | |||||||||||||||
| Total Liabilities |
642,614 | 6,478 | 622,394 | 2.18 | % | 6,787 | ||||||||||||||
| Shareholders’ equity |
67,353 | — | 64,212 | — | — | |||||||||||||||
| Total Liabilities and Shareholders’ Equity |
$ | 709,967 | 6,478 | $ | 686,606 | 6,787 | ||||||||||||||
| Interest income/earning assets |
5.93 | % | 19,257 | 6.30 | % | 19,750 | ||||||||||||||
| Interest expense/interest bearing liabilities |
2.28 | % | 6,478 | 2.44 | % | 6,787 | ||||||||||||||
| Net Interest Spread |
3.65 | % | $ | 12,779 | 3.86 | % | $ | 12,963 | ||||||||||||
| Interest Income/Interest Earning Assets |
5.93 | % | $ | 19,257 | 6.30 | % | $ | 19,750 | ||||||||||||
| Interest expense/Interest Earning Assets |
2.00 | % | 6,478 | 2.16 | % | 6,787 | ||||||||||||||
| Net Interest Margin |
3.94 | % | $ | 12,779 | 4.13 | % | $ | 12,963 | ||||||||||||
| (1) | The amounts are reflected on a fully tax equity basis using the federal statutory rate of 35% in 2004 and 2003, 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 is not material. |
10
| 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $17,766,000 at June 30, 2004 compared to $20,981,000 on December 31, 2003. This decrease resulted from the strong loan growth that the Corporation has experienced during 2004 without corresponding growth in deposits at the same rate that our loans have grown.
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 decreased approximately $16,700,000 or 9.5% since December 31, 2003. The decrease resulted primarily from payments of principal received from our mortgage-backed securities without reinvesting back into the market. Also, the market value of the portfolio has declined $3,400,000 since year end due mainly to an increase in short and intermediate interest rates. The Corporation has been reinvesting the proceeds mainly in the loan portfolio.
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 depositer 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 six months of 2004. At June 30, 2004, the Corporation had $477,312,000 in loans and leases outstanding, net of unearned discount, up $19,063,000 (or 4.2%) since December 31, 2003. The increase was caused by demand in commercial loans including mortgages. While we remain dedicated to the success of commercial lending, as we see this as our competitive advantage, a more aggressive marketing approach has been adopted toward secured consumer loans mainly in the form of home equity loans and lines of credit. This strategy is part of an overall initiative to increase our market share of consumer customers in loans and deposits. The Corporation has continued to use direct marketing to aggressively grow relationships within our market.
11
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established by provisions for losses in the loan and lease portfolio. These provisions are charged against current income. Loans deemed not collectible are charged-off against the allowance while any subsequent collections are recorded as recoveries and increase the allowance.
The table below shows activity within the allowance account:
| Periods Ending |
||||||||||||
| ($’s in thousands) | June 30, 2004 |
Dec. 31, 2003 |
June 30, 2003 |
|||||||||
| Balance at beginning of Period |
$ | 5,764 | $ | 5,036 | $ | 5,036 | ||||||
| Charge-offs: |
||||||||||||
| Commercial and financial |
29 | 19 | 4 | |||||||||
| Commercial mortgages |
112 | 174 | 69 | |||||||||
| Residential mortgages |
94 | 109 | 12 | |||||||||
| Installment |
178 | 511 | 267 | |||||||||
| Lease receivables |
16 | 111 | 50 | |||||||||
| 429 | 924 | 402 | ||||||||||
| Recoveries: |
||||||||||||
| Commercial and financial |
— | 1 | — | |||||||||
| Commercial mortgages |
12 | 2 | 1 | |||||||||
| Residential mortgages |
19 | — | — | |||||||||
| Installment |
21 | 80 | 49 | |||||||||
| Lease receivables |
2 | 34 | 15 | |||||||||
| 54 | 117 | 65 | ||||||||||
| Net charge-offs: |
(375 | ) | (807 | ) | (337 | ) | ||||||
| Provision for loan losses |
600 | 1,535 | 1,080 | |||||||||
| Balance at end-of-period |
$ | 5,989 | $ | 5,764 | $ | 5,779 | ||||||
| Loans, net of unearned |
$ | 477,312 | $ | 458,249 | $ | 435,856 | ||||||
| Allowance to net loans |
1.25 | % | 1.26 | % | 1.33 | % | ||||||
| Net charge-offs to average loans 0.08 |
0.08 | % | 0.18 | % | 0.08 | % | ||||||
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 reserve. 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 |
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.
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The resulting factors are applied to the pool balances in order to estimate the inherent risk of loss within each pool.
