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CNB FINANCIAL CORP/PA - Quarter Report: 2010 September (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 0-13396

 

 

CNB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-1450605

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The number of shares outstanding of the issuer’s common stock as of November 3, 2010

COMMON STOCK: $0 PAR VALUE, 12,223,879 SHARES

 

 

 


Table of Contents

 

INDEX

PART I.

FINANCIAL INFORMATION

 

     Page
Number
 

ITEM 1 – Financial Statements (unaudited)

  

Consolidated Balance Sheets – September 30, 2010 and December 31, 2009

     4   

Consolidated Statements of Income – Three months ended September 30, 2010 and 2009

     5   

Consolidated Statements of Income – Nine months ended September 30, 2010 and 2009

     6   

Consolidated Statements of Comprehensive Income – Three and nine month periods ended September  30, 2010 and 2009

     7   

Consolidated Statements of Cash Flows – Nine months ended September 30, 2010 and 2009

     8   

Notes to Consolidated Financial Statements

     9   

ITEM  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23   

ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk

     34   

ITEM 4 – Controls and Procedures

     35   
PART II.   
OTHER INFORMATION   

ITEM 1 – Legal Proceedings

     36   

ITEM 1A – Risk Factors

     36   

ITEM 6 – Exhibits

     36   

Signatures

     37   

Forward-Looking Statements

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to our financial condition, liquidity, results of operations, future performance and business. These forward-looking statements are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that are not historical facts. Forward-looking statements include statements with respect to beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond our control). Forward-looking statements often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would” and “could.” Such known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements include, but are not limited to: changes in

 

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general business, industry or economic conditions or competition; changes in any applicable law, rule, regulation, policy, guideline or practice governing or affecting financial holding companies and their subsidiaries or with respect to tax or accounting principals or otherwise; adverse changes or conditions in capital and financial markets; changes in interest rates; higher than expected costs or other difficulties related to integration of combined or merged businesses; the inability to realize expected cost savings or achieve other anticipated benefits in connection with business combinations and other acquisitions; changes in the quality or composition of our loan and investment portfolios; adequacy of loan loss reserves; increased competition; loss of certain key officers; continued relationships with major customers; deposit attrition; rapidly changing technology; unanticipated regulatory or judicial proceedings and liabilities and other costs; changes in the cost of funds, demand for loan products or demand for financial services; and other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices. Some of these and other factors are discussed in our annual and quarterly reports filed with the Securities and Exchange Commission.

The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of the filing of this document. We undertake no obligation to publicly update or revise any forward-looking statements included in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise, except to the extent required by law. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document might not occur and you should not put undue reliance on any forward-looking statements.

 

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CNB FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

Dollars in thousands

 

     (unaudited)
September 30,
2010
    December 31,
2009
 
ASSETS   

Cash and due from banks

   $ 26,976      $ 19,959   

Interest bearing deposits with other banks

     3,816        2,399   
                

Total cash and cash equivalents

     30,792        22,358   

Interest bearing time deposits with other banks

     3,517        6,388   

Trading securities

     878        955   

Securities available for sale

     501,890        345,415   

Loans held for sale

     3,951        1,218   

Loans

     755,501        718,022   

Less: unearned discount

     (2,556     (2,880

Less: allowance for loan losses

     (10,830     (9,795
                

Net loans

     742,115        705,347   

FHLB and other equity interests

     6,726        6,907   

Premises and equipment, net

     24,122        23,355   

Bank owned life insurance

     19,542        16,440   

Mortgage servicing rights

     847        876   

Goodwill

     10,821        10,821   

Other intangible assets

     10        85   

Accrued interest receivable and other assets

     17,959        21,426   
                

TOTAL

   $ 1,363,170      $ 1,161,591   
                
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Non-interest bearing deposits

   $ 140,508      $ 116,310   

Interest bearing deposits

     974,146        840,548   
                

Total deposits

     1,114,654        956,858   

Treasury, tax and loan borrowings

     1,032        1,380   

FHLB and other borrowings

     95,193        100,003   

Subordinated debentures

     20,620        20,620   

Accrued interest payable and other liabilities

     13,894        13,321   
                

Total liabilities

     1,245,393        1,092,182   
                

Common stock, $0 par value; authorized 50,000,000 shares; issued 12,599,603 shares at September 30, 2010 and 9,233,750 shares at December 31, 2009

     —          —     

Additional paid in capital

     44,640        12,631   

Retained earnings

     72,150        68,676   

Treasury stock, at cost (382,158 shares at September 30, 2010 and 472,477 shares at December 31, 2009)

     (5,723     (7,023

Accumulated other comprehensive income (loss)

     6,710        (4,875
                

Total shareholders’ equity

     117,777        69,409   
                

TOTAL

   $ 1,363,170      $ 1,161,591   
                

 

 

See Notes to Consolidated Financial Statements

 

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CNB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

 

     Three months ended
September 30,
 
     2010     2009  

INTEREST AND DIVIDEND INCOME:

    

Loans including fees

   $ 11,813      $ 11,516   

Deposits with banks

     25        46   

Securities:

    

Taxable

     3,270        1,920   

Tax-exempt

     683        536   

Dividends

     6        8   
                

Total interest and dividend income

     15,797        14,026   
                

INTEREST EXPENSE:

    

Deposits

     3,340        3,228   

Borrowed funds

     993        1,110   

Subordinated debentures

     201        204   
                

Total interest expense

     4,534        4,542   
                

NET INTEREST INCOME

     11,263        9,484   

PROVISION FOR LOAN LOSSES

     853        1,094   
                

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     10,410        8,390   
                

NON-INTEREST INCOME:

    

Wealth and asset management fees

     431        339   

Service charges on deposit accounts

     1,120        1,153   

Other service charges and fees

     374        325   

Net realized and unrealized gains on securities for which fair value was elected

     15        191   

Mortgage banking

     116        278   

Bank owned life insurance

     200        180   

Other

     288        238   
                
     2,544        2,704   
                

Total other-than-temporary impairment losses on available-for-sale securities

     (821     (971

Less portion of loss recognized in other comprehensive income

     —          —     
                

Net impairment losses recognized in earnings

     (821     (971

Net realized gains on available-for-sale securities

     118        333   
                

Net impairment losses recognized in earnings and realized gains on available-for-sale securities

     (703     (638
                

Total non-interest income

     1,841        2,066   
                

NON-INTEREST EXPENSES:

    

Salaries and benefits

     3,998        3,705   

Net occupancy expense of premises

     1,053        1,019   

FDIC insurance premiums

     427        327   

Amortization of intangibles

     25        25   

Other

     2,610        2,408   
                

Total non-interest expenses

     8,113        7,484   
                

INCOME BEFORE INCOME TAXES

     4,138        2,972   

INCOME TAX EXPENSE

     1,032        723   
                

NET INCOME

   $ 3,106      $ 2,249   
                

EARNINGS PER SHARE:

    

Basic

   $ 0.25      $ 0.26   

Diluted

   $ 0.25      $ 0.26   

DIVIDENDS PER SHARE:

    

Cash dividends per share

   $ 0.165      $ 0.165   

 

 

See Notes to Consolidated Financial Statements

 

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CNB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

 

     Nine months ended
September 30,
 
     2010     2009  

INTEREST AND DIVIDEND INCOME:

    

Loans including fees

   $ 34,940      $ 34,350   

Deposits with banks

     88        178   

Securities:

    

Taxable

     8,539        5,698   

Tax-exempt

     1,706        1,562   

Dividends

     20        26   
                

Total interest and dividend income

     45,293        41,814   
                

INTEREST EXPENSE:

    

Deposits

     10,148        9,679   

Borrowed funds

     3,170        3,428   

Subordinated debentures

     586        653   
                

Total interest expense

     13,904        13,760   
                

NET INTEREST INCOME

     31,389        28,054   

PROVISION FOR LOAN LOSSES

     2,599        2,964   
                

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     28,790        25,090   
                

NON-INTEREST INCOME:

    

Wealth and asset management fees

     1,255        1,118   

Service charges on deposit accounts

     3,117        3,167   

Other service charges and fees

     1,048        1,046   

Net realized and unrealized gains (losses) on securities for which fair value was elected

     (42     133   

Mortgage banking

     365        775   

Bank owned life insurance

     602        540   

Other

     841        643   
                
     7,186        7,422   
                

Total other-than-temporary impairment losses on available-for-sale securities

     (1,923     (1,211

Less portion of loss recognized in other comprehensive income

     —          —     
                

Net impairment losses recognized in earnings

     (1,923     (1,211

Net realized gains on available-for-sale securities

     691        608   
                

Net impairment losses recognized in earnings and realized gains on available-for-sale securities

     (1,232     (603
                

Total non-interest income

     5,954        6,819   
                

NON-INTEREST EXPENSES:

    

Salaries and benefits

     11,689        10,768   

Net occupancy expense of premises

     3,204        3,092   

FDIC insurance premiums

     1,202        1,410   

Amortization of intangibles

     75        75   

Other

     7,434        7,308   
                

Total non-interest expenses

     23,604        22,653   
                

INCOME BEFORE INCOME TAXES

     11,140        9,256   

INCOME TAX EXPENSE

     2,750        2,293   
                

NET INCOME

   $ 8,390      $ 6,963   
                

EARNINGS PER SHARE:

    

Basic

   $ 0.83      $ 0.81   

Diluted

   $ 0.83      $ 0.80   

DIVIDENDS PER SHARE:

    

Cash dividends per share

   $ 0.495      $ 0.495   

 

 

See Notes to Consolidated Financial Statements

 

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CNB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Dollars in thousands

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2010     2009     2010     2009  

NET INCOME

   $ 3,106      $ 2,249      $ 8,390      $ 6,963   

Other comprehensive income, net of tax:

        

Change in fair value of interest rate swap agreement designated as a cashflow hedge, net of tax of $33 and $41 for the three months ended September 30, 2010 and 2009, and $115 and ($79) for the nine months ended September 30, 2010 and 2009

     (61     (76     (213     147   

Net change in unrealized gains (losses) on securities available for sale:

        

Unrealized losses on other-than-temporarily impaired securities available for sale:

        

Unrealized losses arising during the period, net of tax of $36 and $212 for the three months ended September 30, 2010 and 2009 and $172 and $244 for the nine months ended September 30, 2010 and 2009

     (66     (393     (320     (454

Reclassification adjustment for losses included in net income, net of tax of ($288) and ($340) for the three months ended September 30, 2010 and 2009, and ($673) and ($424) for the nine months ended September 30, 2010 and 2009

