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CNB FINANCIAL CORP/PA - Quarter Report: 2012 March (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 March 31, 2012

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 000-13396

 

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  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 April 30, 2012

COMMON STOCK NO PAR VALUE PER SHARE: 12,439,146 SHARES

 

 

 


Table of Contents

INDEX

 

     Page Number  

PART I.

FINANCIAL INFORMATION

 

ITEM 1 – Financial Statements (unaudited)

  

Consolidated Balance Sheets – March 31, 2012 and December 31, 2011

     1   

Consolidated Statements of Income – Three months ended March 31, 2012 and 2011

     2   

Consolidated Statements of Comprehensive Income – Three months ended March 31, 2012 and 2011

     3   

Consolidated Statements of Cash Flows – Three months ended March 31, 2012 and 2011

     4   

Notes to Consolidated Financial Statements

     5   

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

     26   

ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk

     34   

ITEM 4 – Controls and Procedures

     36   

PART II.

OTHER INFORMATION

  

  

ITEM 1 – Legal Proceedings

     36   

ITEM 1A – Risk Factors

     36   

ITEM 6 – Exhibits

     36   

Signatures

     37   


Table of Contents

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 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 principles 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. Such factors could cause actual results to differ materially from those in the forward-looking statements.

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.


Table of Contents

Part I Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except share data

 

     (unaudited)
March 31,
2012
    December 31,
2011
 
ASSETS   

Cash and due from banks

   $ 26,295      $ 36,032   

Interest bearing deposits with other banks

     3,908        3,671   
  

 

 

   

 

 

 

Total cash and cash equivalents

     30,203        39,703   

Interest bearing time deposits with other banks

     275        224   

Securities available for sale

     721,586        638,107   

Trading securities

     3,187        3,233   

Loans held for sale

     1,347        1,442   

Loans

     862,891        852,769   

Less: unearned discount

     (2,881     (2,886

Less: allowance for loan losses

     (13,015     (12,615
  

 

 

   

 

 

 

Net loans

     846,995        837,268   

FHLB and other equity interests

     6,461        6,537   

Premises and equipment, net

     24,041        24,004   

Bank owned life insurance

     25,933        25,672   

Mortgage servicing rights

     913        906   

Goodwill

     10,821        10,821   

Accrued interest receivable and other assets

     14,858        14,290   
  

 

 

   

 

 

 

TOTAL

   $ 1,686,620      $ 1,602,207   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Non-interest bearing deposits

   $ 165,743      $ 152,732   

Interest bearing deposits

     1,271,245        1,201,119   
  

 

 

   

 

 

 

Total deposits

     1,436,988        1,353,851   

FHLB and other borrowings

     74,417        74,456   

Subordinated debentures

     20,620        20,620   

Accrued interest payable and other liabilities

     21,412        21,391   
  

 

 

   

 

 

 

Total liabilities

     1,553,437        1,470,318   
  

 

 

   

 

 

 

Common stock, $0 par value; authorized 50,000,000 shares; issued 12,599,603 shares

     0        0   

Additional paid in capital

     44,016        44,350   

Retained earnings

     82,336        80,038   

Treasury stock, at cost (167,921 shares at March 31, 2012 and 222,285 shares at December 31, 2011)

     (2,424     (3,260

Accumulated other comprehensive income

     9,255        10,761   
  

 

 

   

 

 

 

Total shareholders’ equity

     133,183        131,889   
  

 

 

   

 

 

 

TOTAL

   $ 1,686,620      $ 1,602,207   
  

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

 

     Three months ended
March 31,
 
     2012      2011  

INTEREST AND DIVIDEND INCOME:

     

Loans including fees

   $ 12,255       $ 11,705   

Deposits with banks

     2         42   

Securities:

     

Taxable

     3,683         3,258   

Tax-exempt

     871         682   

Dividends

     13         7   
  

 

 

    

 

 

 

Total interest and dividend income

     16,824         15,694   
  

 

 

    

 

 

 

INTEREST EXPENSE:

     

Deposits

     3,149         3,435   

Borrowed funds

     797         769   

Subordinated debentures

     201         191   
  

 

 

    

 

 

 

