<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File Number 0-13396
ended March 31, 1997
or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
CNB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1450605
------------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
County National Bank
Market and Second Streets
P.O. Box 42
Clearfield, Pennsylvania 16830
(Address of principal executive offices)
Registrant's telephone number, including area code, (814) 765-9621
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock: $4.00 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares outstanding of the issuer's
common stock as of March 31, 1997:
COMMON STOCK: $4.00 PAR VALUE - 1,722,834 SHARES
1
<PAGE>
INDEX
PART I.
FINANCIAL INFORMATION
Sequential
Page Number
- -----------
PAGE 3. Notes to Consolidated Financial Statements
PAGE 4. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PAGE 7. Table 1 - Consolidated Balance Sheets - March 31, 1997
PAGE 9. Table 2 - Consolidated Statements of Cash Flows - March 31, 1997
PAGE 13. Table 3 - Consolidated Statements of Income - Quarter ending
March 31, 1997
PAGE 14. Table 4 - Consolidated Yield Comparisons
PART II.
OTHER INFORMATION
PAGE 16. ITEM 5 Other Information
PAGE 16. Signatures
2
<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 three month periods ended March 31,
1997 and 1996 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
to shareholders and Form 10-K for the period ended December 31, 1996.
The financial performance reported for the Corporation as of March 31,
1997 is not necessarily the result to be expected for the full year. The results
contain no extraordinary income (loss) for changes in accounting or other
events.
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 average annual assumed rates of increases in the per capita cost of
covered benefits range from 10% in 1997 to 8% in 1999 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. The discount rate used in determining the accumulated postretirement
benefit was 6.50 percent.
SFAS No. 109: Accounting for Income Taxes
- ------------------------------------------
The Corporation adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" in 1993. This statement requires the use of
the liability method to account for deferred income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities. These are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
SFAS No. 114 & SFAS No. 118: Accounting for the Impairment of a Loan
- ---------------------------------------------------------------------
3
<PAGE>
In May, 1993 the Financial Accounting Standards (FASB) issued 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 statement provides guidelines on how to
determine if the 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 and significantly delinquent loans on a case-by-case basis and 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.
SFAS No. 115: Accounting for Certain Debt and Equity Securities
- -----------------------------------------------------------------
At the time of acquisition, management classifies debt securities as
either held to maturity, available for sale or trading securities in compliance
with SFAS No. 115. Debt securities are classified as held to maturity when the
Corporation has the positive intent and ability to hold the securities to
maturity. Held to maturity securities are stated at amortized cost. Debt
securities that the Corporation does not have the positive intent (i.e. the
liquidity portfolio) and ability to hold to maturity, and all marketable equity
securities, are classified as available for sale or trading and carried at fair
value. Unrealized gains and losses, net of tax, on securities classified as
available for sale are carried as a separate component of shareholders' equity.
Unrealized gains and losses on securities classified as trading are to be
reported in earnings. Management has not classified any debt or equity
securities as trading.
The amortized cost of debt securities classified as held to maturity or
available for sale is adjusted for the amortization of premiums and the
accretion of discounts on a "worst yield basis". For securities purchased at
less than face value the discount is accreted to maturity , despite possible
call features. For securities purchased at a price in excess of their face
value, the premium is amortized to the earlier of call or put, rather than
maturity. In the case of mortgage-backed securities and collateralized mortgage
obligations discounts or premiums are realized over the estimated life of the
security. Such amortization is included in interest income from investments.
Realized gains and losses and declines in value judged to be other than
temporary are included in other income. The cost of securities sold is
accounted for under the specific identification method.
Neither the Corporation nor the Bank engages in securities trading and
therefore this category has not been 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 March 31, 1997, the Corporation had an after-tax
unrealized gain in the "Available For Sale" category of $439,000.
SFAS No. 121: Impairment of Long-Lived Assets and Long-Lived Assets to Be
- -------------------------------------------------------------------------
Disposed of
- -----------
The Corporation adopted SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of", effective January 1,
1996. This standard requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
4
<PAGE>
circumstances indicate the carrying value may not be recoverable. The adoption
of this standard has not had a material impact on the Corporation's financial
position or results of operation.