     534        631        1,250        787   
                                
     468        238        930        333   
                                

Unrealized gains on other securities available for sale:

        

Unrealized gains arising during the period, net of tax of ($3,315) and ($1,508) for the three months ended September 30, 2010 and 2009, and ($6,094) and ($912) for the nine months ended September 30, 2010 and 2009

     6,156        2,801        11,317        1,694   

Reclassification adjustment for accumulated gains included in net income, net of tax of $41 and $117 for the three months ended September 30, 2010 and 2009, and $242 and $213 for the nine months ended September 30, 2010 and 2009

     (77     (217     (449     (395
                                
     6,079        2,584        10,868        1,299   
                                

Other comprehensive income

     6,486        2,746        11,585        1,779   
                                

COMPREHENSIVE INCOME

   $ 9,592      $ 4,995      $ 19,975      $ 8,742   
                                

 

 

See Notes to Consolidated Financial Statements

 

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CNB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Dollars in thousands

 

     Nine months ended
September 30,
 
     2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 8,390      $ 6,963   

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

    

Provision for loan losses

     2,599        2,964   

Depreciation and amortization

     1,533        1,497   

Amortization, accretion and deferred loan fees and costs

     1,588        786   

Net impairment losses recognized in earnings and realized gains (losses) on available-for-sale securities

     1,232        603   

Net realized and unrealized (gains) losses on securities for which fair value was elected

     42        (133

Gain on sale of loans

     (270     (683

Net gains on dispositions of premises and equipment and foreclosed assets

     (101     —     

Proceeds from sale of loans

     6,008        41,103   

Origination of loans held for sale

     (11,932     (43,087

Increase in bank owned life insurance

     (602     (540

Stock-based compensation expense

     166        87   

Changes in:

    

Accrued interest receivable and other assets

     (2,602     290   

Accrued interest payable and other liabilities

     (269     935   
                

NET CASH PROVIDED BY OPERATING ACTIVITIES

     5,782        10,785   
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Net decrease in interest bearing time deposits with other banks

     2,871        127   

Proceeds from maturities, prepayments and calls of securities

     86,330        70,701   

Proceeds from sales of securities

     51,507        71,619   

Purchase of securities

     (279,073     (203,849

Loan origination and payments, net

     (36,251     (21,570

Purchase of bank owned life insurance

     (2,500     —     

Redemption (purchase) of FHLB and other equity interests

     181        (1,234

Purchase of premises and equipment

     (1,542     (954

Proceeds from the sale of premises and equipment and foreclosed assets

     287        526   
                

NET CASH USED IN INVESTING ACTIVITIES

     (178,190     (84,634
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net change in:

    

Checking, money market and savings accounts

     130,487        104,215   

Certificates of deposit

     27,309        (30,197

Proceeds from sale of treasury stock

     923        977   

Proceeds from exercise of stock options

     69        587   

Proceeds from stock offering, net of issuance costs

     32,128        —     

Cash dividends paid

     (4,916     (4,283

Advances from long-term borrowings

     20,000        625   

Repayment of long-term borrowings

     (36,085     (4,573

Net change in short-term borrowings

     10,927        (3,107
                

NET CASH PROVIDED BY FINANCING ACTIVITIES

     180,842        64,244   
                

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     8,434        (9,605

CASH AND CASH EQUIVALENTS, Beginning

     22,358        31,256   
                

CASH AND CASH EQUIVALENTS, Ending

   $ 30,792      $ 21,651   
                

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 14,207      $ 13,950   

Income taxes

   $ 3,314      $ 1,857   

SUPPLEMENTAL NONCASH DISCLOSURES:

    

Transfers to other real estate owned

   $ 333      $ 52   

Transfers to assets held for sale

   $ —        $ 699   

Loans transferred from held for sale to held for investment

   $ 3,321      $ 1,736   

Grant of restricted stock awards from treasury stock

   $ 233      $ —     

 

 

See Notes to Consolidated Financial Statements

 

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and in compliance with accounting principles generally accepted in the United States of America (GAAP). Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.

In the opinion of management of the registrant, the accompanying consolidated financial statements as of September 30, 2010 and for the three and nine month periods ended September 30, 2010 and 2009 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 CNB Financial Corporation (the Corporation) for the three and nine month periods ended September 30, 2010 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 Form 10-K for the period ended December 31, 2009.

STOCK COMPENSATION

The Corporation has a stock incentive plan for key employees and independent directors. The Stock incentive plan, which is administered by a committee of the Board of Directors, provides for up to 500,000 shares of common stock in the form of nonqualified options or restricted stock. For key employees, the plan vesting is one-fourth of the granted options or restricted stock per year beginning one year after the grant date, with 100% vested on the fourth anniversary of the grant. For independent directors, the vesting schedule is one-third of the granted options per year beginning one year after the grant date, with 100% vested on the third anniversary of the grant.

At September 30, 2010, there was no unrecognized compensation cost related to nonvested stock options granted under this plan, and no stock options were granted during the three or nine month periods then ended.

Compensation expense for the restricted stock awards is recognized over the requisite service period noted above based on the fair value of the shares at the date of grant. Unearned restricted stock awards are recorded as a reduction of shareholders’ equity until earned. Compensation expense resulting from these restricted stock awards was $44,000 and $166,000 for the three and nine months ended September 30, 2010, and $31,000 and $87,000 for the three and nine months ended September 30, 2009. As of September 30, 2010, there was $413,000 of total unrecognized compensation cost related to unvested restricted stock awards.

A summary of changes in unvested restricted stock awards for the three months ended September 30, 2010 follows:

 

     Shares     Weighted Average
Grant Date Fair Value
 

Nonvested at beginning of period

     36,284      $ 15.12   

Granted

     —          —     

Vested

     (950     14.16   

Forfeited

     —          —     
                

Nonvested at end of period

     35,334      $ 15.14   
                

 

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

A summary of changes in unvested restricted stock awards for the nine months ended September 30, 2010 follows:

 

     Shares     Weighted Average
Grant Date Fair Value
 

Nonvested at beginning of period

     30,144      $ 14.83   

Granted

     16,500        15.00   

Vested

     (10,760     14.07   

Forfeited

     (550     14.98   
                

Nonvested at end of period

     35,334      $ 15.14   
                

FAIR VALUE

Fair Value Option

Management elected to adopt the fair value option for its investment in perpetual preferred equity securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) as well as its investment in certain other equity securities. Management elected the fair value option for these securities to provide financial statement users with greater visibility into the Corporation’s financial instruments that do not have a defined maturity date.

Fair value changes attributable to unrealized gains that were included in earnings for the three and nine months ended September 30, 2010 were $15,000 and $26,000. Fair value changes included in earnings for the three and nine month months ended September 30, 2009 were $191,000 and $133,000. During the third quarter of 2010, the perpetual preferred equity securities issued by FNMA and FHLMC were sold, resulting in realized losses during the three and nine months ended September 30, 2010 of ($8,000) and ($68,000), respectively. There were no sales of securities for which the fair value option was elected during the three and nine months ended September 30, 2009.

Dividend income is recorded based on cash dividends and comprises the “Dividends” line item in the accompanying consolidated statement of income. Dividend income was $6,000 and $20,000 for the three and nine months ended September 30, 2010, and $8,000 and $26,000 for the three and nine months ended September 30, 2009.

Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy has also been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following three levels of inputs are used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of most trading securities and securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair values of certain mortgage-backed securities and one corporate bond classified as available for sale have been determined by using Level 3

 

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

inputs. The Corporation has engaged valuation experts to price these securities using proprietary models, which incorporate assumptions that market participants would use in pricing the securities, including bid/ask spreads and liquidity and credit premiums.

Trust preferred securities which are issued by financial institutions and insurance companies are priced using Level 3 inputs. The decline in the level of observable inputs and market activity in this class of investments by the measurement date has been significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, vary widely, and the once active market has become comparatively inactive.

The Corporation engaged a third party consultant who has developed a model for pricing these securities. Information such as historical and current performance of the underlying collateral, deferral and default rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required by a market participant, and financial trend analysis with respect to the individual issuing financial institutions and insurance companies are utilized in determining individual security valuations. Due to the current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

The Corporation’s derivative instrument is an interest rate swap that trades in liquid markets. As such, significant fair value inputs can generally be verified and do not typically involve significant management judgments (Level 2 inputs).

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by external appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2010 and December 31, 2009 (in thousands):

 

           Fair Value Measurements at September 30, 2010  Using  
           Quoted Prices in
Active Markets for
Identical Assets
     Significant Other
Observable Inputs
    Significant
Unobservable
Inputs
 

Description

   Total     (Level 1)      (Level 2)     (Level 3)  

Assets:

         

Securities Available For Sale:

         

U.S. Treasury

   $ 8,267      $ —         $ 8,267      $ —     

U.S. Government sponsored entities

     129,887        4,000         125,887        —     

States and political subdivisions

     127,946        11,427         116,519        —     

Residential mortgage and asset backed

     199,823        15,298         184,162        363   

Corporate notes and bonds

     9,665        —           8,385        1,280   

Pooled trust preferred

     1,412        —           —          1,412   

Pooled SBA

     23,188        23,188         —          —     

Other securities

     1,702        1,702         —          —     
                                 

Total Securities Available For Sale

   $ 501,890      $ 55,615       $ 443,220      $ 3,055   
                                 

Trading Securities:

         

Equity securities – financial services

   $ 469      $ 469       $ —        $ —     

Equity securities – health care

     147        147         —          —     

Equity securities – energy

     102        102         —          —     

Equity securities – industrials

     100        100         —          —     

Equity securities – utilities

     60        60         —          —     
                                 

Total Trading Securities

   $ 878      $ 878       $ —        $ —     
                                 

Liabilities – Interest rate swap

   $ (1,029   $ —         $ (1,029   $ —     
                                 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

           Fair Value Measurements at December 31, 2009  Using  
           Quoted Prices in
Active Markets for
Identical Assets
     Significant Other
Observable Inputs
    Significant
Unobservable
Inputs
 

Description

   Total     (Level 1)      (Level 2)     (Level 3)  

Assets:

         

Securities Available For Sale:

         