The allowance coverage of net loans has remained constant. Through the analysis methodology detailed above, no increase in coverage was considered necessary as our risk profile has not changed. 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 incurred losses in the portfolio as of June 30, 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 $2,920,000 or 0.42% of total assets on June 30, 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 main focus for source of funds in the Corporation, reaching $577,176,000 at June 30, 2004. Deposits have increased only 0.30% since year-end 2003. Deposit growth has been slow during the year as loan growth has been strong. The Bank has seen customer deposits leaving to enter the financial markets over the past six months as confidence in the various stock markets appears to be increasing.
The Corporation utilizes term borrowings from the Federal Home Loan Bank (FHLB) to meet funding needs not accommodated by deposit growth. 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 $66,019,000 at June 30, 2004 compared to $66,447,000 at December 31, 2003 a decrease of $428,000 or 0.64%. In the first six months of 2004, the Corporation earned $4,030,000 and declared dividends of $2,381,000, a dividend payout ratio of 59.1% of net income. The decline was caused by the decline in the securities market value as previously mentioned in the securities section and discussed below.
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 2004 have continued to be at historically low levels. This situation has caused a decrease in accumulated other comprehensive income, included in shareholders’ equity of $2,283,000 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 13.21% at June 30, 2004 is above the well-capitalized standard of 10%. The Corporation’s Tier 1 capital ratio of 12.07% is above the well-capitalized minimum of 6%. The leverage ratio at June 30, 2004 was 9.10%, 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 unaudited 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
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establishes and monitors ranges of acceptable liquidity. Management feels the Corporation’s current liquidity and interest rate position is acceptable.
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 June 30, 2004:
| Commitments to extend credit |
$ | 107,142 | |
| Standby letters of credit |
9,657 | ||
| $ | 116,799 | ||
RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
The Corporation had net income of $2,015,000 and $4,030,000 for the second quarter and first six months of 2004, respectively. The earnings per diluted share for the respective periods were $0.22 and $0.44. Net income was $2,284,000 and $4,292,000 for the second quarter and first six months of 2003, which equates to earnings per diluted share of $0.25 and $0.47, respectively. The return on assets and the return on equity for the six months of 2004 are 1.15% and 12.77%.
INTEREST INCOME AND EXPENSE
Net interest income totaled $6,045,000 in the second quarter, a decrease of 1.2% over the second quarter of 2003 and totaled $12,025,000 for the six months of 2004, a decrease of 2.4% compared to the prior year. Total interest income decreased during the quarter by $247,000 or 2.6% while interest expense decreased by $173,000 or 5.1% when compared to the second quarter of 2003. The decrease in interest income is a result of lower yields on earning assets caused by an overall decline in interest rates in the United States since June of 2001.
PROVISION FOR LOAN LOSSES
The Corporation recorded a provision for loan and lease losses in the second quarter of $300,000 compared to the second quarter of 2003 of $540,000 and $600,000 for the six months of 2004 compared to $1,080,000 in 2003. As part of the in-depth analysis as previously described, it has been determined that the credit risk of the Corporation is showing positive trends and therefore a lesser provision is required. In 2003, the commercial mix in the portfolio became the majority of our loans as opposed to our traditional concentration in home mortgages and thus management felt that a larger provision was required at that time. In addition, charge-off history has remained positive. Based on managements’ evaluation of problem loans, criticized assets and charge-offs in the loan portfolio and the overall effects of the economy, management’s analysis indicates that the allowance provision appears to be adequate.
OTHER INCOME
Other income decreased $257,000 (or 14.2%) and $146,000 (or 4.3%) in the second quarter and six months of 2004, respectively, when compared to the same periods in 2003. During 2004, income derived from the sale of mortgages was lower due to a rise in mortgage rates. This decrease was $271,000 or 82.6% over the first six months of 2003. Mitigating this decline was an increase in service charges on deposit accounts of $181,000 or 11.2% due to continued increases in the number of deposit accounts as well as a slight increase in fees.
OTHER EXPENSE
Other expense increased $249,000 or 5.7% during the second quarter of 2004 and $516,000 or 5.8% in the six months of 2004 when compared to the same periods in 2003. The increase is primarily due to increasing salary and benefits expense which increased 5.0% over the prior year. Our increasing personnel costs are a result of adding employees with the opening of our loan production office in the fourth quarter of 2004. In addition, occupancy expenses have increased 8% over the prior year as a result of several ongoing projects.
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RETURN ON ASSETS
For the six months ended June 30, 2004, the Corporation’s return on average assets (“ROA”) totaled 1.15% compared to 1.27% recorded in 2003.
