<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 September 30, 1995
-----------------------------
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 25-01450605
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Market and Second Streets, Clearfield, Pennsylvania 16830
---------------------------------------------------------
(Address of principal executive offices)
814-765-9621
------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and
former fiscal year, if changed since last report)
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 period 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 31, 1995
- ------------------------- ---------------------------------
Common stock, par value 1,722,834
$4.00 per share
<PAGE>
CNB FINANCIAL CORPORATION
FORM 10-Q
INDEX Page
-----
Part I. Financial Information
Page 3 Consolidated Balance Sheets - September 30, 1995
and December 31, 1994
4 Consolidated Statement of Income - Three Months 4
Ended September 30, 1995 and 1994
5 Consolidated Statement of Income - Six Months
Ended September 30, 1995 and 1994
6 Consolidated Statement of Cash Flows
for Six Months Ended September 30, 1995 and 1994
7 Notes to Consolidated Financial Statements 6
8 Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II. Other Information
14 Item 5. Other Information
14 Item 6. Exhibits and Reports on Form 8K
14 Signatures
<PAGE>
CNB Financial Corporation September 30, 1995
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except percent data)
<TABLE>
<CAPTION>
Sept 30 Dec. 31 Sept 30 12 month
ASSETS 1995 1994 1994 change
<S> <C> <C> <C> <C>
Cash and Due from Banks........................................... $8,701 $9,390 $7,599 14.50%
Deposits with Other Banks......................................... 20 18 10 100.00%
Federal Funds Sold................................................ 350 325 2,250 (84.44)%
Investment Securities Available for sale 47,537 37,361 38,068 24.87%
Investment Securities Held to Maturity, fair value of $32,023
at September 30, 1995, $33,888 at December 31, 1994 and
$37,294 at September 30, 1994 .................................... 31,396 33,953 37,067 (15.30)%
Loans 196,447 184,785 188,842 4.03%
Less: Unearned Discount........................................ 3,725 2,996 3,048 22.21%
Allowance for Loan Losses..................................... 2,177 2,033 1,925 13.09%
------- ------- -------
NET LOANS....................................................... 190,545 179,756 183,764 3.69%
Premises and Equipment............................................ 7,272 5,143 4,496 61.74%
Accrued Interest and Other Assets................................. 3,697 3,752 4,044 (8.58)%
------- ------- -------
TOTAL ASSETS.................................................... $289,518 $269,698 $277,298 4.41%
LIABILITIES
Deposits:
Non-interest bearing deposits................................... $27,675 $28,046 $27,858 (0.68)%
Interest bearing deposits....................................... 218,812 202,595 204,622 6.93%
------- ------- -------
TOTAL DEPOSITS.................................................. 246,487 230,641 232,480 6.03%
Other Borrowings.................................................. 4,118 3,685 9,440 (56.38)%
Accrued Interest and Other Liabilities............................ 1,853 857 1,221 51.78%
------- ------- -------
TOTAL LIABILITIES............................................... 252,458 235,183 243,141 3.63%
SHAREHOLDERS' EQUITY
Common Stock $4.00 Par Value
Authorized 2,500,000 Shares (issued 1,728,000) 6,912 6,912 6,912 0.00%
Retained Earnings............................................... 29,628 28,324 27,730 6.85%
Treasury Stock, At Cost (5,166) (100) (100) (100) 0.00%
Net unrealized securities losses................................ 620 (621) (385) *******
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY...................................... 37,060 34,515 34,157 8.50%
------- ------- -------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY........................ $289,518 $269,698 $277,296 4.41%
</TABLE>
<PAGE>
CNB Financial Corporation September 30, 1995
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER
INTEREST INCOME 1995 1994
------- -------
<S> <C> <C>
Loans including Fees....................................................... $4,297 $3,848 11.68%
Deposits with Other Banks.................................................. 0 4 -90.00%
Federal Funds Sold......................................................... 1 4 -75.00%
Other Short Term Investments............................................... ---- ---- 0.00%
Investment Securities:
Taxable Securities: Available for Sale.................................. 523 475
Tax-Exempt Securities: Available for Sale............................... 111 17 552.94%
Taxable Securities: Being Held to Maturity.............................. 251 271 -7.38%
Tax-Exempt Securities: Being Held to Maturity........................... 235 294 -20.07%
Interest on restructured loans............................................. 10 ---- 0.00%
Interest on other assets................................................... 45 ---- 0.00%
------ ------ -------
TOTAL INTEREST INCOME................................................... $5,473 $4,913 11.41%
INTEREST EXPENSE
Deposits................................................................... $2,324 $1,762 31.90%
Borrowed Funds............................................................. 112 83 34.94%
------ ------ -------
TOTAL INTEREST EXPENSE.................................................. 2,435 1,845 31.98%
Net Interest Income..................................................... $3,040 $3,068 -0.92%
Provision for possible loan losses......................................... 65 131 -50.38%
------ ------ -------
NET INTEREST INCOME AFTER PROVISION .................................... $2,974 $2,937 1.25%
NON-INTEREST INCOME
Fiduciary Commissions and Fees............................................. $129 $99 30.30%
Service charges on deposit accounts........................................ 168 120 40.00%