U.S. Treasury

   $ 10,269      $ —         $ 10,269      $ —     

U.S. Government sponsored entities

     106,961        30,643         76,318        —     

States and political subdivisions

     56,561        3,273         53,288        —     

Residential mortgage and asset backed

     145,400        5,625         139,272        503   

Corporate notes and bonds

     13,631        —           13,631        —     

Pooled trust preferred

     1,909        —           —          1,909   

Pooled SBA

     8,989        5,017         3,972        —     

Other securities

     1,695        1,695         —          —     
                                 

Total Securities Available For Sale

   $ 345,415      $ 46,253       $ 296,750      $ 2,412   
                                 

Trading Securities:

         

Equity securities – financial services

   $ 440      $ 440       $ —        $ —     

Equity securities – health care

     164        164         —          —     

Equity securities – energy

     109        109         —          —     

Equity securities – U.S. Government sponsored entities

     102        102         —          —     

Equity securities – industrials

     81        81         —          —     

Equity securities – other

     59        59         —          —     
                                 

Total Trading Securities

   $ 955      $ 955       $ —        $ —     
                                 

Liabilities – Interest rate swap

   $ (701   $ —         $ (701   $ —     
                                 

The table below presents a reconciliation and income statement classification of gains and losses for all securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2010 (in thousands):

 

     Three months ended
September 30, 2010
    Nine months ended
September 30, 2010
 
     Residential
mortgage  and
asset backed
    Corporate
notes and
bonds
    Pooled
trust
preferred
    Residential
mortgage and
asset backed
    Corporate
notes and
bonds
     Pooled
trust
preferred
 

Beginning balance

   $ 415      $ 1,300      $ 1,524      $ 503      $ —         $ 1,909   

Transfers into Level 3 (a) (b)

     —          —          —          —          1,040         —     

Transfers out of Level 3

     —          —          —          —          —           —     

Total gains or losses (realized/unrealized):

             

Included in earnings

     —          —          (821     —          —           (1,923

Included in other comprehensive income

     —          (20     709        —          240         1,436   

Purchases, issuances, sales, and settlements:

             

Sales

     —          —          —          —          —           —     

Settlements

     (52     —          —          (140     —           (10
                                                 

Ending balance

   $ 363      $ 1,280      $ 1,412      $ 363      $ 1,280       $ 1,412   
                                                 

 

(a) Transferred from Level 2 to Level 3 because of lack of observable market data due to decrease in market activity for this security.
(b) The Corporation’s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that caused the transfer.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

The unrealized losses reported in earnings for the three and nine months ended September 30, 2010 for Level 3 assets that are still held at September 30, 2010 relate to pooled trust preferred securities deemed to be other-than-temporarily impaired.

During the quarter ended September 30, 2010, the following available for sale securities reported as Level 1 securities as of the beginning of the period were transferred to the Level 2 category (in thousands):

 

Description

   Fair value on
date of transfer
 

U.S. Government sponsored entities

   $ 16,502   

States and political subdivisions

     11,085   

Residential mortgage and asset backed

     25,636   
        

Total

   $ 53,223   
        

During the nine months ended September 30, 2010, the following available for sale securities reported as Level 1 securities as of the beginning of the period were transferred to the Level 2 category (in thousands):

 

Description

   Fair value on
date of transfer
 

U.S. Government sponsored entities

   $ 18,643   

States and political subdivisions

     3,273   

Residential mortgage and asset backed

     5,625   
        

Total

   $ 27,541   
        

These securities were transferred from the Level 1 category to the Level 2 category since there were no longer quoted prices for identical assets in active markets that the Corporation had the ability to access.

During the quarter ended September 30, 2010, one Pooled SBA security that was classified as a Level 2 security at June 30, 2010 was transferred to the Level 1 category. The fair value on the date of transfer was $884,000. During the nine months ended September 30, 2010, two pooled SBA securities that were classified as Level 2 securities at December 31, 2009 were transferred to the Level 1 category. The fair value on the date of transfer was $1,798,000. These securities were transferred since the Corporation was able to access a quoted price for identical assets in an active market.

Assets and liabilities measured at fair value on a non-recurring basis are as follows at September 30, 2010 and December 31, 2009 (in thousands):

 

            Fair Value Measurements at September 30, 2010  Using  
            Quoted Prices in
Active Markets for
Identical Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
 

Description

   Total      (Level 1)      (Level 2)      (Level 3)  

Assets, Impaired loans

   $ 4,173       $ —         $ —         $ 4,173   
            Fair Value Measurements at December 31, 2009  Using  
            Quoted Prices in
Active Markets for
Identical Assets
     Significant Other
Observable Inputs
     Significant
Unobservable
Inputs
 

Description

   Total      (Level 1)      (Level 2)      (Level 3)  

Assets, Impaired loans

   $ 9,471       $ —         $ —         $ 9,471   

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

Impaired loans, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a principal balance of $5,308,000 with a valuation allowance of $1,135,000 as of September 30, 2010, resulting in an additional provision (benefit) for loan losses of ($342,000) and ($27,000) for the three and nine months then ended. Impaired loans had a principal balance of $10,880,000 with a valuation allowance of $1,409,000 as of December 31, 2009, resulting in an additional provision for loan losses of $730,000 for the year then ended.

Fair Value of Financial Instruments

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, other borrowings, and variable rate loans, deposits or borrowings that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of loans held for sale is based on market quotes for similar loans. Fair value of debt is based on current rates for similar financing. It is not practical to determine the fair value of FHLB stock and other equity interests due to restrictions placed on the transferability of these instruments. The fair value of off balance sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements. The fair value of off balance sheet items is not material.

While these estimates of fair value are based on management’s judgment of the most appropriate factors as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets had been disposed of or the liabilities settled at that date, since market values may differ depending on various circumstances. The estimated fair values would also not apply to subsequent dates.

In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the disclosures. Also, non-financial instruments typically not recognized on the balance sheet may have value but are not included in the fair value disclosures. These include, among other items, the estimated earnings power of core deposits, the earnings potential of trust accounts, the trained workforce, customer goodwill, and similar items.

The following table presents the carrying amount and fair value of financial instruments at September 30, 2010 and December 31, 2009 (in thousands):

 

     September 30, 2010     December 31, 2009  
     Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  

ASSETS

        

Cash and cash equivalents

   $ 30,792      $ 30,792      $ 22,358      $ 22,358   

Interest bearing time deposits with other banks

     3,517        3,575        6,388        6,565   

Securities available for sale

     501,890        501,890        345,415        345,415   

Trading securities

     878        878        955        955   

Loans held for sale

     3,951        3,994        1,218        1,228   

Net loans

     742,115        772,612        705,347        728,074   

FHLB and other equity interests

     6,726        N/A        6,907        N/A   

Accrued interest receivable

     6,235        6,235        4,728        4,728   

LIABILITIES

        

Deposits

   $ (1,114,654   $ (1,124,588   $ (956,858   $ (956,231

FHLB, Treasury, tax and loan, and other borrowings

     (96,225     (104,329     (101,383     (109,753

Subordinated debentures

     (20,620     (10,536     (20,620     (10,609

Interest rate swap

     (1,029     (1,029     (701     (701

Accrued interest payable

     (1,603     (1,603     (1,906     (1,906

 

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

SECURITIES

Securities available for sale at September 30, 2010 and December 31, 2009 were as follows (in thousands):

 

     September 30, 2010      December 31, 2009  
     Amortized      Unrealized     Fair      Amortized      Unrealized     Fair  
     Cost      Gains      Losses     Value      Cost      Gains      Losses     Value  

U.S. Treasury

   $ 8,176       $ 91       $ —        $ 8,267       $ 10,288       $ 5       $ (24   $ 10,269   

U.S. Gov’t sponsored entities

     124,057         5,830         —          129,887         107,615         94         (748     106,961   

State & political subdivisions

     122,575         5,374         (3     127,946         55,710         991         (140     56,561   

Residential mortgage & asset backed

     195,647         4,311         (135     199,823         144,878         1,188         (666     145,400   

Corporate notes & bonds

     13,349         —           (3,684     9,665         18,713         —           (5,082     13,631   

Pooled trust preferred

     2,661         —           (1,249     1,412         4,594         —           (2,685     1,909   

Pooled SBA

     22,550         638         —          23,188         8,894         102         (7     8,989   

Other securities

     1,670         35         (3     1,702         1,670         28         (3     1,695   
                                                                     

Total

   $ 490,685       $ 16,279       $ (5,074   $ 501,890       $ 352,362       $ 2,408       $ (9,355   $ 345,415   
                                                                     

At September 30, 2010, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

Securities with unrealized losses at September 30, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

 

September 30, 2010

 

Description of Securities

   Less than 12 Months     12 Months or More     Total  
   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

U.S. Treasury

   $ —         $ —        $ —         $ —        $ —         $ —     

U.S. Gov’t sponsored entities

     —           —          —           —          —           —     

State & political subdivisions

     4,139         (3     —           —          4,139         (3

Residential mortgage & asset backed

     14,963         (105     3,910         (30     18,873         (135

Corporate notes & bonds

     —           —          9,665         (3,684     9,665         (3,684

Pooled trust preferred

     —           —          267         (1,249     267         (1,249

Pooled SBA

     —           —          —           —          —           —     

Other securities

     —           —          146         (3     146         (3
                                                   
   $ 19,102       $ (108   $ 13,988       $ (4,966   $ 33,090       $ (5,074
                                                   

 

December 31, 2009

 

Description of Securities

   Less than 12 Months     12 Months or More     Total  
   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

U.S. Treasury

   $ 6,201       $ (24   $ —         $ —        $ 6,201       $ (24

U.S. Gov’t sponsored entities

     49,420         (748     —           —          49,420         (748

State & political subdivisions

     9,865         (103     3,710         (37     13,575         (140

Residential mortgage & asset backed

     68,293         (644     3,198         (22     71,491         (666

Corporate notes & bonds

     —           —          13,631         (5,082     13,631         (5,082

Pooled trust preferred

     —           —          1,909         (2,685     1,909         (2,685

Pooled SBA

     1,009         (7     —           —          1,009         (7

Other securities

     —           —          146         (3     146         (3
                                                   
   $ 134,788       $ (1,526   $ 22,594       $ (7,829   $ 157,382       $ (9,355
                                                   

The Corporation evaluates securities for other-than-temporary impairment on a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation.