SFAS No. 125: Accounting for Transfers and Servicing of Financial Assets and
- ----------------------------------------------------------------------------
Extinguishment of Liabilities.
- ------------------------------
In June, 1996, SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities", was issued effective for
transactions entered into after December 31, 1996. This standard establishes
rules distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. Adoption of this standard has not had a material
impact on the Corporation's financial position or results of operation.
SFAS No. 128: Earnings per Share
- --------------------------------
In February 1997, SFAS No. 128, Earnings per Share, was issued, effective
for periods ending after December 15, 1997, with retroactive presentation for
all periods required. SFAS No. 128 specifies revised computation, presentation
and disclosure requirements for earnings per share. Under the provisions of
SFAS No. 128, primary and fully diluted earnings per share will be replaced with
basic and diluted amounts. This standard would not have impacted reported
earnings per share amounts for the first quarter of 1997 and management does not
expect it to have a material impact on the Corporation's historical per share
amounts.
CONCLUSION
The accompanying financial statements have been prepared pursuant to
rules and regulations of the Securities and Exchange Commission (SEC) and in
compliance with generally accepted accounting practices. Because this report is
based on an interim period, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The registrant
believes that the disclosures made are adequate to make the information
presented a fair representation of the Corporation's financial
status.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
MARKET AREA ECONOMIC CONDITIONS
CNB Financial Corporation and its subsidiary, County National Bank ("the
Bank") are headquartered in Clearfield, Pennsylvania in the north-central region
of the state. The economy of the region is not dominated by any industry sector
and includes coal producers, oil and natural gas producers, wholesale
distribution, light manufacturing, glass production and trucking companies.
Service related businesses such as hospitals, nursing homes and other health
related providers are significant. Government related employers such as public
schools, universities and correctional institutions are also a factor in the
region.
The health of the economy in the region is somewhat mixed with
unemployment rates (December, 1996) ranging from a low of 2.7% in Centre County
to a high of 7.6% in Clearfield County. Other counties' rates in the region are
as follows: Cameron 5.7%; Elk 5.0%; Jefferson 7.0% and McKean 5.1%.
While unemployment levels vary, the region is comparatively in better
economic condition than prior years. Residential housing is in fair demand and
values have been slowly rising throughout the region. In general, the economy
of the Corporation's market area is seen to be improving but lagging behind
other regions of the state.
ASSETS
- ------
Total assets (shown in Table 1 "Consolidated Balance Sheet") have grown
-------
11.8% since one year ago to $340.5 million. Much of the growth has occurred in
the loan portfolios, mainly in mortgage lending. Total gross loans were $238.4
million on March 31, 1997 compared to $202.5 million twelve months ago. The
growth in loans has been supported by $30.7 million in core deposit growth and
retained earnings.
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 assets has
been funded mainly by core deposit growth. Core deposit growth has accelerated
since mid-December, 1996, when the Bank acquired four retail branch locations
and corresponding customer lists from PNC Bank. Three of these locations are
located in the Corporation's market area and the fourth is located in DuBois,
Pennsylvania representing a market area expansion.
The increase in premises and equipment from $7.9 million a year ago to
$9.3 million on March 31, 1997 represents the growth due to branch expansion
from the PNC acquisitions and the placing in service of a de novo branch in
Clearfield, Pennsylvania. It also is reflective of a major investment in the
Corporation's headquarters facility which was expanded and renovated. This work
was completed in August, 1996. Other assets and intangibles increased from $2.6
million on March 31, 1996 to $5.3 in March 31, 1997 primarily as a result of the
recognition of the purchase price of the customer lists acquired from PNC Bank,
N.A.
