<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ ---------------------
Commission File Number 0-13396
CNB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1450605
------------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
County National Bank
1 South Second Street
P.O. Box 42
Clearfield, Pennsylvania 16830
(Address of principal executive offices)
Registrant's telephone number, including area code, (814) 765-9621
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
The number of shares outstanding of the issuer's common stock as of
July 31, 2000:
COMMON STOCK: $1.00 PAR VALUE - 3,665,525 SHARES
1
<PAGE>
INDEX
PART I.
FINANCIAL INFORMATION
Sequential
Page Number
-----------
PAGE 3. Consolidated Balance Sheets - June 30, 2000 and December 31, 1999
PAGE 4. Consolidated Statements of Income - Quarter ending June 30, 2000 and
1999
PAGE 5. Consolidated Statements of Income - Six months ennding
June 30, 2000 and 1999
PAGE 6. Consolidated Statements of Comprehensive Income for the quarter
and six months ending June 30, 2000 and 1999
PAGE 7. Consolidated Statements of Cash Flows - Six months
ending June 30, 2000 and 1999
PAGE 8. Notes to Consolidated Financial Statements
PAGE 10. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PAGE 12. Quantitative and Qualitative Disclosures About Market Risk
PART II.
OTHER INFORMATION
PAGE 16. ITEM 1 Legal Proceedings
PAGE 16. ITEM 2 Changes in Securities and Use of Proceeds
PAGE 16. ITEM 3 Defaults Upon Senior Securities
PAGE 16. ITEM 4 Submission of Matters for Security Holders Vote
PAGE 16. ITEM 5 Other Information
PAGE 16. ITEM 6 Exhibits and Reports on Form 8-K
PAGE 16. Signatures
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
CNB FINANCIAL CORPORATION
Consolidated Balance Sheets (unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, Dec. 31,
ASSETS 2000 1999
------------- -------------
<S> <C> <C>
Cash and due from banks.................................................... $ 15,658 $ 20,893
Interest bearing deposits with other banks................................. 1,243 321
------------- -------------
Total cash and cash equivalents 16,901 21,214
Securities available for sale............................................. 132,930 136,945
Investment securities held to maturity, fair value of $6,467
at June 30, 2000, and $6,652 at December 31, 1999 6,455 6,618
Loans and leases.......................................................... 382,141 367,711
Less: unearned discount................................................ 4,546 4,947
Less: allowance for loan losses......................................... 3,913 3,890
------------- -------------
NET LOANS............................................................... 373,682 358,874
Premises and equipment.................................................... 12,950 12,854
Accrued interest receivable............................................... 3,528 3,463
Loans held for sale....................................................... 1,297 2,381
Intangible, net........................................................... 15,255 15,899
Other assets.............................................................. 1,636 2,914
------------- -------------
TOTAL ASSETS............................................................ $ 564,634 $ 561,162
============= =============
LIABILITIES
Deposits:
Non-interest bearing deposits........................................... $ 54,900 $ 54,891
Interest bearing deposits............................................... 431,941 445,860
------------- -------------
TOTAL DEPOSITS.......................................................... 486,841 500,751
Other borrowings.......................................................... 23,190 6,750
Accrued interest and other liabilities.................................... 6,283 6,018
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TOTAL LIABILITIES....................................................... 516,314 513,519
SHAREHOLDERS' EQUITY
Common stock $1.00 par value
Authorized 10,000,000 shares
Issued 3,693,500 shares ................................................ 3,694 3,694
Additional paid in capital.............................................. 3,728 3,717
Retained earnings....................................................... 43,377 42,278
Treasury stock, at cost ................................................ (703) (715)
(27,975 shares for June 2000, and 29,191 for December 1999)
Accumulated other comprehensive income.................................. (1,776) (1,331)
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TOTAL SHAREHOLDERS' EQUITY.............................................. 48,320 47,643
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY................................ $ 564,634 $ 561,162
============= =============
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
CNB FINANCIAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data) THREE MONTHS ENDED JUNE 30
INTEREST INCOME 2000 1999
----------- ----------
<S> <C> <C>
Loans including fees..................................................... $ 8,138 $6,780
Deposits with other banks................................................ 12 6
Federal funds sold....................................................... 0 50
Investment securities:
Taxable............................................................... 1,464 1,007
Tax-exempt............................................................ 461 476
Dividends............................................................. 158 56
----------- ----------
TOTAL INTEREST INCOME................................................. 10,233 8,375
INTEREST EXPENSE
Deposits................................................................. 4,481 3,641