Other service charges and fees............................................. 89 65 36.92%
Securities gains (losses).................................................. 7 1 600.00%
Gains (losses) on Sale of Assets........................................... ---- ---- 0.00%
Other income............................................................... 27 63 -57.84%
------ ------ -------
TOTAL NON-INTEREST INCOME............................................... $421 $348 20.85%
NON-INTEREST EXPENSE
Salaries................................................................... $908 $832 9.13%
Employee benefits.......................................................... 274 259 5.79%
Net occupancy expense...................................................... 248 270 -8.00%
Other Operating Expense.................................................... 668 637 4.87%
TOTAL NON-INTEREST EXPENSE.............................................. 2,098 1,998 5.03%
Income Before Federal Income Taxes......................................... $1,295 $1,287 0.61%
Applicable Taxes........................................................... 278 302 -8.05%
Effect of Change in Accounting Principles.................................. ---- ---- 0.00%
==================================================
NET INCOME.............................................................. $1,017 $985 3.26%
==================================================
Per Share Data
- --------------
Primary
Income Before Effect of Cumulative Change in Accounting Method $0.59 $0.57 3.51%
Cumulative impact due to accounting method changes ---- $0.00 0.00%
------ ------ -------
Net Income $0.59 $0.57 3.51%
Cash dividends paid $0.29 $0.27 7.41%
Average Primary Common Shares Outstanding 1,722,834 1,722,834
</TABLE>
<PAGE>
CNB Financial Corporation September 30, 1995
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
NINE MONTHS ENDED
SEPTEMBER
1995 1994
------ ------
<S> <C> <C> <C>
INTEREST INCOME
Loans including Fees...................................... $12,407 $10,875 14.09%
Deposits with Other Banks................................. 1 91 -98.90%
Federal Funds Sold........................................ 59 38 55.26%
Other Short Term Investments.............................. --- --- 0.00%
Investment Securities:
Taxable Securities: Available for Sale................. 1,603 1,383
Tax-Exempt Securities: Available for Sale.............. 235 28 739.29%
Taxable Securities: Being Held to Maturity............. 749 851 -11.99%
Tax-Exempt Securities: Being Held to Maturity.......... 676 925 -26.92%
Interest on restructured loans............................ 10 --- 0.00%
Interest on other assets.................................. 45 --- 0.00%
-------- -------- -------
TOTAL INTEREST INCOME.................................. $15,785 $14,191 11.23%
INTEREST EXPENSE
Deposits.................................................. $6,421 $5,168 24.25%
Borrowed Funds............................................ 230 154 49.09%
-------- -------- -------
TOTAL INTEREST EXPENSE................................. $6,651 $5,322 24.97%
Net Interest Income.................................... $9,135 $8,869 3.00%
Provision for possible loan losses........................ 315 394 -20.05%
-------- -------- -------
NET INTEREST INCOME AFTER PROVISION ................... $8,820 $8,475 4.07%
NON-INTEREST INCOME
Fiduciary Commissions and Fees............................ $390 $307 27.04%
Service charges on deposit accounts....................... 438 277 58.12%
Other service charges and fees............................ 307 188 63.30%
Securities gains (losses)................................. 7 5 40.00%
Gains (losses) on Sale of Assets.......................... --- --- 0.00%
Other income.............................................. 209 299 -30.25%
-------- -------- -------
TOTAL NON-INTEREST INCOME.............................. $1,351 $1,076 25.52%
NON-INTEREST EXPENSE
Salaries.................................................. $2,678 $2,452 9.22%
Employee benefits......................................... 857 868 -1.27%
Net occupancy expense..................................... 861 786 9.59%
Other Operating Expense................................... 2,090 1,929 8.35%
TOTAL NON-INTEREST EXPENSE............................. 6,487 6,035 7.50%
Income Before Federal Income Taxes........................ $3,684 $3,516 4.76%
Applicable Taxes.......................................... 879 866 1.54%
====================================
NET INCOME............................................. $2,803 $2,650 5.78%
====================================
Per Share Data
--------------
Primary
Net Income $1.63 $1.54 5.84%
Cash dividends paid $0.87 $0.81 7.41%
Average Primary Common Shares Outstanding 1,722,834 1,722,834
</TABLE>
<PAGE>
CNB Financial Corporation September 30, 1995
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
Cash flows from operating activities 1995 1994
----------------- -------------
<S> <C> <C>
Net Income....................................................... $2,803 $2,650
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses.................................... 315 394
Depreciation................................................. 393 347
Amortization and accretion of net deferred loan fees......... (164) (101)
Amortization and accretion of premiums and discounts
on investments............................................. 222 279
Changes in:
Interest receivable............................................ (295) (174)
Other assets................................................... (365) (555)
Interest payable............................................... 213 129
Other liabilities.............................................. 783 326
Net cash provided by operating activities........................ 3,905 3,295
Cash flows from investing activities:
Proceeds from maturities of:
Investment securities........................................ 11,308 8,081
Securities available for sale................................ 14,029 11,416