6
<PAGE>
TABLE 1
CONSOLIDATED BALANCE SHEETS
CNB FINANCIAL CORPORATION
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except percent data)
<TABLE>
<CAPTION>
March 31, Dec. 31 March 31,
1997 1996 1996
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Cash and Due from Banks........................................ $ 12,409 $ 10,806 $ 8,200
Deposits with Other Banks...................................... 14 14 14
Federal Funds Sold............................................. 0 0 8,625
Investment Securities Available for sale....................... 62,176 61,309 57,418
Investment Securities Held to Maturity, fair value of $16,643
at March 31, 1997, $17,717 at December 31, 1996 and
$21,383 at March 31, 1996...................................... 16,390 17,387 20,925
Loans and Leases............................................... 238,390 226,407 202,524
Less: Unearned Discount..................................... 3,238 3,304 3,512
Less: Allowance for Loan Losses.............................. 2,551 2,473 2,255
-------- -------- --------
NET LOANS.................................................... 232,601 220,630 196,757
Premises and Equipment......................................... 9,311 9,312 7,890
Accrued Interest Receivable.................................... 2,263 2,181 2,115
Other Assets and Intangibles................................... 5,308 5,369 2,645
-------- -------- --------
TOTAL ASSETS................................................. $340,472 $327,008 $304,589
LIABILITIES
Deposits:
Non-interest bearing deposits................................ $ 31,078 $ 30,812 $ 26,947
Interest bearing deposits.................................... 260,795 239,244 234,263
-------- -------- --------
TOTAL DEPOSITS............................................... 291,873 270,056 261,210
Other Borrowings............................................... 5,742 14,656 3,372
Accrued Interest and Other Liabilities......................... 3,035 2,580 2,068
-------- -------- --------
TOTAL LIABILITIES............................................ $300,650 $287,292 $266,650
SHAREHOLDERS' EQUITY
Common Stock $4.00 Par Value
Authorized 2,500,000 Shares (issued 1,728,000).............. $ 6,912 $ 6,912 $ 6,912
Retained Earnings............................................ 32,571 32,289 30,788
Treasury Stock, At Cost (5,166).............................. (100) (100) (100)
Net unrealized securities gains.............................. 439 615 339
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY................................... 39,822 39,716 37,939
-------- -------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY..................... $340,472 $327,008 $304,589
</TABLE>
7
<PAGE>
LIABILITIES
- -----------
Total deposits on March 31, 1997 were $291.9 million, an increase of
$30.7 million over March 31, 1996. As stated above, this deposit growth has
been accelerated with the branch location acquisitions in December, 1996 with
$21.8 million in growth occurring in the first quarter of 1997.
Deposit growth has occurred in all categories with the largest increase
over March 31, 1996 resulting from growth in time deposits of $20.9 million.
The Bank has not utilized other liabilities to fund its assets. An analysis of
the sources and uses of funds is shown in Table 2 "Statement of Consolidated
----------------------------------
Cash Flow".
- -----------
LIQUIDITY AND INTEREST RATE SENSITIVITY
- ---------------------------------------
The primary functions of asset/liability management are to assure
adequate liquidity and maintain an appropriate balance between interest rate
sensitive earning assets and interest rate sensitive liabilities so that
earnings are not excessively influenced by changes in interest rates. Liquidity
management involves the ability to meet the cash demands 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 rate
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 practices. These assets totaled $62.1
million at March 31, 1997 compared to $57.4 million on March 31, 1996.
Contractual payments of principal and interest as well as some early pay-offs of
loans also provide a source of liquidity. Principal payments of $53 million are
contractually due within one year as compared to $51 million as of March 31,
1996. 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. The Bank maintains large back-up
facilities at both Federal Reserve Bank of Philadelphia and the Federal Home
Loan Bank of Pittsburgh. As of March 31, 1997, the Bank had $15 million in
lines of credit available with correspondent commercial banks. Also, the Bank
had a remaining available credit line with the Federal Home Loan Bank in the
amount of $93 million. The reader is again referred to Table 2 "Statement of
-------
Consolidated Cash Flows".
Management regularly monitors the relationship between interest earning
assets and interest bearing liabilities maturing or repricing 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 75.9% compared to 75.5% on
March 31, 1996.