At September 30, 2010, management evaluated the structured pooled trust preferred securities for other-than-temporary impairment by estimating the cash flows expected to be received from each security within the collateral pool, taking into account estimated levels of deferrals and defaults by the underlying issuers, and discounting those cash flows at the

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

appropriate accounting yield. Management also assumed that all issuers in deferral will default prior to their next payment date. Trust preferred collateral is deeply subordinated within issuers’ capital structures, so large recoveries are unlikely. Accordingly, management assumed 10% recoveries on bank collateral and none on collateral issued by other companies. Due to the current crisis in the U.S. economy, management also added a baseline default rate of 2% annually for the next two years to our default projections for specific issuers. This percentage represents the peak, post-war bank default rate that occurred at the height of the savings and loan crisis, which we believe is an accurate proxy for the current environment. Within the next two years, management expects that credit markets will normalize and that banks with the financial strength to survive will default at a .36% average annual rate, which represents Moody’s idealized default probability for BBB corporate credits, and is in line with historical bank failure rates. In addition, management expects prepayments to occur at a rate of approximately 5% over a five year period, with the exception of certain large institutions that are expected to begin calling their collateral in 2011 and 2012 as a result of the elimination of the Tier I capital treatment of trust preferred securities for institutions with greater than $15 billion in assets beginning in 2013.

Using this methodology, five of the Corporation’s structured pooled trust preferred securities are deemed to be other-than-temporarily impaired. An impairment loss for the entire cost basis of two of these securities was recognized in earnings prior to 2010, and impairment losses for the remaining securities were recognized in earnings during the three and nine months ended September 30, 2010 as disclosed in the table below. The Corporation separated the other-than-temporary impairment related to these structured pooled trust preferred securities into (a) the amount of the total impairment related to credit loss, which is recognized in the income statement, and (b) the amount of the total impairment related to all other factors, which is recognized in other comprehensive income. The Corporation measured the credit loss component of other-than-temporary impairment based on the difference between the cost basis and the present value of cash flows expected to be collected.

The following table provides detailed information related to the Corporation’s structured pooled trust preferred securities as of and for the three and nine months ended September 30, 2010 (in thousands):

 

     Adjusted
Amortized
Cost
     Unrealized
Gain (Loss)
    Fair
Value
     Credit Losses
Realized in Earnings
Three Months
Ended Sept. 30, 2010
     Credit Losses
Realized in Earnings
Nine Months

Ended Sept. 30, 2010
 

ALESCO Preferred Funding V, Ltd.

   $ 860       $ (640   $ 220       $ 180       $ 380   

ALESCO Preferred Funding XII, Ltd.

     429         (392     37         —           784   

ALESCO Preferred Funding XVII, Ltd.

     —           —          —           —           —     

Preferred Term Securities XVI, Ltd.

     227         (217     10         641         759   

US Capital Funding VI, Ltd.

     —           —          —           —           —     

MM Community Funding II, Ltd.

     1,145         —          1,145         —           —     
                                           

Total

   $ 2,661       $ (1,249   $ 1,412       $ 821       $ 1,923   
                                           

A roll-forward of the other-than-temporary impairment amount related to credit losses for the three months ended September 30, 2010 is as follows (in thousands):

 

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, beginning of period

   $ 2,517   

Additional credit loss for which other-than-temporary impairment was not previously recognized

     —     

Additional credit loss for which other-than-temporary impairment was previously recognized

     821   
        

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, end of period

   $ 3,338   
        

 

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

A roll-forward of the other-than-temporary impairment amount related to credit losses for the nine months ended September 30, 2010 is as follows (in thousands):

 

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, beginning of period

   $ 1,415   

Additional credit loss for which other-than-temporary impairment was not previously recognized

     759   

Additional credit loss for which other-than-temporary impairment was previously recognized

     1,164   
        

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, end of period

   $ 3,338   
        

At September 30, 2010, approximately 25% of the total unrealized losses relate to structured pooled trust preferred securities, primarily from issuers in the financial services industry, which are not currently trading in an active, open market with readily observable prices. As a result, these securities were classified within Level 3 of the valuation hierarchy. The fair values of these securities have been calculated using a discounted cash flow model and market liquidity premium. With the current market conditions, the assumptions used to determine the fair value of Level 3 securities has greater subjectivity due to the lack of observable market transactions. The fair values of these securities have declined due to the fact that subsequent offerings of similar securities pay a higher market rate of return. This higher rate of return reflects the increased credit and liquidity risks in the marketplace. Except as described above, based on management’s evaluation of the structured pooled trust preferred securities, the present value of the projected cash flows is sufficient for full repayment of the amortized cost of the securities and, therefore, it is believed that the decline in fair value is temporary due to current market conditions. However, without recovery of these securities, other-than-temporary impairments may occur in future periods.

For all of the securities that comprise corporate notes and bonds, management monitors publicly available financial information such as filings with the Securities and Exchange Commission in order to evaluate the securities for other-than-temporary impairment. For financial institution issuers, management also monitors information from quarterly “call” report filings that are used to generate Uniform Bank Performance Reports. When reviewing this information, management considers the financial condition and near term prospects of the issuer and whether downgrades by bond rating agencies have occurred. The Corporation does not intend to sell and it is not more likely than not that it will be required to sell the securities in an unrealized loss position before recovery of its amortized cost basis.

As of September 30, 2010 and December 31, 2009, management concluded that the previously mentioned securities were not other-than-temporarily impaired for the following reasons:

 

   

There is no indication of any significant deterioration of the creditworthiness of the institutions that issued the securities.

 

   

The unrealized losses are predominantly attributable to liquidity disruptions within the credit markets and the generally stressed condition of the financial services industry.

 

   

All contractual interest payments on the securities have been received as scheduled, and no information has come to management’s attention through the processes previously described which would lead to a conclusion that future contractual payments will not be received timely.

Information pertaining to security sales is as follows (in thousands):

 

     Proceeds      Gross Gains      Gross Losses  

Three months ended September 30, 2010

   $ 13,442       $ 121       ($ 3

Nine months ended September 30, 2010

   $ 51,507       $ 708       ($ 17

 

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at September 30, 2010 and December 31, 2009 (in thousands):

 

     September 30, 2010      December 31, 2009  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

1 year or less

   $ 32,416       $ 32,669       $ 27,183       $ 27,175   

1 year – 5 years

     58,086         59,968         74,532         74,608   

5 years – 10 years

     133,653         140,388         61,617         61,077   

After 10 years

     69,213         67,341         42,482         35,460   
                                   
     293,368         300,366         205,814         198,320   

Residential mortgage & asset backed securities

     195,647         199,822         144,878         145,400   
                                   

Total debt securities

   $ 489,015       $ 500,188       $ 350,692       $ 343,720   
                                   

Mortgage and asset backed securities are not due at a single date; periodic payments are received based on the payment patterns of the underlying collateral.

LOANS

Total loans at September 30, 2010 and December 31, 2009 are summarized as follows (in thousands):

 

     Sept. 30,
2010
     December 31,
2009
 

Residential mortgage

   $ 258,580       $ 225,845   

Commercial, industrial, and agricultural

     241,829         240,357   

Commercial mortgage

     199,389         194,718   

Consumer and other

     55,703         57,102   
                 
   $ 755,501       $ 718,022   
                 

At September 30, 2010 and December 31, 2009, net unamortized loan costs and fees of ($289,000) and ($417,000), respectively, have been included in the carrying value of loans.

The Corporation’s outstanding loans and related unfunded commitments are primarily concentrated within Central and Western Pennsylvania. The Bank attempts to limit concentrations within specific industries by utilizing dollar limitations to single industries or customers, and by entering into participation agreements with third parties. Collateral requirements are established based on management’s assessment of the customer.

Deposit accounts that have overdrawn their current balance, known as overdrafts, are reclassified to loans. Overdrafts included in loans are $1,472,000 at September 30, 2010 and $391,000 at December 31, 2009.

 

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

Impaired loans are as follows at September 30, 2010 and December 31, 2009 (in thousands):

 

     Sept. 30,
2010
     December 31,
2009
 

Loans with no allocated allowance for loan losses

   $ 1,416       $ 3,182   

Loans with allocated allowance for loan losses

     13,108         10,880   
                 
   $ 14,524       $ 14,062   
                 

Amount of the allowance for loan losses allocated

   $ 1,394       $ 1,409   
                 

Average impaired loans outstanding during the three and nine month periods ended September 30, 2010 were $14,239 and $14,669, respectively. Interest income recognized during impairment and cash basis interest income recognized was not material in any period presented.

Nonaccrual loans and loans past due over 90 days still on accrual at September 30, 2010 and December 31, 2009 are as follows (in thousands):

 

     Sept. 30,
2010
     December 31,
2009
 

Loans past due over 90 days still on accrual

   $ 532       $ 584   

Nonaccrual loans

     6,661         12,757   
                 
   $ 7,193       $ 13,341   
                 

Nonaccrual loans and loans past due over 90 days still on accrual include impaired loans that are not performing and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment.

The Corporation has allocated $513,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2010. As of September 30, 2010, the carrying value of these loans was $9,535,000. The Corporation has no further loan commitments to customers whose loans are classified as a troubled debt restructuring.

FEDERAL HOME LOAN BANK (FHLB) STOCK

As a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), the Corporation is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants.

As of September 30, 2010, the Corporation holds $5,401,000 of stock in FHLB. In December 2008, the FHLB voluntarily suspended dividend payments on its stock, as well as the repurchase of excess stock from members. The FHLB cited a significant reduction in the level of core earnings resulting from lower short-term interest rates, the increased cost of liquidity, and constrained access to the debt markets at attractive rates and maturities as the main reasons for the decision to suspend dividends and the repurchase of excess capital stock. The FHLB last paid a dividend in the third quarter of 2008.

 

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. The Company evaluates impairment quarterly. The decision of whether impairment exists is a matter of judgment that reflects our view of the FHLB’s long-term performance, which includes factors such as the following:

 

   

its operating performance;

 

   

the severity and duration of declines in the fair value of its net assets related to its capital stock amount;

 

   

its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance;

 

   

the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of FHLB; and

 

   

its liquidity and funding position

After evaluating all of these considerations, the Corporation concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.

DEPOSITS

Total deposits at September 30, 2010 and December 31, 2009 are summarized as follows (in thousands):

 

     Percentage
Change
    Sept. 30,
2010
     December 31,
2009
 

Checking, non-interest bearing

     20.8   $ 140,508       $ 116,310   

Checking, interest bearing

     9.2     266,669         244,218   

Savings accounts

     30.7     356,934         273,096   

Certificates of deposit

     8.4     350,543         323,234   
                   
     16.5   $ 1,114,654       $ 956,858   
                   

EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares issuable under certain stock compensation plans. For the three and nine month periods ended September 30, 2010, 119,875 and 86,750 shares issuable under stock compensation plans, respectively, were excluded from the diluted earnings per share calculations since they were anti-dilutive. For the three and nine month periods ended September 30, 2009, 45,000 and 124,875 shares, respectively, were excluded from the diluted earnings per share calculations since they were anti-dilutive.

Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. The Corporation has determined that its outstanding non-vested stock awards are participating securities

 

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

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

 

     Three months
ended
September 30,
    Nine  months
ended
September 30,
 
     2010     2009     2010     2009  

Basic earnings per common share computation:

        

Distributed earnings allocated to common stock

   $ 2,008      $ 1,432      $ 4,900      $ 4,273   

Undistributed earnings allocated to common stock

     1,090        813        3,462        2,677   
                                

Net earnings allocated to common stock

   $ 3,098      $ 2,245      $ 8,362      $ 6,950   
                                

Weighted average common shares outstanding, including shares considered participating securities

     12,203        8,681        10,092        8,643   

Less: Average participating securities

     (28     (11     (31     (14
                                

Weighted average shares

     12,175        8,670        10,061        8,629   
                                

Basic earnings per common share

   $ 0.25      $ 0.26      $ 0.83      $ 0.81   
                                

Diluted earnings per common share computation:

        

Net earnings allocated to common stock

   $ 3,098      $ 2,245      $ 8,362      $ 6,950   
                                

Weighted average common shares outstanding for basic earnings per common share

     12,175        8,670        10,061        8,629   

Add: Dilutive effects of assumed exercises of stock options

     5        25        9        16   
                                

Weighted average shares and dilutive potential common shares

     12,180        8,695        10,070        8,645   
                                

Diluted earnings per common share

   $ 0.25      $ 0.26      $ 0.83      $ 0.80   
                                

COMMON STOCK ISSUANCE

On June 18, 2010, the Corporation completed an equity offering, resulting in the issuance of 3,365,853 shares of common stock at $10.25 per share. In total, the Corporation raised proceeds of $32,128,000, net of issuance costs accrued on or prior to September 30, 2010.

DERIVATIVE INSTRUMENTS

The Corporation records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

For derivatives designated as cash flow hedges, the effective portion of the changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified into earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Corporation assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. On August 1, 2008, the Corporation executed an interest rate swap agreement with a 5 year term to hedge $10 million of a subordinated note that was entered into by the Corporation during 2007 and elected cash flow hedge accounting for the agreement. The Corporation’s objective in using this derivative is to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involves the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreement without exchange of the underlying notional amount. At September 30, 2010, the variable rate on the subordinated debt was 1.84% (LIBOR plus 155 basis points) and the Corporation was paying 5.84% (4.29% fixed rate plus 155 basis points).

 

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

As of September 30, 2010, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Corporation does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

The following tables provide information about the amounts and locations of activity related to the interest rate swap designated as a cash flow hedge within the Corporation’s consolidated balance sheet and statement of income as of September 30, 2010 and for the three and nine month periods then ended (in thousands):

 

      Liability Derivative  
As of September 30, 2010    Balance Sheet
Location
   Fair
Value
 

Interest rate contract

   Accrued interest payable
and other liabilities
   ($ 1,029

 

     (a)    

(b)

   (c)    

(d)

   (e)  

For the Three Months Ended September 30, 2010

            

Interest rate contract

   $ (61  

Interest expense –

subordinated debentures

   ($ 97   Other income    $ —     

For the Nine Months Ended September 30, 2010

            

Interest rate contract

   $ (213  

Interest expense –

subordinated debentures

   ($ 299   Other income    $ —     

 

(a) Amount of Gain or (Loss) Recognized in Other Comprehensive Loss on Derivative (Effective Portion), net of tax
(b) Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
(c) Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
(d) Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
(e) Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Amounts reported in accumulated other comprehensive loss related to the interest rate swap will be reclassified to interest expense as interest payments are made on the subordinated debentures. Such amounts reclassified from accumulated other comprehensive loss to interest expense in the next 12 months are expected to approximate $400,000.

SUBSEQUENT EVENT

On October 14, 2010, the Corporation repaid a borrowing with the FHLB in the amount of $10 million and a rate of 5.63%. Since this borrowing had an original maturity date of March 22, 2012, the Corporation incurred a prepayment penalty of $708,000, which will be reported in earnings during the quarter ended December 31, 2010.

 

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

(UNAUDITED)

 

 

 

 

RECENT ACCOUNTING PRONOUNCEMENTS

In March 2010, the FASB issued Accounting Standards Update No. 2010-11, “Derivatives and Hedging (Topic 815); Scope Exception Related to Embedded Credit Derivatives.” This update clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only one form of embedded credit derivative qualifies for the exemption – one that is related only to the subordination of one financial instrument to another. For example, the cash flows associated with a typical collateralized debt obligation are allocated first to senior tranches then to subordinated tranches as available. This results in an embedded credit derivative as the cash flows to the lower tranches are subordinated to the more senior tranches. Entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. In initially adopting the amendments in this update, an entity may elect the fair value option for any investment in a beneficial interest in a securitized financial asset. The amendments in this update are effective at the beginning of an entity’s first fiscal quarter beginning after June 15, 2010, and early adoption is permitted. The Corporation is not adopting the fair value option for its structured pooled trust preferred securities; therefore, the adoption of this update did not have a material effect on the Corporation’s results of operations or financial position.

ITEM 2

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial statements of CNB Financial Corporation (the “Corporation”) is presented to provide insight into management’s assessment of financial results. The Corporation’s principal subsidiary, CNB Bank (the “Bank”), provides financial services to individuals and businesses primarily within the west central Pennsylvania counties of Cambria, Clearfield, Centre, Elk, Jefferson and McKean. ERIEBANK, a division of CNB Bank, provides financial services to individuals and businesses in the northwestern Pennsylvania counties of Erie and Crawford. The Bank is subject to regulation, supervision and examination by the Pennsylvania State Department of Banking as well as the Federal Deposit Insurance Corporation. The financial condition and results of operations are not necessarily indicative of future performance. One of the Corporation’s subsidiaries, CNB Securities Corporation, is incorporated in Delaware and currently maintains investments in debt and equity securities. County Reinsurance Company, also a subsidiary, is an Arizona Corporation, and provides credit life and disability insurance for customers of CNB Bank. CNB Insurance Agency, incorporated in Pennsylvania, provides for the sale of nonproprietary annuities and other insurance products. Holiday Financial Services Corporation, incorporated in Pennsylvania, offers small balance unsecured loans and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics. Management’s discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes.

GENERAL OVERVIEW

In September 2009, the Corporation expanded its ERIEBANK division by opening a temporary location in Meadville, Pennsylvania and construction of a full service office was completed in the second quarter of 2010. In September 2010, the Corporation expanded CNB Bank by opening a full service branch in Kylertown, Pennsylvania. Management believes that our ERIEBANK division, along with our traditional CNB Bank market areas, should provide the Bank with moderate loan growth during 2010. Deposit growth was significant in 2009 and the first nine months of 2010 as a result of the Corporation’s continued offering of competitive rates and growth of its ERIEBANK division. Deposit growth is expected to be moderate throughout the remainder of 2010 due to the continued historically low interest rate environment and the resulting adjustments that management made to certain deposit rates in the first quarter of 2010.

While non-interest costs are expected to increase with the growth of the Corporation’s banking and consumer discount loan portfolios, these new ventures should continue to provide growth in earning assets as well as growth in relationships and enhanced non-interest income which we believe will more than offset these costs in 2010 and beyond. In addition, throughout 2009 and the first nine months of 2010, management conducted a cost management study covering all areas of non-interest expense. Cost savings as a result of this study were recognized in 2009 and the first nine months of 2010, with benefits expected to continue into subsequent periods.

 

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The interest rate environment will continue to play an important role in the future earnings of the Corporation. We experienced some compression of our net interest margin in the first nine months of 2010 as compared to the first nine months of 2009 as a result of the current interest rate environment. However, management will continue to apply a disciplined approach to managing our balance sheet in these uncertain times. We have taken measures such as instituting rate floors on our commercial lines of credit and home equity lines as a result of the historic lows on various key interest rates such as the Prime Rate and 3-month LIBOR. The Corporation’s net interest margin increased from 3.67% for the six months ended June 30, 2010 to 3.70% for the nine months ended September 30, 2010 as the Corporation continued to attract and deploy low cost core deposits and was able to actively manage the cost of its existing deposit base.

In addition, we will implement strategies intended to effectively reduce our cost of funds. Due to our continued growth, non-interest income should be enhanced in several areas including wealth and asset management income, service charges and other fees. While our business plan continues to focus on commercial lending, we also offer a full service approach to servicing the needs of high net worth individuals through our Private Banking group.

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, we feel the Corporation is positioned to sustain core earnings through the remainder of 2010.

On July 21, 2010, President Obama signed into law the “Dodd-Frank Wall Street and Consumer Protection Act” (Financial Reform) that could impact the performance of the Corporation in future periods. The Financial Reform includes numerous provisions designed to strengthen the financial industry, enhance consumer protection, expand disclosures and provide for transparency. Some of these provisions include changes to FDIC insurance coverage, which includes a permanent increase in the coverage to $250,000 and extending the Temporary Account Guarantee Program to December 31, 2010. Additional provisions create a Consumer Protection Bureau, which is authorized to write rules on all consumer financial products, and a Financial Services Oversight Council, which is empowered to determine which entities are systematically significant and require tougher regulations and is charged with reviewing, and when appropriate, submitting comments to the Securities and Exchange Commission and Financial Accounting Standards Board with respect to existing or proposed accounting principles, standards or procedures. Although the aforementioned provisions are only a few of the numerous ones included in the Financial Reform, the full impact of the entire Financial Reform will not be known until the full implementation is completed, which may take more than 12 months.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled $30.8 million at September 30, 2010 compared to $22.4 million at December 31, 2009. Cash and cash equivalents will fluctuate based on the timing and amount of liquidity events that occur in the normal course of business.

We believe 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 available for sale and trading securities have combined to increase $156.4 million or 45.2% since December 31, 2009. The increase is primarily the result of purchases of securities issued by government sponsored entities, including residential mortgage and asset backed securities, and securities issued by state and local political subdivisions. These purchases resulted from deposit growth and proceeds from the Corporation’s capital raise not reinvested in loans.