Purchase of:
Investment securities........................................ (9,024) (1,827)
Securities available for sale................................ (22,307) (12,221)
Net principal disbursed on loan................................ (10,847) (17,902)
(Redemption) Purchase of Federal Home Loan Bank Stock......... (14) 20
Purchase of premises and equipment............................. (2,521) (482)
Proceeds from the sale of foreclosed assets.................... 28 235
Net cash used in investing activities............................ (19,348) (12,680)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts.................. 7,453 4,296
Certificates of deposit...................................... 8,393 1,857
(Repayment) Proceeds-Federal Home Loan Bank Advances.......... (20) 540
Other borrowed funds........................................... 453 4,983
Cash dividends paid............................................ (1,500) (1,395)
Net cash (used in) provided by financing activities.............. 14,779 10,281
Net (decrease) in cash and cash equivalents...................... (664) 896
Cash and cash equivalents at beginning of year................... 9,715 8,953
Cash and cash equivalents at end of period....................... $9,051 $9,849
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to
certificate accounts)...................................... 6,865 5,452
Income taxes................................................. 991 1,020
Real estate acquired in settlement of loans.................... 93 51
</TABLE>
<PAGE>
CNB FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
-----------
SCOPE
-----
In the opinion of Management of the registrant, the accompanying consolidated
financial statements for the nine month period ended September 30, 1995 and 1994
include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of the results for the period. This information
should be read in conjunction with the Corporation's Annual Report and Form 10-K
for the period ended December 31, 1994.
The financial results reported for the Corporation's first through third fiscal
quarters of 1995 are not necessarily the results to be expected for the full
year. The financial results contain three one-time events; one represents a
$53,000.00 gain on the sale of higher education loans to the Student Loan
Marketing Association (SLMA) and a $45,000.00 one-time expense for travel
related to the Corporation's data processing conversion. The last item was the
receipt of a $146,500 rebate from the Federal Deposit Insurance Corporation
(FDIC) on September 19, 1995. This rebate was credited to insurance expense.
The results contain no extraordinary income (loss) for changes in accounting.
Tax provisions for interim financial statements are based on the estimated tax
rates for the full fiscal year. The estimated effective tax rate differs from
the statutory tax rate principally due to tax-free interest income on certain
loans and investments which qualify for such treatment.
ACCOUNTING GUIDELINES
---------------------
SFAS No. 106: Post Retirement Benefits
- ---------------------------------------
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standard (SFAS) No. 106 "Employers Accounting for Postretirement
Benefits Other Than Pension", which requires the accrual of expected costs of
providing for certain postretirement benefits during the years the employee
provided services. The corporation previously expensed the cost of these
benefits, which are principally healthcare, as claims were incurred. The
Corporation elected, at that time, to recognize the obligation of approximately
$456,276 over the participant's average remaining service period of twenty-one
years. The Corporation's cash flows are not affected by implementation of this
standard but the Corporation is accruing $47,271 for this year's service and
interest cost and amortizing $21,727 of its transition obligation.
The average annual assumed rates of increases in the per capita cost of covered
benefits range from 12% in 1995 to 8% in 1998 and beyond. The healthcare cost
trend rate assumption has a significant effect on the amounts reported. These
rates have been determined to be in line with industry practice by both
management and Ernst and Young, LLP, the company's external accountants. The
discount rate used in determining the accumulated postretirement benefit was
7.75 percent.
SFAS No. 109 "Accounting for Income Taxes
- -----------------------------------------
<PAGE>
The Corporation adopted SFAS No. 109 "Accounting for Income Taxes" effective
January 1, 1993. SFAS No. 109 required the use of the liability method to
account for deferred income taxes. Under this method, deferred tax assets and
liabilities were determined on differences between financial reporting and tax
bases. Procedures determined the current enacted tax rates and laws which would
be in effect when the differences were expected to be recognized. Previously,
deferred income taxes were accounted for using the deferred method.
As permitted by SFAS No. 109, the Corporation elected not to restate the
Financial Statements of any prior periods, however, the Corporation did
recognize a one-time increase in net income in 1993 of $225,597, or $.13 per
share in that year.
SFAS No. 114 & SFAS No. 118: Accounting for the Impairment of a Loan
- ---------------------------------------------------------------------
In May, 1993 the Financial Accounting Standards (FASB) issue Statement No. 114
"Accounting by Creditors for the Impairment of a Loan" which is effective for
the fiscal years beginning after December 15, 1994. This guideline was
subsequently amended by a second Statement of Financial Accounting Standard No.
118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". The guidelines are designed to set standards in determining
whether a loan is impaired, how to measure the impairment based on the type of
loan and how to recognize interest based on the stream of cash flows which are
expected to be received.