8
<PAGE>
TABLE 2
CONSOLIDATED STATEMENTS OF CASHFLOWS
CNB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net Income.................................................................. $ 869 $ 1,180
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses................................................. 150 125
Depreciation.............................................................. 183 157
Amortization and accretion of net deferred loan fees...................... (155) (176)
Amortization and accretion of premiums and discounts on investments......... 8 40
Security Losses (Gains)................................................... (78) 13
Gain on sale of loans..................................................... 2 0
Changes in:
Interest receivable........................................................ (82) (18)
Other assets and intangibles............................................... (79) (952)
Interest payable........................................................... (260) (41)
Other liabilities.......................................................... 715 761
Net cash provided by operating activities................................... 1,273 1,089
Cash flows from investing activities:
Proceeds from maturities of:
Securities held to maturity............................................... 1,000 4,979
Securities available for sale............................................. 2,080 3,886
Proceeds from sales of:
Securities available for sale............................................. 153 0
Loans..................................................................... 262 0
Purchase of:
Securities held to maturity............................................... 0 (998)
Securities available for sale............................................. (3,300) (10,699)
Net principal disbursed on loans........................................... (12,240) 1,182
Purchase of Federal Home Loan Bank Stock................................... 240 (81)
Purchase of premises and equipment......................................... (182) (265)
Proceeds from the sale of foreclosed assets................................ 0 2
Net cash used in investing activities....................................... (11,987) (1,994)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts............................... 2,314 4,638
Certificates of deposit................................................... 19,503 785
Other borrowed funds...................................................... 1,115 547
Cash dividends paid........................................................ (586) (534)
Principal reduction in Federal Home Loan Bank advances..................... (10,029) (21)
Net cash provided by financing activities................................... 12,317 5,415
Net increase in cash and cash equivalents................................... 1,603 4,510
Cash and cash equivalents at beginning of year.............................. 10,820 12,329
Cash and cash equivalents at end of period.................................. 12,423 $16,839
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to certificate accounts).... $ 2,716 $ 2,431
Income Taxes........................................................... $ -- $ 380
Noncash Investing Activities:
(Decrease) in net unrealized gain on securities available for sale..... $ (266) $ (377)
Real estate acquired in settlement of loans............................. $ -- $ --
</TABLE>
9
<PAGE>
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 what management
believes is the most prudent measures to be taken by a community bank to avoid
earnings instability.
CAPITAL RESOURCES
- -----------------
The Corporation's capital position, of $39.8 million on March 31,
1997, 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 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 perpetual preferred stock, and minority
interests less intangibles. Tier 2 capital consists of the allowance for
possible loan and lease losses (subject to a maximum), perpetual preferred stock
(not used in Tier 1), hybrid capital instruments, term subordinate debt and
intermediate-term (limited life) 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 4.0% Tier 1 capital. Capital that qualifies as Tier 2
capital is limited to 100% of Tier 1 capital.
In addition to the above referenced risk based capital requirements,
the Federal Reserve also requires a minimum leverage capital ratio of 4% of Tier
1 capital to total assets less any intangibles.
The table below summarizes the Corporation's regulatory capital ratios at March
31, 1997 and 1996:
<TABLE>
<CAPTION>
1st Qtr. 1st Qtr. Regulatory
1997 1996 Minimums
--------- --------- -----------
<S> <C> <C> <C>
Tier 1 Risk-Based Capital Ratio 16.98% 17.73% 4.0%
Total Risk-Based Capital Ratio 18.08% 18.81% 8.0%
Leverage Ratio 11.88% 12.42% 4.0%
</TABLE>
REGULATORY MATTERS
- ------------------
The Corporation and 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. The primary regulator, the Office of the Comptroller of the
Currency, conducted a safety and soundness review during July and August of
1996. The results included several recommendations to improve the overall
operations of the Bank, but there were no significant deficiencies in the Bank's
reported results or functionality. The Federal Reserve Bank of Philadelphia
concluded an examination of the Corporation during the third quarter of 1994.