Total interest expense

     4,147         4,395   
  

 

 

    

 

 

 

NET INTEREST INCOME

     12,677         11,299   

PROVISION FOR LOAN LOSSES

     1,104         777   
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     11,573         10,522   
  

 

 

    

 

 

 

NON-INTEREST INCOME:

     

Wealth and asset management fees

     387         415   

Service charges on deposit accounts

     975         963   

Other service charges and fees

     432         352   

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

     320         113   

Mortgage banking

     265         179   

Bank owned life insurance

     261         249   

Other

     209         240   
  

 

 

    

 

 

 
     2,849         2,511   
  

 

 

    

 

 

 

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

     0         (398

Less portion of loss recognized in other comprehensive income

     0         0   
  

 

 

    

 

 

 

Net impairment losses recognized in earnings

     —           (398

Net realized gains on available-for-sale securities

     566         74   
  

 

 

    

 

 

 

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

     566         (324
  

 

 

    

 

 

 

Total non-interest income

     3,415         2,187   
  

 

 

    

 

 

 

NON-INTEREST EXPENSES:

     

Salaries and benefits

     4,725         4,243   

Net occupancy expense of premises

     1,149         1,199   

FDIC insurance premiums

     259         449   

Other

     2,881         2,400   
  

 

 

    

 

 

 

Total non-interest expenses

     9,014         8,291   
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     5,974         4,418   

INCOME TAX EXPENSE

     1,627         1,141   
  

 

 

    

 

 

 

NET INCOME

   $ 4,347       $ 3,277   
  

 

 

    

 

 

 

EARNINGS PER SHARE:

     

Basic

   $ 0.35       $ 0.27   

Diluted

   $ 0.35       $ 0.27   

DIVIDENDS PER SHARE:

     

Cash dividends per share

   $ 0.165       $ 0.165   

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Dollars in thousands

 

     Three months ended
March 31,
 
     2012     2011  

NET INCOME

   $ 4,347      $ 3,277   

Other comprehensive income (loss), net of tax:

    

Change in fair value of interest rate swap agreement designated as a cash flow hedge, net of tax of ($33) and ($36), respectively

     63        67   

Net change in unrealized gains on securities available for sale:

    

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

    

Unrealized gains arising during the period, net of tax of ($32) in 2011

     —          60   

Reclassification adjustment for losses included in net income, net of tax of ($139) in 2011

     —          259   
  

 

 

   

 

 

 
     —          319   
  

 

 

   

 

 

 

Unrealized gains on other securities available for sale:

    

Unrealized (losses) gains arising during the period, net of tax of $647 and ($675), respectively

     (1,201     1,254   

Reclassification adjustment for accumulated gains included in net income, net of tax of $198 and $26, respectively

     (368     (48
  

 

 

   

 

 

 
     (1,569     1,206   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (1,506     1,592   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 2,841      $ 4,869   
  

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Dollars in thousands

 

     Three months ended
March 31,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 4,347      $ 3,277   

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

    

Provision for loan losses

     1,104        777   

Depreciation and amortization of premises and equipment

     522        502   

Securities amortization and accretion and deferred loan fees and costs

     992        738   

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

     (566     324   

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

     (320     (113

Proceeds from sale of securities for which fair value was elected

     1,749        170   

Purchase of securities for which fair value was elected

     (1,457     (143

Gain on sale of loans

     (246     (151

Net gains on dispositions of premises and equipment and foreclosed assets

     (6     (3

Proceeds from sale of loans

     6,996        7,979   

Origination of loans held for sale

     (6,730     (9,486

Income on bank owned life insurance

     (261     (249

Stock-based compensation expense

     59        53   

Contribution of treasury stock

     30        30   

Changes in:

    

Accrued interest receivable and other assets

     5        388   

Accrued interest payable and other liabilities

     117        (68
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     6,335        4,025   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Net (increase) decrease in interest bearing time deposits with other banks