 

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The Corporation’s structured pooled trust preferred securities currently do not trade in an active, open market with readily observable prices and are therefore classified within Level 3 of the valuation hierarchy. The fair value of these securities has been calculated using a discounted cash flow model and market liquidity premium. With the current market conditions, the assumptions used to determine the fair value of Level 3 securities has greater subjectivity due to the lack of observable market transactions. The fair values of these securities have declined due to the fact that the subsequent offerings of similar securities pay a higher market rate of return. The higher rate of return reflects the increased credit and liquidity risks in the market.

When the structured pooled trust preferred securities were purchased, they were considered to be investment grade based on ratings assigned by Moody’s. As a result of liquidity disruptions within the credit markets and the generally stressed conditions within the financial services industry, Moody’s has downgraded the rating of these securities since they were purchased by the Corporation. As of September 30, 2010, the Corporation held two structured pooled trust preferred securities rated Ca by Moody’s having an amortized cost of $1,087,000 and fair value of $230,000, one structured pooled trust preferred security rated C by Moody’s having an amortized cost of $429,000 and fair value of $37,000, and one structured pooled trust preferred security rated Baa2 by Moody’s having an amortized cost and fair value of $1,145,000. Based on our evaluation of certain structured pooled trust preferred securities, the present value of the projected cash flows was not sufficient for full repayment of the amortized cost for three of the securities resulting in total impairment charges realized during the first nine months and third quarter of 2010 of $1,923,000 and $821,000, respectively. For the other pooled trust preferred security, the present value of the projected cash flows was sufficient for full repayment of amortized cost, and, therefore, it is believed the decline in fair value is temporary due to current market conditions. However, without recovery, other-than-temporary impairments may occur in future periods.

During the first nine months of 2010, management sold certain debt securities in an attempt to re-position a portion of its portfolio into lower risk-weighted assets. Proceeds from the sales were reinvested in other available for sale securities. Individually and in the aggregate, none of these sales resulted in the realization of a significant loss.

The Corporation generally buys into the market over time and does not attempt to “time” its transactions. In doing this, the highs and lows of the market are averaged into the portfolio and minimize the overall effect of different rate environments. We monitor 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, we maintain a sufficient level of liquidity to satisfy depositor requirements and various credit needs of our customers.

LOANS

The Corporation experienced an increase in loans, net of unearned discount, of $37.8 million, or 5.3%, during the first nine months of 2010. Our lending is focused in the west, central and northwest Pennsylvania markets and consists principally of commercial and retail lending, which includes single family residential mortgages and other consumer loans. The Corporation views commercial lending as its competitive advantage and continues to focus on this area by hiring and retaining experienced loan officers and supporting them with quality credit analysis. The Corporation expects loan demand to increase throughout the remainder of 2010.

 

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ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established by provisions for losses in the loan portfolio as well as overdrafts in deposit accounts. These provisions are charged against current income. Loans and overdrafts deemed not collectible are charged off against the allowance while any subsequent collections are recorded as recoveries and increase the allowance. The table below shows activity within the allowance account for the specified periods (in thousands):

 

     Nine months  ended
September 30, 2010
    Year ending
December 31,  2009
    Nine months  ended
September 30, 2009
 

Balance at beginning of period

   $ 9,795      $ 8,719      $ 8,719   

Charge-offs:

      

Commercial, industrial, and agricultural

     293        860        301   

Commercial mortgages

     166        381        307   

Residential mortgages

     184        378        292   

Consumer

     938        1,723        1,313   

Overdraft deposit accounts

     178        269        192   
                        
     1,759        3,611        2,405   
                        

Recoveries:

      

Commercial, industrial, and agricultural

     9        2        1   

Commercial mortgages

     4        —          —     

Residential mortgages

     3        1        1   

Consumer

     91        75        66   

Overdraft deposit accounts

     88        144        119   
                        
     195        222        187   
                        

Net charge-offs

     (1,564     (3,389     (2,218
                        

Provision for loan losses

     2,599        4,465        2,964   
                        

Balance at end of period

   $ 10,830      $ 9,795      $ 9,465   
                        

Loans, net of unearned discount

   $ 752,945      $ 715,142      $ 692,528   

Allowance to net loans

     1.44     1.37     1.37

Net charge-offs to average loans

     0.29     0.49     0.44

Nonperforming assets

   $ 7,587      $ 13,593      $ 14,400   

Nonperforming assets divided by total loans plus other real estate owned

     1.01     1.90     1.32

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

Reviewed

 

   

Commercial, industrial, and agricultural

 

   

Commercial mortgages

Homogeneous

 

   

Residential real estate

 

   

Consumer

 

   

Credit cards

 

   

Overdrafts

 

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

 

   

Levels of and trends in delinquencies, non-accrual loans, and classified loans

 

   

Trends in volume and terms of loans

 

   

Effects of any changes in lending policies and procedures

 

   

Experience, ability and depth of management

 

   

National and local economic trends and conditions

 

   

Concentrations of credit

The methodology described above was created using the experience of our credit administrator, guidance from the regulatory agencies, expertise of our third party loan review provider, and discussions with our peers. The resulting factors are applied to the pool balances in order to estimate the probable risk of loss within each pool. Prudent business practices dictate that the level of the allowance, as well as corresponding charges to the provision for loan losses, should be commensurate with identified areas of risk within the loan portfolio and the attendant risks inherent therein. The quality of the credit risk management function and the overall administration of this vital segment of the Corporation’s assets are critical to the ongoing success of the Corporation.

The previously mentioned analysis considered numerous historical and other factors to analyze the adequacy of the allowance and current period charges against the provision for loan losses. Management paid special attention to a section of the analysis that compared and plotted the actual level of the allowance against the aggregate amount of loans adversely classified in order to compute the estimated probable losses associated with those loans. By noting the “spread” at the present time, as well as prior periods, management can determine the current adequacy of the allowance as well as evaluate trends that may be developing. The volume and composition of the Corporation’s loan portfolio continue to reflect growth in commercial credits including commercial real estate loans.

As mentioned in the Loans section of this analysis, management considers commercial lending a competitive advantage and continues to focus on this area as part of its strategic growth initiatives. However, management must also consider the fact that the inherent risk is more pronounced in these types of credits and is also driven by the economic environment of its market areas.

During the nine month period ended September 30, 2010, the Corporation decreased its provision for loan losses as compared to the nine month period ended September 30, 2009. The decrease was a result of reductions in net charge-offs, primarily in the consumer discount portfolio, and fewer nonperforming assets, as described in the following paragraph.

Nonperforming assets have decreased significantly from September 30, 2009 to September 30, 2010. One commercial loan, a shared national credit in which the Corporation participates, with a carrying value of $5.2 million at September 30, 2009 was placed on nonaccrual status during the third quarter of 2009. As a result of nine consecutive months of current payments and approval by the regulatory oversight body of the lead institution in the shared national credit, this loan was reinstated to accrual status during the third quarter of 2010 with no loss incurred by the Corporation. In addition, a commercial loan with a carrying value of $2.0 million at September 30, 2009 was repaid during the second quarter of 2010 and no loss was incurred by the Corporation. The specific allocation for these two loans totaled $640 thousand at September 30, 2009.

During the quarter ended September 30, 2010, the Corporation restructured two commercial loans that are considered to be troubled debt restructurings under GAAP. As of September 30, 2010, the carrying value of these loans is $9.5 million and the related provision for loan losses that was recognized was $513 thousand.

During the twelve month period ended September 30, 2010, the allowance for loan losses as a percentage of net loans increased by seven basis points from 1.37% at September 30, 2009 to 1.44% at September 30, 2010 due to reserves related to loans that do not require a specific allocation, primarily as a result of the current economic environment.

Management believes that both its 2010 provision and allowance for loan losses are reasonable and adequate to absorb probable incurred losses in its portfolio at September 30, 2010.

 

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PREMISES AND EQUIPMENT

Premises and equipment increased $767 thousand, or 3.3%, since December 31, 2009. This increase is the result of growth initiatives with the ERIEBANK division. As mentioned in the General Overview section, the Corporation completed the construction of a full service branch in Meadville, Pennsylvania in the second quarter of 2010.

BANK OWNED LIFE INSURANCE

The Corporation has periodically purchased Bank Owned Life Insurance (“BOLI”). The policies cover executive officers and a select group of other employees with the Bank being named as beneficiary. Earnings from the BOLI assist the Corporation in offsetting its benefit costs. During the first quarter of 2010, additional BOLI of $2.5 million was purchased.

FUNDING SOURCES

The Corporation considers deposits, short-term borrowings, and term debt when evaluating funding sources. Traditional deposits continue to be the main source of funds in the Corporation, increasing $157.8 million from $956.9 million at December 31, 2009 to $1,114.7 million at September 30, 2010. The growth in deposits was primarily due to increases in savings accounts of $83.8 million over this period as a result of the Corporation’s offering of competitive rates and growth of its ERIEBANK division. In addition, the Corporation’s non-interest bearing checking deposits increased by $24.2 million since December 31, 2009 due primarily to increases in business and consumer checking balances totaling $21.1 million.

During the first nine months of 2010, the Corporation continued to expand its business and consumer relationships in the ERIEBANK market, including the territory that is served by its new Meadville, Pennsylvania branch. In addition, a large regional bank that had a significant presence in northwestern Pennsylvania merged with another financial institution in 2009, resulting in opportunities to market the Corporation’s deposit products to potential new customers.

Periodically, the Corporation utilizes term borrowings from the Federal Home Loan Bank (“FHLB”) and other lenders to meet funding needs. Management plans to maintain access to short- and long-term borrowings as an available funding source when deemed appropriate.

In September 2010, the Corporation repaid a $20 million FHLB borrowing that had a fixed interest rate of 4.52% and an original maturity date of January 24, 2012. The Corporation re-borrowed $20 million from FHLB at a fixed interest rate of 2.09% with a maturity date of September 17, 2015. In connection with the repayment, the Corporation incurred a prepayment penalty of $1.1 million, which will be amortized into earnings during the 5 year term of the new borrowing, resulting in an effective interest rate for the new borrowing of 3.14%.

SHAREHOLDERS’ EQUITY AND CAPITAL RATIOS AND METRICS

On June 18, 2010, the Corporation completed an equity offering, resulting in the issuance of 3,365,853 shares of common stock at $10.25 per share. In total, the Corporation raised proceeds of $32.1 million, net of issuance costs accrued on or prior to September 30, 2010. Prior to September 30, 2010, the Corporation used proceeds from the offering of approximately $9.1 million to repay long-term debt. In addition, $20.0 million was invested in CNB Bank, and the remainder was invested in CNB Securities Corporation.