The agency 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 the Bank.
10
<PAGE>
CONCENTRATION OF CREDIT RISK AND ASSET QUALITY
- ----------------------------------------------
The Corporation, specifically the Bank, generates profits primarily through
lending and investing activities. The risk of loss from lending and investing
activities include the possibility that a loss may occur from the failure of a
borrower or one of its affiliates to perform according to their terms of the
loan or investment agreement. This possibility of loss is known as credit risk.
Credit risk is increased by lending and / or investing activities that
concentrate financial institution's earning assets in such a way as to expose
the institution to a material loss from any single occurrence or group of
related occurrences. This can occur through lending heavily to one borrower, an
industry segment or heavy concentration in a particular type of lending or
investing.
The Bank seeks to mitigate credit risk by limiting concentrations within
various industries and single borrowers by established legal lending limits.
Management also seeks to keep a stable allocation among the various loan types.
The Bank firmly follows all regulatory limits of credits to a single borrower.
In addition, the Bank monitors the local economic conditions and the financial
performance of its larger credit customers in an effort to promptly identify and
address deteriorating industries. The Corporation also seeks to minimize credit
risk in its investment portfolio by adhering to an investment policy that limits
exposure to credit risks inherent in the investment process. This policy sets
parameters for appropriate investments of the Corporation and provides for
supervision and oversight of this policy by the Board of Directors.
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 Metropolitan Statistical Areas in the state. The Bank's
formal loan review process provides the best defense against credit losses by
providing early warning of a borrowing company's financial deterioration.
The Bank's loan policy states that loans over 90 days past due be placed on
non-accrual status. However, policy allows that if the loan is sufficiently
collateralized and in the process of collection, 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 loans
past due 90 days and over by type of loan for March 31, 1997 and March 31, 1996.
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
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 $ 395 $152 $ 437 $0
Mortgage Loans 341 136 585 0
Installment Loans 322 0 352 0
------ ---- ------ --
TOTAL $1,058 $288 $1,374 $0
</TABLE>
11
<PAGE>
RESULTS OF OPERATIONS
The "Consolidated Statement of Income" (Table 3) compares the three month
--------
period ending March 31, 1997 and 1996. The table summarizes at the bottom that
the Corporation has earned $0.50 per share in the first quarter of 1997 compared
to $0.69 per share one year ago.
NET INTEREST INCOME
- -------------------
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.
Total interest income for the quarter of $6.1 million reflects a 7.0%
increase or $0.4 million more interest income when compared with the same three
months of 1996. This interest income increase for the quarter is a result of a
higher level of earning assets of the Corporation. Table 4 "Yield Comparisons"
---------------------------
highlights effective interest rates on interest bearing assets and liabilities.
Table 4 interest income totals differ from those in Table 3 in that tax free
interest is converted to a fully taxable equivalent basis.
Total interest expense of $2.7 million for the quarter reflects an increase
of 8.0% from the interest expense of $2.5 million for the same quarter of 1996.
The change represents higher interest expense due to increased deposits as
average interest bearing deposits for the quarter were 8.5% greater than those
in the first quarter of 1996. The weighted average cost of interest bearing
deposits decreased from 4.21% to 4.16% as shown in Table 4 due to maturing time
deposits repricing at lower interest rates.
Table 4 "Yield Comparisons" shows that the yield on earning assets dropped
from 8.32% on March 31, 1996 to 8.23% on March 31, 1997. The increase in net
interest income is attributable to higher levels of earning assets in the loan
and investment categories.
PROVISION FOR POSSIBLE LOAN LOSSES
- ----------------------------------
The provision for possible loan losses was $150,000 for the first quarter
of 1997, $25,000 higher than the first quarter of 1996. The Bank has
experienced increasing level of loan losses over the past two quarters reversing
a positive trend for losses in the eight quarters prior to September 30, 1996.
The present allowance for loan losses of $2.6 million represents 1.07% of
outstanding loans compared to $2.3 million or 1.11% of loans on March 31, 1996.