Borrowed funds........................................................... 442 264
----------- ----------
TOTAL INTEREST EXPENSE................................................ 4,923 3,905
----------- ----------
Net interest income................................................... 5,310 4,470
Provision for possible loan losses.................................... 207 153
----------- ----------
NET INTEREST INCOME AFTER PROVISION...................................... 5,103 4,317
OTHER INCOME
Trust & asset management fees............................................ 218 198
Service charges on deposit accounts...................................... 580 387
Other service charges and fees........................................... 180 97
Securities gains(losses)................................................. 6 29
Gains on sale of loans................................................... 27 26
Other income............................................................. 81 153
----------- ----------
TOTAL OTHER INCOME.................................................... 1,092 890
OTHER EXPENSES
Salaries................................................................. 1,630 1,353
Employee benefits........................................................ 586 515
Net occupancy expense.................................................... 582 468
Amortization of intangible............................................... 463 216
Other.................................................................... 1,074 1,049
----------- ----------
TOTAL OTHER EXPENSES.................................................. 4,335 3,601
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Income before income taxes............................................... 1,860 1,606
Applicable income taxes.................................................. 467 388
----------- ----------
NET INCOME............................................................ $ 1,393 $1,218
=========== ==========
Earnings Per Share, Based on Weighted Average Shares Outstanding
----------------------------------------------------------------
Net income, basic........................................................ $0.38 $0.33
Net income, fully diluted................................................ $0.38 $0.33
Cash dividends per share................................................. $0.21 $0.20
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
CNB FINANCIAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data) SIX MONTHS ENDED JUNE 30
INTEREST AND DIVIDEND INCOME 2000 1999
------------ -------------
<S> <C> <C>
Loans including fees............................................................. $ 16,012 $ 13,388
Deposits with other banks........................................................ 31 9
Federal funds sold............................................................... 6 208
Investment securities:
Taxable....................................................................... 2,984 1,967
Tax-exempt.................................................................... 927 952
Dividends..................................................................... 242 115
------------ -------------
TOTAL INTEREST AND DIVIDEND INCOME............................................ 20,202 16,639
------------ -------------
INTEREST EXPENSE
Deposits......................................................................... 8,955 7,346
Borrowed funds................................................................... 650 535
------------ -------------
TOTAL INTEREST EXPENSE........................................................ 9,605 7,881
------------ -------------
Net interest income........................................................... 10,597 8,758
Provision for possible loan losses............................................ 387 307
------------ -------------
NET INTEREST INCOME AFTER PROVISION.............................................. 10,210 8,451
------------ -------------
OTHER INCOME
Trust & asset management fees.................................................... 450 383
Service charges on deposit accounts.............................................. 1,111 705
Other service charges and fees................................................... 312 186
Securities gains(losses)......................................................... (35) 29
Gains on sale of loans........................................................... 34 52
Other............................................................................ 132 238
------------ -------------
TOTAL OTHER INCOME............................................................ 2,004 1,593
------------ -------------
OTHER EXPENSES
Salaries......................................................................... 3,125 2,723
Employee benefits................................................................ 1,160 980
Net occupancy expense............................................................ 1,222 949
Amortization of intangible....................................................... 926 387
Other............................................................................ 2,234 2,070
------------ -------------
TOTAL OTHER EXPENSES.......................................................... 8,667 7,109
------------ -------------
Income before income taxes....................................................... 3,547 2,935
Applicable income taxes.......................................................... 907 655
------------ -------------
NET INCOME.................................................................... $ 2,640 $ 2,280
============ =============
Earnings Per Share, Based on Weighted Average Shares Outstanding
----------------------------------------------------------------
Net income, basic................................................................ $0.72 $0.62