The Corporation’s capital continued to provide a base for profitable growth through September 30, 2010. Total shareholders’ equity was $117.8 million at September 30, 2010 and $69.4 million at December 31, 2009. In the first nine months of 2010, the Corporation earned $8.4 million and declared dividends of $4.9 million, a dividend payout ratio of 58.6% of net income. 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.

 

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The Corporation’s capital ratios and book value per common share as of September 30, 2010 and December 31, 2009 are as follows:

 

     Sept. 30, 2010     December 31, 2009  

Total risk-based capital ratio

     15.90     11.95

Tier 1 capital ratio

     14.65     10.70

Leverage ratio

     9.01     7.87

Tangible common equity/tangible assets (1)

     7.91     5.08

Book value per share

   $ 9.64      $ 7.92   

Tangible book value per share (1)

   $ 8.75      $ 6.68   

 

(1) Tangible common equity, tangible assets and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity is calculated by excluding the balance of goodwill and other intangible assets from the calculation of stockholders’ equity. Tangible assets is calculated by excluding the balance of goodwill and other intangible assets from the calculation of total assets. Tangible book value per share is calculated by dividing tangible common equity by the number of shares outstanding. The Corporation believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. A reconciliation of these non-GAAP financial measures is provided below (dollars in thousands, except per share data).

 

     Sept. 30, 2010     December 31, 2009  

Shareholders’ equity

   $ 117,777      $ 69,409   

Less goodwill

     10,821        10,821   

Less other intangible assets

     10        85   
                

Tangible common equity

   $ 106,946      $ 58,503   
                

Total assets

   $ 1,363,170      $ 1,161,591   

Less goodwill

     10,821        10,821   

Less other intangible assets

     10        85   
                

Tangible assets

   $ 1,352,339      $ 1,150,685   
                

Ending shares outstanding

     12,217,445        8,761,273   

Tangible book value per share

   $ 8.75      $ 6.68   

Tangible common equity/tangible assets

     7.91     5.08

LIQUIDITY

Liquidity measures an organization’s ability to meet cash obligations as they come due. The consolidated statement of cash flows presented on page 7 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 both management and the ALCO, which establishes and monitors ranges of acceptable liquidity. Management believes the Corporation’s current liquidity position is acceptable.

OFF BALANCE SHEET ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customer financing needs. The contractual amount of financial instruments with off-balance sheet risk was as follows at September 30, 2010 (in thousands):

 

Commitments to extend credit

   $ 208,147   

Standby letters of credit

     22,991   
        
   $ 231,138   
        

 

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CNB FINANCIAL CORPORATION

CONSOLIDATED YIELD COMPARISONS

AVERAGE BALANCES AND NET INTEREST MARGIN FOR THE NINE MONTHS ENDED

Dollars in thousands

 

     September 30, 2010      September 30, 2009  
     Average
Balance
    Annual
Rate
    Interest
Inc./Exp.
     Average
Balance
    Annual
Rate
    Interest
Inc./Exp.
 

ASSETS:

             

Interest-bearing deposits with other banks

   $ 7,254        1.62   $ 88       $ 9,187        2.58   $ 178   

Federal funds sold and securities purchased under agreements to resell

     —            —           2        0.00     —     

Securities:

             

Taxable (1)

     374,871        3.01     8,539         209,142        3.46     5,698   

Tax-Exempt (1,2)

     62,691        5.46     2,505         54,423        5.67     2,273   

Equity Securities (1,2)

     1,620        2.14     26         1,484        3.14     35   
                                     

Total securities

     439,182        3.35     11,070         265,049        3.89     8,006   
                                     

Loans:

             

Commercial (2)

     256,141        5.70     10,959         240,476        5.81     10,486   

Mortgage (2)

     424,180        6.17     19,640         392,732        6.47     19,052   

Consumer

     50,058        13.02     4,887         46,632        15.09     5,278   
                                     

Total loans (3)

     730,379        6.48     35,486         679,840        6.83     34,816   
                                     

Total earning assets

     1,176,815        5.28   $ 46,644         954,078        5.95   $ 43,000   
                                     

Non interest-bearing assets:

             

Cash and due from banks

     34,957             32,736       

Premises and equipment

     23,917             23,160       

Other assets

     52,977             49,733       

Allowance for loan losses

     (10,230          (9,151    
                         

Total non interest-bearing assets

     101,621             96,478       
                         

TOTAL ASSETS

   $ 1,278,436           $ 1,050,556       
                         

LIABILITIES AND SHAREHOLDERS’ EQUITY:

             

Demand - interest-bearing

   $ 251,864        0.74     1,403       $ 241,070        0.81     1,467   

Savings

     339,580        1.33     3,378         181,996        1.69     2,306   

Time

     343,258        2.08     5,367         320,139        2.46     5,906   
                                     

Total interest-bearing deposits

     934,702        1.45     10,148         743,205        1.74     9,679   

Short-term borrowings

     2,708        0.15     3         2,192        0.24     4   

Long-term borrowings

     91,816        4.60     3,167         105,472        4.33     3,424   

Subordinated debentures

     20,620        3.79     586         20,620        4.22     653   
                                     

Total interest-bearing liabilities

     1,049,846        1.77   $ 13,904         871,489        2.11   $ 13,760   
                         

Demand - non interest-bearing

     123,834             102,622       

Other liabilities

     13,060             11,313       
                         

Total liabilities

     1,186,740             985,424       

Shareholders’ equity

     91,696             65,132       
                         

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,278,436           $ 1,050,556       
                         

Interest income/Earning assets

       5.28   $ 46,644           5.95   $ 43,000   

Interest expense/Interest-bearing liabilities

       1.77     13,904           2.11     13,760   
                                     

Net interest spread

       3.51   $ 32,740           3.84   $ 29,240   
                                     

Interest income/Earning assets

       5.28     46,644           5.95     43,000   

Interest expense/Earning assets

       1.58     13,904           1.92     13,760   
                                     

Net interest margin

       3.70   $ 32,740           4.03   $ 29,240   
                                     

 

(1) Includes unamortized discounts and premiums. Average balance is computed using the carrying value of securities. The average yield has been computed using the historical amortized cost average balance for available for sale securities.
(2) Average yields are stated on a fully taxable equivalent basis.
(3) 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.

 

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2010 and 2009

OVERVIEW OF THE INCOME STATEMENT

The Corporation had net income of $3.1 million for the third quarter of 2010 compared to $2.2 million for the same period of 2009. The earnings per diluted share were $0.25 in the third quarter of 2010 and $0.26 for the third quarter of 2009. The decrease in earnings per diluted share resulted from the additional shares that were issued during the second quarter of 2010 in connection with the Corporation’s equity offering.

The Corporation’s third quarter 2010 results of operations were negatively affected by other-than-temporary impairment charges of $821 thousand related to two structured pooled trust preferred securities. The Corporation’s third quarter 2009 results of operations were negatively affected by other-than-temporary charges of $971 thousand related to three structured pooled trust preferred securities and one private label collateralized mortgage obligation.

INTEREST INCOME AND EXPENSE

Net interest income totaled $11.3 million during the three months ended September 30, 2010, an increase of $1.8 million, or 15.8%, over the comparable period of 2009. During the three months ended September 30, 2010, the Corporation had growth in interest-bearing deposits of $16.5 million, or 1.7%; however, interest expense on deposits decreased by $28 thousand from the quarter ended June 30, 2010 to the quarter ended September 30, 2010. The Corporation’s focus on its deposit mix and active management of its deposit rates allowed the Corporation to reduce its interest expense in spite of the historically low interest rates and resulting net interest margin compression the Corporation experienced throughout the latter part of 2009 and the first nine months of 2010. In addition, the Corporation was able to successfully deploy deposit growth not reinvested in loans into its investment portfolio, resulting in an increase in interest and dividends from securities of $1.5 million, or 60.7%, from the quarter ended September 30, 2009 to the quarter ended September 30, 2010.

PROVISION FOR LOAN LOSSES

The Corporation recorded a provision for loan losses of $853 thousand for the three months ended September 30, 2010 compared to $1.1 million for the comparable period in 2009. Nonperforming assets decreased from $13.1 million at June 30, 2010 to $7.6 million at September 30, 2010 and net loan chargeoffs decreased from $860 thousand during the third quarter of 2009 to $438 thousand during the third quarter of 2010, resulting in the need for a lower provision for loan losses for the third quarter of 2010 than was recorded for the third quarter of 2009. Management believes the provision for loan losses is appropriate and the allowance for loan losses is adequate to absorb probable incurred losses in our portfolio as of September 30, 2010. See the “Allowance for Loan Losses” section of Management’s Discussion and Analysis for a complete description of the methodology used by the Corporation to calculate the provision and allowance for loan losses.

NON-INTEREST INCOME

Non-interest income decreased $225 thousand, or 10.9%, during the three months ended September 30, 2010 as compared to the comparable period in 2009. The Corporation recorded other-than-temporary impairment charges in the third quarter of 2010 of $821 thousand, which was offset by realized gains on available-for-sale securities of $118 thousand. The Corporation recorded other-than-temporary impairment charges in the third quarter of 2009 of $971 thousand, which was offset by realized gains on available-for-sale securities of $333 thousand. In addition, the Corporation recorded unrealized gains during the three months ended September 30, 2010 and 2009 of $15 thousand and $191 thousand, respectively, for securities for which the fair value option was elected.

 

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Excluding the effects of securities transactions, there was a modest change in the Corporation’s non-interest income, increasing $16 thousand, or 0.6%, during the three months ended September 30, 2010 as compared to the comparable period in 2009.

NON-INTEREST EXPENSE

Non-interest expense increased $629 thousand, or 8.4%, during the three months ended September 30, 2010 compared to the comparable period in 2009. The Corporation’s insurance premiums due to the Federal Deposit Insurance Corporation (“FDIC”) increased by $100 thousand, or 30.6%, for the three months ended September 30, 2010 compared to the comparable period in 2009 due to increases in the deposits on which the premium assessment is based and higher assessment rates in 2010. Salaries and benefits expenses increased $293 thousand, or 7.9%, during the three months ended September 30, 2010 compared to the comparable period in 2009 as a result of an increase in full-time equivalent employees from 277 at September 30, 2009 to 289 at September 30, 2010 as well as an increase in health care claims expense during the third quarter of 2010 compared to the third quarter of 2009.