Non-performing assets (NPA), which includes loans contractually past due 90 days
or more, loans in a non-accrual status and other real estate owned totaled $1.4
million at end of quarter. This yields a ratio of NPA to loan loss reserve of
0.54% at period end.
Management performs quarterly adequacy analysis on the loan loss reserve.
The loan review officer determines adequacy by following the Comptroller of the
Currency's BC-201 qualitative factors and eight quarters of loan loss
experience. The officer's analysis is performed by separate loan categories;
Commercial and Industrial Loans, Commercial Real Estate Loans, Residential Real
Estate, Consumer Installment and Credit Card Loans. The officer's report is
presented to the Bank's board of directors for approval and a subcommittee of
the Board meets to review his detailed accounts.
12
<PAGE>
TABLE 3
CONSOLIDATED STATEMENTS OF INCOME
CNB FINANCIAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
INTEREST INCOME 1997 1996
------- -------
<S> <C> <C>
Loans including Fees ............................................................. $ 4,908 $ 4,511
Deposits with Other Banks ........................................................ 0 1
Federal Funds Sold ............................................................... 16 58
Investment Securities:
Taxable Securities: Available for Sale ........................................ 681 621
Tax-Exempt Securities: Available for Sale ..................................... 225 172
Taxable Securities: Being Held to Maturity .................................... 159 216
Tax-Exempt Securities: Being Held to Maturity ................................. 106 142
------- -------
TOTAL INTEREST INCOME ......................................................... $ 6,095 $ 5,721
INTEREST EXPENSE
Deposits ......................................................................... $ 2,589 $ 2,432
Borrowed Funds ................................................................... 126 37
------- -------
TOTAL INTEREST EXPENSE ........................................................ $ 2,715 $ 2,469
Net Interest Income ........................................................... $ 3,380 $ 3,252
Provision for possible loan losses ............................................ 150 125
------- -------
NET INTEREST INCOME AFTER PROVISION .............................................. $ 3,230 $ 3,127
OTHER INCOME
Trust & Asset Management Fees .................................................... $ 159 $ 199
Service charges on deposit accounts .............................................. 181 129
Other service charges and fees ................................................... 102 94
Securities gains (losses) ........................................................ 78 (13)
Gains on Sale of Loans ........................................................... 2 0
Other income ..................................................................... 63 54
------- -------
TOTAL OTHER INCOME ............................................................ $ 585 $ 463
OTHER EXPENSES
Salaries ......................................................................... $ 1,114 $ 964
Employee benefits ................................................................ 239 315
Net occupancy expense ............................................................ 436 353
Other Operating Expense .......................................................... 853 564
------- -------
TOTAL OTHER EXPENSES .......................................................... $ 2,642 $ 2,196
Income Before Income Taxes and Cumulative Effect of Change
in Accounting Principle .......................................................... $ 1,173 $ 1,394
Applicable Income Taxes .......................................................... 304 370
------- -------
Income Before Cumulative Effect of Change in
Accounting Principle ............................................................. 869 1,024
Cumulative Effect of Change in Accounting Principle, after Taxes ................. 0 156
------- -------
NET INCOME .................................................................... $ 869 $ 1,180
======= =======
Per Share Data
- --------------
Income Before Cumulative Effect of Accounting Change ............................. $ 0.50 $ 0.60