Net income, fully diluted........................................................ $0.72 $0.62
Cash dividends per share......................................................... $0.42 $0.40
</TABLE>
5
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CNB FINANCIAL CORPORATION
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 1,393 $ 1,218 $ 2,640 $ 2,280
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities:
Unrealized gains/(losses) arising
during the period 146 (1,124) (468) (1,433)
Less: Reclassified adjustment for
accumulated gains/(losses)
included in net income 4 19 (23) 19
-------- -------- -------- --------
Unrealized gains/(losses) on securities 142 (1,143) (445) (1,452)
-------- -------- -------- --------
Comprehensive income $ 1,535 $ 75 $ 2,195 $ 828
======== ======== ======== ========
</TABLE>
6
<PAGE>
CONSOLIDATED STATEMENTS OF CASHFLOWS
CNB FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30
Cash flows from operating activities: 2000 1999
------------ --------------
<S> <C> <C>
Net Income.................................................................... $ 2,640 $ 2,280
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses................................................. 387 307
Depreciation and amortization............................................. 1,470 884
Amortization and accretion and deferred loan fees......................... (237) 223
Deferred Taxes............................................................ 478 (411)
Security Gains............................................................ 35 (29)
Gain on sale of loans..................................................... (34) (52)
Net (gains) losses on dispositions of acquired property.................... 0 22
Changes in:
Proceeds from sale of loans................................................ 5,618 12,355
Origination of loans for sale.............................................. (4,500) (9,741)
Interest receivable....................................................... (65) (127)
Other assets and intangibles.............................................. 830 (872)
Interest payable.......................................................... (161) 157
Other liabilities......................................................... 177 3,044
------------ --------------
Net cash provided by operating activities..................................... 6,638 8,040
Cash flows from investing activities:
Proceeds from maturities of:
Securities held to maturity............................................. 310 800
Securities available for sale........................................... 8,197 14,326
Proceeds from sales of securities available for sale........................ 4,934 4,329
Purchase of securities available for sale................................... (9,924) (23,251)
Acquisitions, net of cash received.......................................... 0 (4,742)
Net principal disbursed on loans............................................ (14,861) (14,275)
Purchase of Federal Reserve Bank Stock...................................... (146) 0
Purchase of premises and equipment.......................................... (640) (258)
Proceeds from the sale of foreclosed assets................................. 165 (22)
------------ --------------
Net cash used in investing activities......................................... (11,965) (23,093)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts............................. (4,203) (29,962)
Certificates of deposit................................................. (9,707) 26,751
Acquisition of treasury stock............................................ 0 (612)
Sale of treasury stock.................................................. 23 12
Cash dividends paid..................................................... (1,539) (1,433)
Net advances from other borrowings.......................................... 16,440 6,426
------------ --------------
Net cash provided by financing activities..................................... 1,014 1,182
------------ --------------
Net increase (decrease) in cash and cash equivalents.......................... (4,313) (13,871)
Cash and cash equivalents at beginning of year................................ 21,214 26,093
------------ --------------
Cash and cash equivalents at end of period.................................... $ 16,901 $ 12,222
============ ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to certificate accounts).... $ 9,444 $ 8,049
Income Taxes............................................................. $ 540 $ 525
Noncash Investing Activities:
(Dec.) in net unrealized gain on securities available for sale......... $ 0 ($1,451)
(Inc.) in net unrealized loss on securities available for sale......... $ ($675) $ 0
</TABLE>
7
<PAGE>
CNB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared pursuant
to rules and regulations of the Securities and Exchange Commission (SEC) and in
compliance with generally accepted accounting principles. Because this report
is based on an interim period, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
In the opinion of Management of the registrant, the accompanying consolidated
financial statements for the quarter and six month periods ended June 30, 2000
and 1999 include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the financial condition and
the results of operations for the period. The financial performance reported
for the Corporation for the three and six-month periods ended June 30, 2000 is
not necessarily indicative of the results to be expected for the full year.
This information should be read in conjunction with the Corporation's Annual
Report to shareholders and Form 10-K for the period ended December 31, 1999.