The Corporation's accounting policy for loans is to quarterly examine non-
accruing loans on a case-by-case basis to determine if there is the possibility
that the Bank has little or no chance of recovering its principal. In a case
where there is a collateral shortfall and no foreseeable repayment stream, the
loan is charged-off. If a borrower has some ability to meet part of its
obligation, but total repayment is in serious question, Management may decide to
restructure the terms of repayment. In such an instance, pro forma financials
are performed on the borrower and if the financial strength of the borrower
warrants it, Management will restructure the loan using SFAS No. 114 and SFAS
No. 118 guidelines.
The Corporation adopted these accounting standards in the first quarter of 1995.
One loan which had been on non-accrual status since early 1994 had emerged from
a Chapter 11 filing with a court approved restructuring plan. Bank Management
waited seven months to determine if the new terms would be met. In August of
this year, after sufficient history had been established, management applied the
standards of No. 114 and No. 118 to this borrowing. The balance then was
$784,330. Management discounted the cash flows at the original note rate of 12%
and charged-off $59,400. The Bank then began recognizing interest income at the
new rate of 8.0% as allowed under Generally Accepted Accounting Practices. The
Corporation's outside accounting firm, Ernst and Young, LLP reviewed this
treatment.
SFAS No. 115: Accounting for Certain Debt and Equity Securities
- ----------------------------------------------------------------
Also in May 1993, the FASB issued Statement 115 "Accounting for Certain
Investments in Debt and Equity Securities" which is effective for fiscal years
beginning after December 15, 1993. Statement No. 115 addresses the definition
of, accounting for, and disclosure of debt and equity securities. In accordance
with the statement, securities are to be classified into, and accounted for,
based on three distinct categories: securities held to maturity, securities
available for sale and trading securities.
<PAGE>
On January 1, 1994 the Corporation began accounting for its investment portfolio
under the guidelines set forth under SFAS 115. At that time, the securities
designated as "Available for Sale" had an unrealized gain of $219,000. In
accordance with the accounting procedures set forth, the company has designated
all of its investments holdings into either the "Available for Sale" or "Held to
Maturity" categories. Although the accounting procedures specify a third
category for "Trading Securities" the company does not engage in securities
trading and therefore this category is not used. Management has decided that
the Bank's liquidity investments are designated as "Available for Sale" and
portfolio investments are purchased for holding until the security matures.
Additionally, equity securities held in the parent company are all considered
available for sale. As of September 30, 1995, the corporation had an after-tax
unrealized gain in the "Available for Sale" category of $620,000.
CONCLUSION
----------
The accompanying financial statements have been prepared pursuant to rules and
regulations of the SEC. As a result, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The registrant believes that the disclosures made are adequate to make the
information presented a fair representation of the corporation's financial
status.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
MARKET AREA ECONOMIC CONDITIONS
CNB Financial Corporation is headquartered in Clearfield, Pennsylvania in
the north-central region of the state. Due to the small population of the area,
little specific economic analysis is available. Despite the Corporation's
relative proximity to State College, the demographic and economic
characteristics are significantly different. For example, State College is
reported by PNC Bank's Economics Division to have a September, 1995 unemployment
rate of 3.7%. Data from the Bureau of Research Statistics reported that the
Clearfield-Jefferson County labor market had a 7.5% unemployment rate for August
of 1995. This was down from the 8.0% unemployment rate reported in July.
Industry in the area is dominated by trucking companies, coal producers and
timber/paper companies. These industries provide some stability to the region
while building and construction vary greatly by season and serve to distort true
unemployment and economic reporting.
With the recent location into the area of a nationally known retailer's
northeast distribution center, the area's housing market has been characterized
as there being a shortage of middle-income housing. This is evidenced in the
general rise in housing prices. Moderate housing construction is visible and
the Corporation's market area is believed to be growing though no formal
documents are yet available.
ASSETS
- ------
Total assets have grown 4.41% since one year ago to $289.5 million. The
growth has occurred in the loan portfolios with approximately equal percentage
increases in the mix of commercial, consumer and real estate related loans.
Total gross loans were $190.5 million on September 30, 1995 compared to $183.8
million twelve months ago. The growth in loans has been supported by $14
million in higher core deposit growth, retained earnings and borrowed federal
funds.
The Corporation's interest earning assets consist of deposits with other
banks, federal funds sold, short term investments, investment securities and
loans. Management uses the short term liquid assets to balance changes in
either loans or core deposits. Over the past year, the increase in loans has
been funded mainly by core deposit growth in the Bank's new deposit product
called "The Prime Money Fund". This product has proved very successful in
stemming the outflow of deposits into non-bank financial service companies. The
Bank's product pays interest which is competitively set from published short
term indices.
<PAGE>
The Corporation entered into an agreement early this year with the Student
Loan Marketing Association (SLMA) to sell our current student loans. On May 1,
1995 the Bank sold $4.7 million of higher education loans and recognized a
$53,000 premium on the sale. Under this agreement, the Bank will still be an
active lender to qualifying students. However, due to the increasing
complexities of accounting for student loans, and the uncertainties of how the
program will be administered, Management decided it would be best able to serve
our customers' needs if a third party were to handle the ongoing servicing of
the loans.