Cumulative Effect of Change in Accounting Principle .............................. 0.00 0.09
Net Income........................................................................ 0.50 0.69
Cash Dividends Per Share ......................................................... 0.34 0.31
</TABLE>
13
<PAGE>
TABLE 4
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation
Average Balances and Net Interest Margin
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996 March 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest Average Annual Interest
Balance Rate Inc./Exp. Balance Rate Inc./Exp. Balance Rate Inc./Exp.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits with banks $ 14 0.00% $ 0 $ 14 0.00% $ 0 $ 15 3.61% $ 0
Federal funds sold and securities
purchased under agreements to resell 1,156 5.27% 16 1,597 5.45% 87 4,607 5.05% 58
Other short-term investments 0 0.00% 0 0
Investment Securities:
Taxable 54,847 6.14% 842 55,861 6.17% 3,445 54,791 6.13% 837
Tax-Exempt (1) 25,395 7.88% 500 24,740 7.92% 1,962 23,673 8.07% 476
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 81,412 6.67% 1,358 82,212 6.68% 5,494 83,086 6.62% 1,371
Loans
Commercial 50,686 8.05% 1,020 47,679 8.14% 3,882 49,442 8.40% 1,036
Mortgage 129,694 8.11% 2,631 116,233 8.52% 9,898 95,859 9.41% 2,249
Installment 47,696 10.53% 1,256 42,009 10.60% 4,451 55,226 8.90% 1,226
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans (2) 228,076 8.61% 4,907 205,921 8.85% 18,231 200,527 9.02% 4,511
Total earning assets 309,488 8.10% 6,265 288,133 8.23% 23,725 283,613 8.32% 5,882
Non Interest Bearing Assets
Cash & Due From Banks 9,592 0 8,579 0 7,844 0
Premises & Equipment 9,334 0 8,297 0 7,872 0
Other Assets 6,368 0 2,965 0 2,895 0
Allowance for Possible Loan Losses (2,520) 0 (2,301) 0 (2,195) 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Non-interest earning assets 22,774 -- 0 17,540 -- 0 16,416 -- 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $332,262 $6,265 $305,673 $23,725 $300,029 $5,882
================================================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing $ 83,751 3.13% $ 657 $ 76,496 3.13% $ 2,397 $ 80,232 3.33% $ 666
Savings 35,754 1.68% 150 36,266 1.66% 601 36,161 1.64% 148
Time 132,592 5.38% 1,782 117,339 5.47% 6,423 115,999 5.59% 1,618
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 252,097 4.11% 2,589 230,101 4.09% 9,421 232,392 4.20% 2,432
Short-term borrowings 8,150 5.35% 109 7,186 5.23% 376 2,926 5.07% 37
Long-term borrowings 1,071 6.34% 17 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 261,318 4.16% 2,715 237,287 4.13% 9,797 235,318 4.21% 2,469
Demand - non-interest-bearing 28,684 -- 0 27,852 -- 0 24,947 -- 0
Other liabilities 2,386 -- 0 2,054 -- 0 1,889 -- 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 292,388 3.71% 2,715 267,193 3.67% 9,797 262,154 3.78% 2,469
Shareholders' equity 39,874 -- 0 38,480 -- 0 37,875 -- 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $332,262 $2,715 $305,673 $ 9,797 $300,029 $2,469
================================================================================
Interest income/earning assets 8.10% $6,265 8.23% 23,725 8.32% $5,882
Interest expense/interest bearing liabilities 4.16% 2,715 4.13% 9,797 4.21% 2,469
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.94% $3,550 4.10% 13,928 4.11% $3,413
============== =============== =================
Interest Income/Interest Earning Assets 8.23% $6,265 8.23% $23,725 8.32% $5,882
Interest expense/Interest Earning Assets 3.50% 2,715 3.40% 9,797 3.49% 2,469
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.73% $3,550 4.83% $13,928 4.83% $3,413
============== =============== =================
</TABLE>
(1) The amounts are reflected on a fully tax equivalent basis using the federal
statutory rate of 34% in 1997 and 1996, 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.
14
<PAGE>
NON-INTEREST INCOME
- -------------------
Total other income for the first quarter of 1997 of $585,000 is $122,000
more than during the same period in 1996. Increased service charge income and
gains from the sale of securities more than offset a decline in fiduciary fee
income resulting in an overall increase in non-interest income.