RETURN ON EQUITY
The Corporation’s return on average shareholder’s equity (“ROE”) in the first six months was 12.77% compared to 14.67% for 2003.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $660,000 in the second quarter of 2004 as compared to $731,000 in the second quarter of 2003 resulting in an effective tax rate of 24.7%and 24.2%, respectively. For the six-month period comparisons the effective tax rate was 23.1% in 2004 versus 24.9% in 2003.
FUTURE OUTLOOK
With interest rates still at historically low levels, the Corporation is experiencing pressure on earnings resulting from a lower net interest margin when compared to 2003. Net interest income could show little growth in the remainder of the year even if interest rates continue a measured gradual increase during the last two quarters of 2004. Management continues to focus on growth from increased market share utilizing checking accounts and home equity lending as core banking services augmented by the sale of other income producing products and services. The Bank has introduced wealth management services to its product mix and their sale should 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.
Loan demand was strong during the first six months. Management expects loan growth for the year to slow to a rate between 5 and 8 percent. The Corporation’s loan to deposit ratio has increased to 81.66% at the end of the second quarter compared to 78.63% at year-end 2003 and 74.28% at June 30, 2003. Deposit growth has been minimal during the first and second quarters and is expected to be flat throughout the remainder of 2004.
During the first two quarters of 2004, consumer loan charge-offs continued to comprise the majority of the Corporation’s recent charge-offs. In the first six months, total net charge-offs were $375,000 of which consumer net charge-offs totaled $246,000. 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 six months ended June 30, 2004, the Corporation’s efficiency ratio was 57.20% compared to 52.56% for the same period last year. The increase is caused in a 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.
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CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of CNB Financial Corporation are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the financial services industry. Accounting and reporting practices for the allowance for loan and lease losses and mortgage servicing rights are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by management could result in material changes in CNB Financial Corporation’s financial position or results of operations. Note 1 ( Summary of Significant Accounting Policies), Note 5 (Allowance for Loan and Lease Losses), and Note 6 (Secondary Mortgage Market Activities), of the 2003 Annual Report and 10-K, provide detail with regard to the Corporation’s accounting for the allowance for loan and lease losses and for mortgage servicing rights. There have been no significant changes in the application of accounting policies since December 31, 2003.
“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, 2003.
| ITEM 4 | CONTROLS AND PROCEDURES |
As of the end of the period covered by this quarterly 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-15(e) and 15d-15(e) 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.
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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 | ||||
| 4/1/04 to 4/30/04 |
28 | 17.36 | — | — | ||||
| 5/1/04 to 5/31/04 |
89 | 17.59 | — | — | ||||
| 6/1/04 to 6/30/04 |
18,332 | $13.51 | 18,000 | 432,000 | ||||
| Total |
18,449 | $13.54 | 18,000 | 432,000 | ||||
Purchases not made in conjunction with the Publicly Announced Plan were made to facilitate employee benefit plans in the form of a 401(k).
| 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 20, 2004, for the purpose of electing three 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
| Dennis L. Merrey |
William R. Owens |
Deborah Dick Pontzer | ||||
| For |
6,990,170 | 6,769,270 | 6,982,810 | |||
| Against or Withheld |
181,510 | 402,410 | 188,870 |
The total shares voted at the annual meeting were 7,171,680.
The following directors’ terms of office as director continued after the meeting:
Robert E. Brown, William F. Falger, James J. Leitzinger, James P. Moore, Robert C. Penoyer, Jeffrey S. Powell, James B. Ryan, and Peter F. Smith
| ITEM 5. | OTHER INFORMATION - None |
| ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K – |
A Form 8-K was filed on April 15, 2004 announcing a two and a half for one stock split for all shares owned and recorded on April 21, 2004
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A Form 8-K was filed on April 21, 2004 announcing the annual meeting of CNB Financial Corporation Shareholders on April 20, 2004.
A Form 8-K was filed on May 13, 2004 announcing the declaration of a 13 cent per share dividend (split-adjusted) payable on June 15, 2004 to shareholders of record on June 4, 2004.
| EXHIBIT 31.1 |
CEO Certification | |
| EXHIBIT 31.2 |
CFO Certification | |
| EXHIBIT 32 |
Certifications |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CNB FINANCIAL CORPORATION (Registrant) | ||||
| DATE: August 5, 2004 |
/s/ WILLIAM F. FALGER | |||
| William F. Falger President and Director (Principal Executive Officer) | ||||
| DATE: August 5, 2004 |
/s/ JOSEPH B. BOWER, JR. | |||
| Joseph B. Bower, Jr. Treasurer (Principal Financial Officer) (Principal Accounting Officer) | ||||
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