COMMON STOCK PLAN
The Corporation has a common stock plan for key employees and independent
directors. The Stock Incentive Plan, which is administered by a disinterested
committee of the Board of Directors, provides for 250,000 shares of common stock
in the form of qualified options, nonqualified options, stock appreciation
rights or restrictive stock. The Corporation applies Accounting Principles
Board Opinion 25 and related interpretations in accounting for its common stock
plan. Accordingly, no compensation expense has been recognized for the plans.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments
-------------------------------------
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement provides for potential
investment reclassification out of the held-to-maturity category. As amended by
FAS No. 137, the standard is effective for fiscal years beginning after June 15,
2000 with earlier adoption permitted. The effect of this standard will depend
upon the nature and extent of derivative instruments in place at the time of
adoption. The Corporation had no derivative instruments as of June 30, 2000.
8
<PAGE>
CONSOLIDATED YIELD COMPARISONS
CNB Financial Corporation
Average Balances and Net Interest Margin
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
----------------------------------------------------------------------------------------------------------------------------
Average Annual Interest Average Annual Interest
Balance Rate Inc./Exp. Balance Rate Inc./Exp.
----------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks $ 1,101 5.63% 31 336 5.36% 9
Federal funds sold and securities
purchased under agreements to resell 222 5.41% 6 8,634 4.82% 208
Investment Securities:
Taxable 97,271 6.14% 2,984 74,582 5.31% 1,979
Tax-Exempt (1) 36,169 7.08% 1,280 38,069 6.96% 1,324
Equity Investments (1) 8,973 6.58% 295 5,552 4.97% 138
----------------------------------------------------------------------------------------------------------------------------
Total Investments 143,736 6.40% 4,596 127,173 5.75% 3,658
Loans
Commercial (1) 77,323 8.78% 3,395 65,418 8.12% 2,656
Mortgage (1) 218,830 8.57% 9,381 188,353 8.47% 7,980
Installment 46,957 9.47% 2,223 41,088 8.88% 1,825
Leasing 30,802 7.29% 1,123 27,478 7.50% 1,030
----------------------------------------------------------------------------------------------------------------------------
Total loans (2) 373,912 8.62% 16,122 322,337 8.37% 13,491
------------ ------------ ---------- ------------
Total earning assets 517,648 8.00% 20,718 449,510 7.63% 17,149
Non Interest Bearing Assets
Cash & Due From Banks 13,840 -- 10,944 --
Premises & Equipment 12,936 -- 10,594 --
Other Assets 20,162 -- 12,326 --
Allowance for Possible Loan Losses (3,816) -- (3,438) --
----------------------------------------------------------------------------------------------------------------------------
Total Non-interest earning assets 43,122 -- -- 30,426 -- --
----------------------------------------------------------------------------------------------------------------------------
Total Assets $560,770 $20,718 $479,936 $17,149
==============================================================================
Liabilities and Shareholders' Equity
Interest-Bearing Deposits
Demand - interest-bearing 118,340 2.44% 1,443 108,042 2.63% 1,422
Savings 72,839 3.68% 1,341 65,247 3.20% 1,044
Time 242,328 5.09% 6,171 190,246 5.13% 4,880
----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 433,507 4.13% 8,955 363,535 4.04% 7,346
Short-term borrowings 8,510 5.92% 252 3,558 4.72% 84
Long-term borrowings 12,885 6.18% 398 17,839 5.06% 451
----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 454,902 4.22% 9,605 384,932 4.09% 7,881
Demand - non-interest-bearing 51,525 -- 40,129 -- --
Other liabilities 5,262 -- 5,900 -- --
----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 511,689 9,605 430,961 3.66% 7,881
Shareholders' equity 49,082 -- 48,975 -- --
----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity 560,771 9,605 479,936 7,881
==============================================================================
Interest income/earning assets 8.00% 20,718 7.63% $17,149
Interest expense/interest bearing liabilities 4.22% 9,605 4.09% 7,881
----------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.78% $11,113 3.54% $ 9,268
=========================== ====== =====================
Interest Income/Interest Earning Assets 8.00% $20,718 7.63% $17,149
Interest expense/Interest Earning Assets 3.71% 9,605 3.51% 7,881
============================================================================================================================
</TABLE>
(1) The amounts are reflected on a fully tax equity basis using the federal
statutory rate of 34% in 2000 and 1999, 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 in not material.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The following discussion and analysis of the consolidated financial
statements of the Corporation is presented to provide insight into management's
assessment of financial results. The Corporation's subsidiary County National
Bank (the "Bank") provides financial services to individuals and businesses
within the Bank's market area made up of the west central Pennsylvania counties
of Clearfield, Cambria, Centre, Elk, Jefferson, and McKean. County National
Bank is a member of the Federal Reserve System and subject to regulation,
supervision and examination by the Office of the Comptroller of the Currency
("OCC").