NON-INTEREST EXPENSE
- --------------------
Non-interest expenses increased $446,000 or 20.3% in the first quarter of
1997 compared to the first quarter of 1996. This increase is the result of
higher operating expenses for salaries and occupancy expense related to the
purchase of the four PNC Bank branches and the opening of a de novo office in
the quarter. These increases were mitigated somewhat by a decline in the cost
of employee benefits due to favorable trends in healthcare costs under the
Corporation's self-funded healthcare program. In addition, the Corporation
began amortizing the acquisition cost of the acquired PNC customer lists in the
first quarter of 1997. After further analysis of deposit inflows during the
first quarter of 1997, the amortization period for this expense was extended to
10 years from 7.5 years which was previously established and noted in the 1996
10-K filing of the Corporation. This modification did not affect any previously
reported results of operations.
NET INCOME
- ----------
Net income for the first quarter of 1997 was $869,000 or $0.50 per share.
This compares to net income of $1,024,000 or $0.60 per share in the first
quarter of 1996. During the first quarter of 1996 the Corporation changed its
method of accounting for trust income from the cash basis to the accrual basis.
All first quarter 1996 financial information has been restated to reflect the
cumulative effect of this change in accounting principle. The comparative
decline in net income is the result of net interest income growth and other
income growth being exceeded by the growth in operating expenses. During the
quarter the Corporation also experienced a decline in its net interest spread as
higher cost time deposits were acquired at a faster rate than other deposits and
interest income could not be increased at the same rate in order to maintain the
spread. As mentioned previously the higher operating expenses were a result of
growth in branch operations resulting of the PNC Bank branch acquisitions.
For the remainder of 1997, net interest income and non-interest income are
expected to continue to increase as more earning assets are acquired as a result
of anticipated further deposit growth. Non-interest income is anticipated to
increase as the Bank begins originating and selling mortgages into the secondary
market in the second quarter which should result in higher levels of fee income
during the remainder of the year. During the rest of the year operating
expenses are anticipated to remain fairly constant. The Corporation cautions
that these forward-looking statements are subject to numerous assumptions, risks
and uncertainties, all of which may change over time. Actual results could
differ materially from forward-looking statements.
The return on average assets was 1.04% and the return on average equity was
8.74% during the quarter ending March 31, 1997 compared to 1.37% and 10.81%
respectively in the first quarter of 1996.
INCOME TAXES
- ------------
The provision for income taxes was $304,000 in the first quarter of 1997
compared to $370,000 in the first quarter of 1996. This is the result of lower
taxable income in the first quarter of 1997.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
No Form 8-K's were filed for this period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB FINANCIAL CORPORATION
(Registrant)
DATE: May 14, 1997 /s/ James P. Moore
------------ -------------------------------------
James P. Moore
President and Director
(Principal Executive Officer)
DATE: May 14, 1997 /s/ William F. Falger
------------ -------------------------------------
William F. Falger
Executive Vice President and Director
(Principal Financial Officer)
(Principal Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,409
<INT-BEARING-DEPOSITS> 14
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,176
<INVESTMENTS-CARRYING> 16,390
<INVESTMENTS-MARKET> 16,643
<LOANS> 235,152
<ALLOWANCE> 2,551
<TOTAL-ASSETS> 340,472
<DEPOSITS> 291,873
<SHORT-TERM> 5,742
<LIABILITIES-OTHER> 3,035
<LONG-TERM> 0
0
0
<COMMON> 6,912
<OTHER-SE> 32,910
<TOTAL-LIABILITIES-AND-EQUITY> 340,472
<INTEREST-LOAN> 4,908
<INTEREST-INVEST> 1,171
<INTEREST-OTHER> 16
<INTEREST-TOTAL> 6,095
<INTEREST-DEPOSIT> 2,589
<INTEREST-EXPENSE> 126
<INTEREST-INCOME-NET> 3,380
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 78
<EXPENSE-OTHER> 2,642
<INCOME-PRETAX> 1,173
<INCOME-PRE-EXTRAORDINARY> 1,173
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 869
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
<YIELD-ACTUAL> 8.23
<LOANS-NON> 288
<LOANS-PAST> 2,351
<LOANS-TROUBLED> 640
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,473
<CHARGE-OFFS> 105
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 2,551
<ALLOWANCE-DOMESTIC> 2,551
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