In analyzing of the sale, Management calculated the 1994 yield on higher
education students to be 7.80%, including the U.S. Government's special
allowance. In anticipation of the sale, the investment portfolio was increased
by $3 million in securities with a weighted average yield of 7.91%. The
additional proceeds were expected and have been deployed in higher yielding loan
categories. Under the agreement with SLMA, the Bank has the one-time option to
again begin holding higher education student loans as assets. Management has
not exercised this option because of internal accounting constraints and the
labor intensive aspects of managing student loans. The Bank does receive
premiums and fees for the applications it submits.
Bank premises and equipment increases reflect the opening of a supermarket
branch in St. Marys, PA which went into operation on August 13, 1994. These
increases also reflect the expansion of our headquarters to properties adjacent
to our main office in Clearfield, PA. The total capital outlay for this
expansion is approximately $2.4 million. This will be financed by cash flow.
To date, the bank has expended a total of $1.6 million for this project.
Accrued interest and other assets dropped slightly over the past twelve
months. Normal fluctuations in interest receipts and pre-paid expenses will
influence changes in these accounts.
Additionally, the Bank will open a leased branch on November 15, 1995 in
Bradford, McKean County, Pennsylvania and is finishing the construction of a de
novo branch which is contemplated to open in mid January, 1996.
LIABILITIES
- -----------
Total deposits on September 30, 1995 were $246.5 million, an increase of
$14.0 million over September 30, 1994 and an increase of $15.8 million from the
year-end. Deposit growth occurred primarily in a new deposit product called
"The Prime Money Fund" which pays on an indexed rate.
Management believes that the deposit customers paid the major portion of
the deposit premium increase in 1988. Therefore, with the Federal Deposit
Insurance Corporation's September rebate, Management offered this new money
market checking account which pays interest based on the IBC Donoghue Retail
index an additional .5% interest until year-end 1995. The FDIC rebate, along
with the reduced premium, financially offset the higher interest expense.
However, Management believes the $16 million of deposit growth has long term
benefits to our shareholders through increased deposit relationships.
<PAGE>
This product has reversed the general deposit declines or slow growth rates
have occurred industry-wide as consumers seek higher returns in non-traditional
financial
vehicles such as mutual funds.
LIQUIDITY AND INTEREST RATE SENSITIVITY
- ---------------------------------------
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-sensitive
earning assets and interest rate sensitive liabilities. Liquidity management
involves the ability to meet the cash flow requirements of customers who may be
either depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. Interest risk
management seeks to avoid instability in net interest margins and to enhance
consistent growth of net interest income through periods of volatile interest
rates.
Sources of asset liquidity are investment securities maturing in one year
or less, time deposits with banks and federal funds sold. In extreme shortages
of liquidity, "Investments Available for Sale" can be liquidated with no capital
impairment due to SFAS No. 115 accounting guidelines. These assets totaled $47.5
million at September 30, 1995 compared to $37.1 million on September 30, 1994.
Contractual payments of principal and interest as well as some early pay-off of
loans also provide a source of liquidity. Principal payments of $52.4 million
are contractually due within one year as compared to $40.1 million as of
September 30, 1994. Liquidity requirements can also be met by aggressively
pricing deposits in the market place, buying federal funds and by selling
securities under an agreement to repurchase at some future date. Additionally,
the Bank has arranged a large back-up facility at both Federal Reserve Bank of
Philadelphia and the Federal Home Loan Bank of Pittsburgh. As of September 30,
1995, the Bank had $11.0 million in unused lines of credit available with
correspondent commercial banks. Also, the Bank has an available credit line with
the Federal Home Loan Bank in the amount of $61.0 million and a $9 million line
with the Federal Reserve Bank of Philadelphia.
Management regularly monitors the relationship between interest-earning
assets and interest bearing liabilities maturing or repricing during similar
intervals. Management also implements actions designed to reduce an imbalance
between such assets and liabilities. In doing this, management seeks to avoid
fluctuating net interest margins in periods of changing interest rates. The
Bank's ratio of interest-rate sensitive assets to interest-rate sensitive
liabilities maturing or repricing within one year was .77% on September 30,
1995, compared to 1.27% at September 30, 1994.
Some changes in assumptions and methodology account for the wide period-to-
period swing.
The Board of Directors, working through Management, adopted a separate
Interest Rate Risk Policy on September 26, 1995. This policy sets specific
limits, responsibilities and reporting to provide for stability in earnings
under fluctuating interest rates. This policy provides for only the most
prudent measures to be taken by a community bank to avoid earnings instability.
<PAGE>
CAPITAL RESOURCES
- -----------------
The Corporation's capital position, of $37.1 million on September 30, 1995,
is an above average capital position as compared to other bank holding companies
of similar size. Capital adequacy for a financial institution is its ability to
support asset growth and to sufficiently protect itself and depositors against
business risk. The Corporation has relied on retained earnings to increase
equity, while providing what management believes is an acceptable return on
invested capital to its shareholders.