The market area that County National Bank operates in is rural in
nature. The customer makeup consists of small business and individuals. The
health of the economy in the region is mixed with unemployment rates running
high in most of our market areas except Centre County. Actual unemployment
percentages (as of December 1999) by county are as follows: Cameron 6.4%;
Centre 2.4%; Clearfield 6.8%; Elk 5.2%; Jefferson 5.7%; and McKean 4.5%.
OVERVIEW OF BALANCE SHEET
Total assets (shown in the Consolidated Balance Sheet) have grown 0.6%
since year-end 1999 to $564.6 million. The growth has occurred primarily in the
loan portfolio. The following comments will further explain the details of the
asset fluctuation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $16,901,000 at June 30, 2000
compared to $21,214,000 on December 31, 1999. This decrease resulted from a
reduction of cash build up at year-end 1999 as a contingency for potential risk
of the year 2000 date change. Also, the Corporation has focused on changing the
cash balance from a non-earning asset to an earning asset.
Management believes the liquidity needs of the Corporation are
satisfied by the current balance of cash and cash equivalents, readily available
access to traditional funding sources, and the portion of the investment and
loan portfolios that mature within one year. These sources of funds will enable
the Corporation to meet cash obligations and off-balance sheet commitments as
they come due.
SECURITIES
Securities decreased $4.2 million (or 2.9%) since December 31, 1999.
Of the Corporation's total securities portfolio, $132,930,000 as of June 30,
2000, (or 95.4%) is classified as available for sale with the balance of
$6,455,000 classified as held to maturity.
The decrease results from payments received on mortgage-backed
securities, which were not reinvested into the portfolio but were used to fund
loan growth. Also, contributing to the decrease was a change in the fair market
valuation of the bond portfolio. In a rising interest rate environment, bond
prices generally decline. This increase gave the Corporation an increase in
unrealized loss of $670,000. The Corporation generally buys into the market
over time and does not attempt to "time" its transactions. In doing this the
highs and lows of the market are averaged into the portfolio and minimizes the
overall effect of different rate environments.
Management monitors the earnings performance and the effectiveness of
the liquidity of the securities portfolio on a regular basis through Asset /
Liability Committee ("ALCO') meetings. The ALCO also reviews and manages
interest rate risk for the Corporation. Through active balance sheet management
and analysis of the securities portfolio, the Corporation maintains sufficient
liquidity to satisfy depositor requirements and various credit needs of its
customers.
10
<PAGE>
LOANS
The Corporation's loan demand remained strong during the first six
months of 2000. The Corporation's lending is focused in the west central
Pennsylvania market and consists principally of retail lending, which includes
single-family residential mortgages and other consumer lending, and commercial
lending primarily to locally owned small businesses.
A June 30, 2000, the Corporation had $377,595,000 in loans and leases
outstanding, net of unearned discount, up $14,831,000 (or 4.1%) since December
31, 1999. This growth pattern is the result of our increased penetration into
the commercial lending opportunities within our market. Our focus on commercial
lending has expanded over the past several years with additional staff increases
to handle more small business loans.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Allowance for Loan and Lease Losses as a percentage of loans
decreased from 1.07% at December 31, 1999 to 1.04% at June 30, 2000. The dollar
amount of the reserve increased $23,000 since year-end 1999. The increase is a
result of the provision of $387,000 expensed during the six months less net
charge-offs. The gross charge-offs for the six months of 2000 were $421,000
while recoveries were $57,000. This level of charge-offs is an increase from
the six months of 1999 when charge-offs were $330,000 with recoveries of
$80,000. While the dollar amount of charge-offs has increased by 27.5%, charge-
offs as a percentage of loans remained the same at 0.11%.