INCOME TAX EXPENSE

Income tax expense was $1.0 million in the third quarter of 2010 as compared to $723 thousand in the third quarter of 2009, resulting in an effective tax rate of 24.9% and 24.3%, respectively. The effective rate for the periods differed from the federal statutory rate of 35.0% principally as a result of tax exempt income from securities and loans as well as earnings from bank owned life insurance.

Nine Months Ended September 30, 2010 and 2009

OVERVIEW OF THE INCOME STATEMENT

The Corporation had net income of $8.4 million for the nine months ended September 30, 2010 compared to $7.0 million for the same period of 2009. The earnings per diluted share were $0.83 for the nine months ended September 30, 2010 and $0.80 for the same period of 2009. The Corporation’s 2010 results of operations were negatively affected by other-than-temporary impairment charges of $1.9 million related to three structured pooled trust preferred securities. The Corporation’s 2009 results of operations were negatively affected by other-than-temporary charges of $1.2 million related to three structured pooled trust preferred securities. The return on assets and return on equity for the nine months ended September 30, 2010 were 0.88% and 12.20%, respectively, compared to 0.89% and 14.29%, respectively, for the same period of 2009.

INTEREST INCOME AND EXPENSE

During the nine months ended September 30, 2010, net interest income increased $3.3 million, or 11.9%, compared to the comparable period in 2009. Net interest margin on a fully tax equivalent basis was 3.70% for the nine months ended September 30, 2010, compared to 4.03% for the comparable period in 2009. Although earning assets continue to grow, these increases have been offset by decreases in the yield on earning assets as a result of the current interest rate environment, and the composition of earning assets has shifted to a greater percentage of investment securities as deposit growth is outpacing loan growth.

Due to significant growth in core deposits, interest-bearing liabilities have grown significantly during the last twelve months. Although interest-bearing deposits as of September 30, 2010 grew $195.7 million, or 25.1%, as compared to September 30, 2009, interest expense for the nine months ended September 30, 2010 increased only $144 thousand, or 1.0%, over the comparable period in 2009. The Corporation’s focus on deposit mix and active management of deposit rates resulted in moderation of interest expense.

 

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PROVISION FOR LOAN LOSSES

The Corporation recorded a provision for loan losses of $2.6 million for the nine months ended September 30, 2010 compared to $3.0 million for the comparable period in 2009. As noted in the allowance for loan loss table above, the Corporation experienced fewer charge-offs during the nine months ended September 30, 2010 compared to the comparable period in 2009. In addition, nonperforming assets have decreased from $13.6 million at December 31, 2009 to $7.6 million at September 30, 2010. These factors resulted in the need for a lower provision for loan losses for the nine months ended September 30, 2010 than was recorded for the nine months ended September 30, 2009. Management believes the provision for loan losses is appropriate and the allowance for loan losses is adequate to absorb probable incurred losses in our portfolio as of September 30, 2010. See the “Allowance for Loan Losses” section of Management’s Discussion and Analysis for a complete description of the methodology used by the Corporation to calculate the provision and allowance for loan losses.

NON-INTEREST INCOME

Net securities gains realized during the nine months ended September 30, 2010 were $691 thousand, compared to net realized securities gains of $608 thousand for the comparable period in 2009. During the nine months ended September 30, 2010 and 2009, an other-than-temporary impairment charge of $1.9 million and $1.2 million, respectively, was recorded in earnings on structured pooled trust preferred securities. The Corporation’s remaining exposure in structured pooled trust preferred securities is $2.7 million at September 30, 2010.

Excluding the effects of these securities transactions, non-interest income was $7.2 million for the nine months ended September 30, 2010, compared to $7.4 million for the nine months ended September 30, 2009. Mortgage banking income decreased $410 thousand from the nine months ended September 30, 2009 compared to the nine months ended September 30, 2010, primarily as a result of the Corporation’s decision not to sell loans in the secondary market during the second quarter of 2010.

NON-INTEREST EXPENSE

Non-interest expense increased $951 thousand, or 4.2%, during the nine months ended September 30, 2010 compared to the comparable period in 2009. Salaries and benefits expenses increased $921 thousand, or 8.6%, during the nine months ended September 30, 2010 compared to the comparable period in 2009 as a result of an increase in full-time equivalent employees from 277 at September 30, 2009 to 289 at September 30, 2010 as well as an increase in health care claims expense during the first nine months of 2010 compared to the first nine months of 2009.

Insurance premiums due to the Federal Deposit Insurance Corporation (“FDIC”) decreased by $208 thousand, or 14.8%, for the nine months ended September 30, 2010 compared to the comparable period in 2009 due to the special assessment in the amount of $475 thousand that was incurred during the quarter ended June 30, 2009. Excluding this special assessment, FDIC insurance premiums increased $267 thousand during the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009, as a result of increases in the deposits on which the premium assessment is based and higher assessment rates in 2010.

INCOME TAX EXPENSE

Income tax expense was $2.8 million for the nine months ended September 30, 2010 as compared to $2.3 million for the same period of 2009, resulting in an effective tax rate of 24.7% and 24.8%, respectively. The effective rate for the periods differed from the federal statutory rate of 35.0% principally as a result of tax exempt income from securities and loans as well as earnings from bank owned life insurance.

 

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CRITICAL ACCOUNTING POLICIES

The Corporation’s accounting and reporting policies are in accordance with GAAP and conform to general practices within the financial services industry. Accounting and reporting practices for the allowance for loan losses and fair value of securities are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by management could result in material changes in CNB Financial Corporation’s financial position or results of operations. Note 1 (Summary of Significant Accounting Policies), Note 3 (Securities), and Note 5 (Allowance for Loan Losses), of the Corporation’s 2009 Form 10-K, provide detail with regard to the Corporation’s accounting for the allowance for loan losses and fair value of securities. There have been no significant changes in the application of accounting policies since December 31, 2009.

ITEM 3

QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. As a financial institution, the Corporation is primarily sensitive to the interest rate risk component. Changes in interest rates will affect the levels of income and expense recorded on a large portion of the Bank’s assets and liabilities. Additionally, such fluctuations in interest rates will impact the market value of all interest sensitive assets. The ALCO is responsible for reviewing the Corporation’s interest rate sensitivity position and establishing policies to control exposure to interest rate fluctuations. The primary goal established by these policies is to increase total income within acceptable risk limits.

The Corporation monitors interest rate risk through the use of two models: static gap and earnings simulation. Each model standing alone has limitations; however, taken together, management believes that they represent a reasonable view of the Corporation’s interest rate risk position.

STATIC GAP: Static Gap analysis is intended to provide an approximation of projected repricing of assets and liabilities at a point in time on the basis of stated maturities, prepayments, and scheduled interest rate adjustments within selected time intervals. A gap is defined as the difference between the principal amount of assets and liabilities which reprice within those time intervals. The cumulative one year gap at September 30, 2010 was 2.48% of total earning assets compared to the Corporation’s policy guidelines of plus or minus 15.0%.

Fixed rate securities, loans and CDs are included in the gap repricing based on time remaining until maturity. Mortgage prepayments are included in the time frame in which they are expected to be received.

Certain shortcomings are inherent in the method of analysis presented in Static Gap. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may not react correspondingly to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate with changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features, like annual and lifetime rate caps, which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed in the table. Finally, the ability of certain borrowers to make scheduled payments on their adjustable-rate loans may decrease in the event of an interest rate increase.

EARNINGS SIMULATION: This model forecasts the projected change in net income resulting from an increase or decrease in the federal funds rate. The model assumes a one time shock of plus or minus 200 basis points or 2%.

 

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The model makes various assumptions about cash flows and reinvestments of these cash flows in the different rate environments. Generally, repayments, maturities and calls are assumed to be reinvested in like instruments and no significant change in the balance sheet mix is assumed. Actual results could differ significantly from these estimates which would produce significant differences in the calculated projected change in income. The limits stated above do not necessarily represent measures that would be taken by management in order to stabilize income results. The instruments on the balance sheet react at different speeds to various changes in interest rates as discussed under Static Gap. In addition, there are strategies available to management that may help mitigate a decline in income caused by a rapid change in interest rates.

The following table below summarizes the information from the interest rate risk measures reflecting rate sensitive assets to rate sensitive liabilities at September 30, 2010 and December 31, 2009:

 

     September 30, 2010     December 31, 2009  

Static 1-Yr. Cumulative Gap

     2.48     (0.60 %) 

Earnings Simulation:

    

-200 bps vs. Stable Rate

     N/A        N/A   

+200 bps vs. Stable Rate

     (3.48 %)      (6.57 %) 

The interest rate sensitivity position at September 30, 2010 was asset sensitive in the short-term; whereas the Corporation was slightly liability sensitive at December 31, 2009. As the federal funds rate was at 0.25% on September 30, 2010, the -200 bps scenario has been excluded. Management measures the potential impact of significant changes in interest rates on both earnings and equity. By the use of computer generated models, the potential impact of these changes has been determined to be acceptable with modest effects on net income and equity given an interest rate shock of an increase in the federal funds rate of 2.0%. We continue to monitor the interest rate sensitivity through the ALCO and use the data to make strategic decisions.

ITEM 4

CONTROLS AND PROCEDURES

As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of the Corporation’s management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) (“Exchange Act”). Based on their evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in the Corporation’s internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

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PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS – None

 

ITEM 1A. RISK FACTORS – There have been no material changes to the risk factors disclosed in Part II, Item 1A. of our Quarterly Report on Form 10-Q for the period ended June 30, 2010 which risk factors superseded the risk factors in our Form 10-K for the year ended December 31, 2009.

 

ITEM 6. EXHIBITS

 

  EXHIBIT 3.1      Amended and Restated Articles of Incorporation of the Corporation, filed as Appendix B to the 2005 Proxy Statement, filed with the Securities and Exchange Commission (“SEC”) on March 24, 2006, and incorporated herein by reference.
  EXHIBIT 3.2     

By-Laws of the Corporation, as amended and restated, filed as Appendix C to the 2005 Proxy Statement, filed with the SEC on March 24, 2006, and incorporated herein by reference.

  EXHIBIT 31.1      CEO Certification
  EXHIBIT 31.2      Principal Financial Officer Certification
  EXHIBIT 32      Certifications

 

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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: November 5, 2010  

/S/    JOSEPH B. BOWER, JR.        

  Joseph B. Bower, Jr.
  President and Director
  (Principal Executive Officer)
DATE: November 5, 2010  

/S/    CHARLES R. GUARINO        

  Charles R. Guarino
  Treasurer
  (Principal Financial Officer)

 

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