The Federal Reserve Board standards classify capital into two tiers,
referred to as Tier 1 and Tier 2. Tier 1 capital consists of common
shareholders' equity, noncumulative and cumulative perpetual preferred stock,
and minority interests less goodwill. Tier 2 capital consists of the allowance
for possible loan losses, perpetual preferred stock (not used in Tier 1), hybrid
capital instruments, term subordinate debt and intermediate-term preferred
stock. All banks are required to meet a minimum ratio of 8% of qualifying total
capital to risk-adjusted total assets with at least 5.5% Tier 1 capital.
Capital that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital.
In addition to the above risk based capital requirements the Federal Reserve
also requires a minimum leverage capital of 3% of Tier 1 capital to total assets
less any goodwill.
The table below summarizes the Corporation's regulatory capital ratios at
September 30, 1995 and 1994:
<TABLE>
<CAPTION>
3rd Qtr. 3rd Qtr.
1995 1994 Regulatory
------ ----- Minimum
-------
<S> <C> <C> <C>
Tier 1 Risk-Based Capital Ratio 14.01% 18.5% 5.5%
Total Risk-Based Capital Ratio 14.90% 19.6% 8.0%
Leverage Ratio 12.27% 12.3% 3.0%
</TABLE>
REGULATORY MATTERS
- ------------------
The Corporation and its Subsidiary (the Bank) are subject to the
regulations of certain federal agencies. Regulators often make recommendations
during the course of their examination that relate to the normal operations of
the Corporation and the Bank. Management reviews all such recommendations
promptly and initiates corrective action. Our primary regulator, the Comptroller
of the Currency, conducted a safety and soundness review during July, 1995 and
their results included several recommendations to improve the overall operations
of the Corporation, but found no significant deficiencies in the Bank's reported
results or functionality. The Comptroller of the Currency and the Federal
Reserve Bank of Philadelphia concluded examinations during the third quarter of
last year. Both agencies noted no substantial deficiencies at that time.
Presently, management is unaware of any recommendation by these regulatory
authorities, that, if implemented, would likely have a material effect on the
liquidity, capital or operations of the Corporation and Subsidiary.
<PAGE>
Management uses a variety of reports to gauge local economic conditions.
One important source of information is the quarterly subscription to PNC Bank
Economics Division's "National Economic Outlook" which includes focus on both
Pennsylvania and some Metropolitian Statistical Areas. Another more refined
source of information is the Pennsylvania Department of Labor and Industry
Bureau of Research Statistics bi-monthly economic release. This reprot, as
mentioned earlier, provides basic statistics for employment activity but does
not breakout economic growth for the Corporation's market area. Visible signs of
growth are evident in the new construction and the prices in the housing market.
The Bank's loan policy states the loans over 90 days past due be placed on
non-accrual status. However, policy allows that if the loan is sufficiently
collateralized, the loan review officer may allow the loan to continue accruing
based on the expected full return of the Bank's monies when the collateral is
liquidated. The table below compares 90 days and over delinquencies by type of
loan for September 30, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
Over 90 Days Over 90 Days Over 90 Days Over 90 Days
Accruing Non-Accruing Accruing Non-Accruing
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Commercial Loans $1,467,471 $ 706,447 $836,302
Mortgage Loans 227,458 114,388 580,027 18,576
Installment Loans 205,409 220,755
$1,900,338 $114,388 $1,507,229 $854,878
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
Operating results are substantially dependent on net interest income. Net
interest income is the difference between interest earned on loans and
investments and interest paid on deposits and borrowings. Operating results are
also affected by the levels of non-interest income and expense.
NET INTEREST INCOME
- -------------------
Total interest income for the quarter of $5.473 million reflects an 11.4%
increase or $560,000 more interest income when compared with the same three
months of 1994. This interest income increase for the quarter comes despite
relative large fluctuations in interest rates and represents active management
of the margin by executive management. The ability to reprice approximately $10
million of maturing investments at rates substantially higher than two years ago
was also an influencing factor. Exhibit A at the end of this discussion
analysis interest income categories and yields.
Total interest expense of $2.44 million for the quarter reflects an
increase of 32.0% from interest expense of $1.85 million for the same quarter of
1994. The increase represents a marked shift by consumers from lower yielding
non-maturity accounts to longer term, higher rate certificates of deposit.
Eighteen and twenty-four month certificates of deposits originated in late 1993
and 1994 are renewing at rates earning at least 1% higher than were maturing
while the premium rate paid on the new deposit product also increased the cost
of funds.
<PAGE>
Net interest income for the nine months ending September 30, 1995 totaled
$6.1 million for an increase of 5.1% over the same six months one year ago. This
increase is attributable to the quick response pricing managers take, in light
of changing rates and the close management of repricing assets and liabilities.