Management continues to closely monitor loan delinquency and loan
losses. Non-performing assets, which include loans 90 or more days past due and
non-accrual loans were $1,503,000 or 0.40% of total loans on June 30, 2000
compared to $2,142,000 or 0.48% on December 31, 1999.
The adequacy of the allowance for loan and lease losses is subject to
a formal analysis by the loan review staff of the Bank and is deemed to be
adequate to absorb probable losses in the portfolio as of June 30, 2000. The
Corporation has disclosed in its annual report on Form 10-K the process and
methodology supporting the loan loss provision.
FUNDING SOURCES
The Corporation considers deposits, short-term borrowings, and term
debt when evaluating funding sources. Traditional deposits continue to be the
most significant source of funds for the Corporation reaching $486,841,000 at
June 30, 2000. Deposit decline of 2.8% since year-end 1999 primarily resulted
from a runoff of jumbo CD's that were acquired via our branch purchases, but
were excluded from the premium paid at the time of purchase. This runoff was
anticipated, as the interest rate being paid on these deposits was higher than
the Corporation generally offers.
The Corporation utilizes term borrowings from the Federal Home Loan
Bank (FHLB) to meet funding needs not accommodated by deposit growth. During
2000, the Corporation borrowed $20 million to fund loan growth and to take
advantage of opportunities existing in the bond market. Management plans to
maintain access to short and long-term FHLB borrowings as an appropriate funding
source.
SHAREHOLDERS' EQUITY
The Corporation's capital continues to provide a strong base for
profitable growth. Total Shareholders' Equity was $48,320,000 at June 30, 2000
compared to $47,643,000 at December 31, 1999 an increase of $677,000 (or 1.4%).
In the first six months of 2000, the Corporation earned $2,640,000 and declared
dividends of $1,539,000, a dividend payout ratio of 58.3% of net income.
Approximately 95% of the investment securities in the Corporation's
portfolio are classified as available-for-sale making this portion of the
Corporation's balance sheet more sensitive to the changing market value of
investments. Interest rates in the first six months of 2000 have been fairly
stable. This situation has caused a decline in accumulated other comprehensive
income which is included in stockholders' equity of $445,000 since December 31,
1999.
11
<PAGE>
The Corporation has also complied with the standards of capital
adequacy mandated by the banking regulators. Bank regulators have established
"risk-based" capital requirements designed to measure capital adequacy. Risk-
based capital ratios reflect the relative risks of various assets banks hold in
their portfolios. A weight category of 0% (lowest risk assets), 20%, 50%, or
100% (highest risk assets), is assigned to each asset on the balance sheet. The
Corporation's total risk-based capital ratio of 10.61% at June 30, 2000 is above
the well-capitalized standard of 10%. The Corporation's Tier 1 capital ratio of
9.61% is above the well-capitalized minimum of 6%. The leverage ratio at June
30, 2000 was 6.60%, also above the well-capitalized standard of 5%. The
Corporation is well capitalized as measured by the federal regulatory agencies.
The ratios provide quantitative data demonstrating the strength and future
opportunities for use of the Corporation's capital base. Management continues
to evaluate risk-based capital ratios and the capital position of the
Corporation as part of its strategic decision making process.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity measures an organizations' ability to meet cash obligations
as they come due. The Consolidated Statement of Cash Flows presented on page 6
of the accompanying financial statements provides analysis of the Corporation's
cash and cash equivalents. Additionally, management considers that portion of
the loan and investment portfolio that matures within one year as part of the
Corporation's liquid assets. The Corporation's liquidity is monitored by the
ALCO Committee, which establishes and monitors ranges of acceptable liquidity.
Management feels the Corporation's current liquidity position is acceptable.
QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the course of conducting business activities, the Corporation is
exposed to market risk, principally interest rate risk, through the operation of
the Bank. Interest rate risk arises from market driven fluctuations in interest
rates, which affect cash flows, income, expense and values of all financial
instruments. Management and the ALCO Committee of the Board monitor the
Corporation's interest rate risk position. No material changes have occurred
during the period in the Bank's market risk strategy or position, a discussion
of which can be found in the SEC Form-10K filed for the period ended December
31, 1999.
12
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
The Corporation had net income of $1,393,000 and $2,640,000 for the
second quarter and first six months of 2000, respectively. The earnings per
diluted share for the respective periods were $0.38 and $0.72. Net income was
$1,218,000 and $2,280,000 for the second quarter and first six months of 1999,
which equates to earnings per diluted share of $0.33 and $0.62, respectively.
The return on assets and the return on equity for the six months of 2000 are
0.94% and 10.79%.
INTEREST INCOME AND EXPENSE
Net interest income totaled $5,310,000 in the second quarter, an
increase of 18.8% over the second quarter of 1999 and totaled $10,597,000 for
the six months of 2000, an increase of 21.0% over the prior year. The Bank
experienced an increase in earning assets in the past twelve months of 17.2%,
which came primarily through the acquisitions that occurred in 1999. Total
interest income increased during the quarter by $1,858,000 or 22.2% while
interest expense increased by $1,018,000 or 26.1% when compared to the second
quarter of 1999.
The Corporation recorded a provision for loan and lease losses in the
second quarter of $207,000 compared to the second quarter of 1999 at $153,000
and $387,000 for the six months of 2000 compared to $307,000 in 1999. Based on
managements evaluation of problem loans, increased charge-offs and growth in the
loan portfolio, managements' analysis indicates the need for a higher allowance
provision.
NON-INTEREST INCOME
Non-interest income increased $202,000 (22.7%) and $411,000 (25.8%) in
the second quarter and six months of 2000, respectively, when compared to the
same periods in 1999. Increased deposit account service charges have been the
primary source of the growth in non-interest income. In the six months, account
service charges totaled $1,111,000 up $406,000 (or 57.6%) over last year. These
increases in fee income were mainly the result of growth in the number of
customers and related deposit accounts over the past twelve months. Also, trust
and asset management fees continue to improve as they increased 17.5% over 1999
to $450,000.
NON-INTEREST EXPENSE
Non-interest expense increased $734,000 or 20.4% during the second
quarter of 2000 and $1,558,000 or 21.9% in the six months of 2000 when compared
to the same periods in 1999. This increased level of non-interest expense is
attributable to the acquisitions that occurred during 1999, which increased our
number of locations by five. Increases in salaries and benefits of $582,000 and
amortization expense of $539,000 in the first six months of 2000 over 1999 were
mainly due to these acquisitions.
RETURN ON ASSETS
For the six months ended June 30, 2000, the Corporation's return on average
assets ("ROA") totaled 0.94% down from the 0.96% recorded in 1999. Operating
cash earnings ROA, which represents earnings excluding one-time merger related
costs and amortization expense, for the six months of 2000 was 1.16% as compared
to 1.13% in the same period for 1999.
The increase in operating cash earnings ROA reflects continued
improvement in the core operations of the Corporation. Exclusive of the
amortization of the premium paid for deposits, earnings continue to increase,
28.2% over the prior year. With the focus on earnings from core assets, the
Corporation realized an increase in ROA for the first time in several years.
RETURN ON EQUITY
The Corporation's return on average shareholder's equity ("ROE") in
the first six months was 10.79% compared to 9.97% for 1999. The increase can be
attributed to the Corporation's plan in the previous year to leverage its
capital through acquisition. The increase in assets without adding additional
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capital will provide the shareholders more earnings from the same capital base.
Operating cash earnings ROE for the first six months was 13.29% compared to
11.78% in 1999.
Management expects improvement in ROE during 2000 and anticipates
further increases with earnings growth. The Corporation is currently well
capitalized under regulatory industry standards.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $467,000 in the second quarter of 2000
compared to $388,000 in the second quarter of 1999. For the six-month period
comparisons, the federal tax expense was $907,000 in 2000 and $655,000 in 1999.