Again, Exhibit A details changes in interest rate yields for deposit categories.
PROVISION FOR POSSIBLE LOAN LOSSES
- ----------------------------------
The provision for possible loan losses was $65,000 less in 1995 for the
same period last year as management has seen decreasing trends in charge-offs
and increased recoveries over the past eight quarters. The present allowance for
loan losses of $2.171 million represents 1.13% of outstanding loans compared to
$2.03 million or 1.09% on September 30, 1994. Non-performing assets (NPA), which
include non-accrual loans and other real estate owned were $234,000 at end of
quarter. This gives an NPA to loan loss reserve ratio of 0.11% at the period
end. The greater provision for loan losses as compared to actual loan losses is
intended to reach a goal management has set which will place the company in the
high performing percentiles for peer comparison.
Management performs quarterly adequacy analysis on the loan loss reserve.
The loan review officer determines adequacy by following the BC-201 Qualitative
factors and eight quarters of loan loss experience. The officer's analysis is
performed broken down by the loan categories; Commercial and Industrial Loans,
Commercial Real Estate Loans, Residential Real Estate, Consumer Installment and
Credit Card Loans.
NON-INTEREST INCOME
- -------------------
Total other income for the third quarter of 1995 of $421,000 is $73,000
more than during the same period in 1994. Increased service charge revenues on
new transaction accounts and higher fiduciary fees account for the remaining
added revenues.
NON-INTEREST EXPENSE
- --------------------
Total non interest expense for the three months ended September 30, 1995
was $100,000 higher than the same period one year ago. The increase in expenses
is related to the opening of new branches and the amortization of the costs
associated with the Corporation's new headquarter's addition. Increased salary
expense represents the new staff hired to staff the branch which will open on
November 15, 1995. Also, annual merit increases contribute to the period's
increase over last year. Included as a reduction in expenses is the $146,500
rebate from the FDIC for insurance premiums, which the Bank received on
September 19, 1995.
NET INCOME
- ----------
Net income for the third quarter 1995 was $1,017,000 or $.59 per share.
This compares to net income and earnings per share for the same quarter in 1994
of $985,000 and $.57 per share.
The Corporation has earned $2.803 million compared with $2.65 million
during the same nine months of 1994. This 5.78% increase is due to higher net
interest margins and increased customers in flat fee based demand accounts as
well as the reduction in FDIC insurance expense. Year to date the Corporation
has earned $1.63 per share and paid cash dividends of $.87 per share. In 1994
the Corporation had earned $1.54 per share and paid cash dividends of $.81 per
share.
<PAGE>
Return on average assets through September 30, 1995 and average equity was
1.38% and 10.11% respectively for the first nine months of 1995.
INCOME TAXES
- ------------
The provision for income taxes of $278,000 for the third quarter of 1995 is
$24,000 less than the same period in 1994. On a year-to-date basis, the
Corporation has accrued $879,000 in federal income taxes which is $13,000 more
than last year.
<PAGE>
EXHIBIT A
Average Consolidate Balance Sheet
and Net Interest Margin
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
Average Annual Interest Average Annual Interest
Balance Rate Inc./Exp. Balance Rate Inc./Exp.
<S> <C> <C> <C> <C> <C> <C>
Assets
Securities
Interest-bearing deposits with banks -- -- 1,306 6.97% 91
Federal funds sold and securities
purchased under agreements to resell 1,376 5.73% 59 1,130 3.81% 43
Other short-term investments 0 0
Investment Securities:
Taxable 52,892 6.06% 2,397 55,712 3.35% 2,983
Tax-Exempt (1) 21,103 8.74% 1,380 21,744 8.62% 1,874
Total securities 75,371 6.80% 3,836 79,892 6.25% 4,991
Loans
Commercial 43,025 8.59% 2,765 37,544 7.41% 2,782
Mortgage 88,767 9.55% 6,338 85,892 8.68% 7,456
Installment 53,379 8.30% 3,315 53,756 8.51% 4,575
Total loans (2) 185,171 8.97% 12,418 177,192 8.36% 14,813
Total earning assets 260,542 8.34% 16,254 257,084 7.70% 19,804
Non Interest Bearing Assets
Cash & Due From Banks 7,404 0 7,228 0
Premises & Equipment 6,140 0 4,471 0
Other Assets 2,986 0 2,600 0
Allowance for Possible Loan Losses (2,172) 0 (1,927) 0
Total Non-interest earning assets 14,358 -- 0 12,372 -- 0
Total Assets 274,900 16,254 269,456 19,804
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing 54,651 1.94% 791 50,779 1.84% 935
Savings 39,797 2.55% 758 42,719 2.07% 886
Time 111,739 5.74% 4,811 109,912 4.70% 5,165
Total interest-bearing deposits 206,187 4.12% 6,360 203,410 3.43% 6,986
Short-term borrowings 5,861 5.25% 230 5,162 4.63% 239
Long-term borrowings 0 0 0 0
Total interest-bearing liabilities 212,048 4.16% 6,590 208,572 3.46% 7,225
Demand - non-interest-bearing 25,526 -- 0 26,225 -- 0
Other liabilities 1,221 -- 0 1,199 -- 0
Total Liabilities 238,795 3.69% 6,590 235,996 3.06% 7,225
Shareholders' equity 36,105 -- 0 33,460 -- 0
Total Liabilities and Shareholders' Equity 274,900 6,590 269,456 7,225
Interest income/earning assets 8.34% 16,254 7.70% 19,804
Interest expense/interest bearing liabilities 4.16% 6,590 3.44% 7,225
Net Interest Spread 4.19% 9,664 4.24% 12,579
Interest Income/Interest Earning Assets 8.34% 16,254 7.70% 19,804
Interest expense/Interest Earning Assets 3.69% 6,590 2.81% 7,225
Effect of Non Interest Bearing Funds 0.47% 0 0.65% 0
Net Interest Margin 4.65% 9,664 4.89% 12,579
</TABLE>
<TABLE>
September 30, 1994
Average Annual Interest
Balance Rate Inc./Exp.
<S> <C> <C> <C>
Assets
Securities
Interest-bearing deposits with banks 1,319 9.22% 91
Federal funds sold and securities
purchased under agreements to resell 1,403 3.62% 38
Other short-term investments -- --
Investment Securities:
Taxable 57,269 5.22% 2,234
Tax-Exempt (1) 21,172 9.11% 1,443
Total securities 81,163 6.27% 3,806
Loans
Commercial 37,424 7.23% 2,024
Mortgage 84,290 8.63% 5,443
Installment 53,192 8.57% 3,408
Total loans (2) 174,906 8.31% 10,875
Total earning assets 256,069 7.67% 14,681
Non Interest Bearing Assets
Cash & Due From Banks 7,124 0
Premises & Equipment 4,345 0
Other Assets 2,601 0
Allowance for Possible Loan Losses (1,885) 0
Total Non-interest earning assets (12,185) -- 0
Total Assets 268,254 14,681
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing 50,660 1.84% 698
Savings 41,957 2.14% 673
Time 111,029 4.57% 3,798
Total interest-bearing deposits 203,646 3.39% 5,169
Short-term borrowings 4,942 4.17% 154
Long-term borrowings 0 0
Total interest-bearing liabilities 208,588 3.41% 5,323
Demand - non-interest-bearing 25,830 -- 0
Other liabilities 1,172 -- 0
Total Liabilities 235,590 3.02% 5,323
Shareholders' equity 32,664 -- 0
Total Liabilities and Shareholders' Equity 268,254 5,323
Interest income/earning assets 7.67% 14,681
Interest expense/interest bearing liabilities 3.41% 5,323
Net Interest Spread 4.23% 9,358
Interest Income/Interest Earning Assets 7.67% 14,681
Interest expense/Interest Earning Assets 3.02% 5,323
Effect of Non Interest Bearing Funds 0.39% 0
Net Interest Margin 4.64% 9,358
</TABLE>
(1) The amounts are reflected on a fully tax equivalent basis using the federal
statutory rate of 34% in 1995 and 1994, 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Corporation received correspondence from the Securities
and Exchange Commission requesting the company provide more
information in its quarterly filings. This document attempts
to include all information which was outlined.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) There were no reports on Form 8-K
for the quarter ended June 30, 1995.
S I G N A T U R E S
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: November 15, 1995 /s/ James P. Moore
------------------------ --------------------------------
James P. Moore
President and Director
(Principal Executive Officer)
Date: November 15, 1995 /s/ J. Matthew McEnroe
------------------------ --------------------------------
J. Matthew McEnroe
Assistant Secretary
and Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 8,701
<INT-BEARING-DEPOSITS> 20
<FED-FUNDS-SOLD> 350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,537
<INVESTMENTS-CARRYING> 31,396
<INVESTMENTS-MARKET> 32,023
<LOANS> 192,722
<ALLOWANCE> 2,177
<TOTAL-ASSETS> 289,518
<DEPOSITS> 246,487
<SHORT-TERM> 1,682
<LIABILITIES-OTHER> 1,853
<LONG-TERM> 2,436
<COMMON> 6,912
0
0
<OTHER-SE> 30,148
<TOTAL-LIABILITIES-AND-EQUITY> 289,518
<INTEREST-LOAN> 12,417
<INTEREST-INVEST> 3,368
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,785
<INTEREST-DEPOSIT> 6,421
<INTEREST-EXPENSE> 230
<INTEREST-INCOME-NET> 9,135
<LOAN-LOSSES> 315
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 6,487
<INCOME-PRETAX> 3,684
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,803
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.63
<YIELD-ACTUAL> 8.34
<LOANS-NON> 114
<LOANS-PAST> 6,018
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,033
<CHARGE-OFFS> 238
<RECOVERIES> 67
<ALLOWANCE-CLOSE> 2,177
<ALLOWANCE-DOMESTIC> 2,177
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