The increase reflects higher pre-tax income in the period when compared to the
same period in the prior year.
FUTURE OUTLOOK
Year-to-date results improved when compared to the prior year and were
consistent with management's expectations. Management continues to focus on
asset growth from increased market share. The goal of asset growth is to
increase shareholder value as well as provide favorable results in the long-term
profitability of the Corporation.
Loan demand was favorable during the first six months. Loan growth is
expected to continue at a moderate to slower pace throughout the remainder of
the year. The Corporation's loan to deposit ratio has increased through the
first six months to 76.8% compared to 71.7% at year-end 1999 as funds from the
acquisition are being deployed into the market mainly in consumer and small
commercial loans. Management expects the loan to deposit ratio to remain
constant throughout the second half of 2000.
Consumer loan charge-offs in the second quarter continued to comprise
the majority of the Corporation's recent charge-offs. In the first six months,
total net charge-offs were $364,000 of which consumer net charge-offs totaled
$302,000. The charge-off level for the remainder of 2000 is expected to decline
somewhat when compared to the first six months. Management believes that the
increased efforts of loan review and collections and our high underwriting
standards will give the Bank favorable charge-off history when compared to peer
institutions.
Enhanced non-interest income and controlled non-interest expense are
important factors in the success of the Corporation and is measured in the
financial services industry by the efficiency ratio, calculated according to the
following: non-interest expense (less amortization of intangibles) as a
percentage of fully tax equivalent net interest income and non-interest income
(less non-recurring income). For the six months ended June 30, 2000, the
Corporation's efficiency ratio was 57.43% compared to 65.91% for the same period
last year.
The efficiency ratio improved as the level of non-interest income has
increased over the year. Management believes controlling the operating costs of
the Corporation is imperative to the future increased profitability derived from
core earnings. A strong focus by management continues to be placed on non-
interest expenses during the remainder of 2000, as the Bank implements a
profitability enhancement program and a formal review of our operational
processes. The effects of these two procedures will streamline our operations
and result in an incremental reduction of expenses.
The interest rate environment will continue to play an important role
in the future earnings of the Corporation. The net interest margin has remained
the central focus of management as competitive pressures in the form of reduced
lending rates coupled with higher cost of funds has created pressure to the
margin. Overall net interest income continues to increase due to growth in
interest earning assets. Management expects further growth in net interest
income for the remainder of 2000.
Management concentrates on return on average equity and earnings per
share evaluations, plus other methods, to measure and direct the performance of
the Corporation. While past results are not an indication of future earnings,
management feels the Corporation is positioned to enhance performance of normal
operations through the remainder of 2000.
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain statements contained in the report that are not historical
facts are forward looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "expects,"
"believes," "estimate" or "projected" and similar expressions as they relate to
CNB Financial Corporation or its management are intended to identify such
forward looking statements. CNB Financial Corporation's actual results,
performance or achievements may materially differ from those expressed or
implied in the forward looking statements. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial services industry, changes in law, governmental
policies and regulations, and rapidly changing technology affecting financial
services.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDERS VOTE
CNB Financial Corporation held its Annual Meeting of Shareholders on
April 18, 2000, for the purpose of electing four directors and to
transact such other business as would properly come before the
meeting. Results of shareholder voting on these individuals were as
follows:
Election of Directors
Robert E. Brown James P. Moore Robert C. Penoyer Joseph L. Waroquier
For 2,746,788 2,756,869 2,741,544 2,746,788
The total shares voted at the annual meeting were 2,829,627.
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Corporation filed an 8-K on May 16, 2000 to report the engagement
of Crowe Chizek and Company, LLP as its external auditors.
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: August 10, 2000 /s/ James P. Moore
------------------- -------------------------------
James P. Moore
President and Director
(Principal Executive Officer)
DATE: August 10, 2000 /s/ Joseph B. Bower, Jr.
------------------- -------------------------------
Joseph B. Bower, Jr.
Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)
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