     (51     99   

Proceeds from maturities, prepayments and calls of securities

     23,709        22,299   

Proceeds from sales of securities

     42,149        23,610   

Purchase of securities

     (152,141     (106,790

Loan origination and payments, net

     (10,808     1,565   

Purchase of bank owned life insurance

     —          (5,000

Redemption of FHLB and other equity interests

     76        270   

Purchase of premises and equipment

     (491     (805

Proceeds from the sale of premises and equipment and foreclosed assets

     260        31   
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (97,297     (64,721
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net change in:

    

Checking, money market and savings accounts

     102,063        58,581   

Certificates of deposit

     (18,926     4,957   

Proceeds from sale of treasury stock

     413        298   

Cash dividends paid

     (2,049     (2,025

Repayment of long-term borrowings

     (39     (29

Net change in short-term borrowings

     —          4,061   
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     81,462        65,843   
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (9,500     5,147   

CASH AND CASH EQUIVALENTS, Beginning

     39,703        37,432   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, Ending

   $ 30,203      $ 42,579   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 4,175      $ 4,442   

Income taxes

   $ 225      $ 17   

SUPPLEMENTAL NONCASH DISCLOSURES:

    

Transfers to other real estate owned

   $ 15      $ 69   

Grant of restricted stock awards from treasury stock

   $ 419      $ 266   

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

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 March 31, 2012 and for the three month periods ended March 31, 2012 and 2011 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 periods presented. The financial performance reported for CNB Financial Corporation (the “Corporation”) for the three month period ended March 31, 2012 is not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the period ended December 31, 2011 (the “2011 Form 10-K”). All dollar amounts are stated in thousands, except share data.

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 aggregate grants of 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 March 31, 2012, there was no unrecognized compensation cost related to nonvested stock options granted under this plan, and no stock options were granted during the three months ended March 31, 2012 and 2011. At March 31, 2012 and December 31, 2011, the Corporation had 107,375 stock options that were fully vested and exercisable.

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 $59 and $53 for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, there was $754 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 March 31, 2012 follows:

 

     Shares     Weighted Average
Grant Date Fair Value
 

Nonvested at beginning of period

     35,613      $ 15.08   

Granted

     26,900        15.57   

Vested

     (9,684     14.77   

Forfeited

     —          —     
  

 

 

   

 

 

 

Nonvested at end of period

     52,829      $ 15.39   
  

 

 

   

 

 

 

 

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Table of Contents

FAIR VALUE

Fair Value Option

Management elected to adopt the fair value option for its investment in certain equity securities in order 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 months ended March 31, 2012 and 2011 were $188 and $103, respectively. Realized gains on the sale of securities for which the fair value option was elected were $132 and $10 during the three months ended March 31, 2012 and 2011, respectively.

Dividend income is recorded based on cash dividends and comprises the “Dividends” line item in the accompanying consolidated statement of income. Dividend income was $13 and $7 for the three months ended March 31, 2012 and 2011.

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 value of one corporate bond has been determined by using Level 3 inputs. The Corporation has engaged a valuation expert to price this security using a proprietary model, which incorporates 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 is similar to those that trade in liquid markets. As such, significant fair value inputs can generally be verified and do not typically involve significant management judgments (Level 2 inputs).

 

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Table of Contents

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals prepared by third-parties. 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 the 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 March 31, 2012 and December 31, 2011:

 

           Fair Value Measurements at March 31, 2012 Using  

Description

   Total     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

Assets:

         

Securities Available For Sale:

         

U.S. Treasury

   $ 8,097      $ —         $ 8,097      $ —     

U.S. Government sponsored entities

     113,645        26,034         87,611        —     

States and political subdivisions

     158,601        3,771         154,830        —     

Residential mortgage and asset backed

     374,682        40,473         334,209        —     

Commercial mortgage and asset backed

     2,136        —           2,136        —     

Corporate notes and bonds

     13,395        —           11,355        2,040   

Pooled trust preferred

     340        —           —          340   

Pooled SBA

     49,145        49,145         —          —     

Other securities

     1,545        1,545         —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities Available For Sale

   $ 721,586      $ 120,968       $ 598,238      $ 2,380   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities:

         

Equity securities – financial services

   $ 550      $ 550       $ —        $ —     

Equity securities – industrials

     496        496         —          —     

Certificates of deposit

     357        357         —          —     

Equity securities – health care

     323        323         —          —     

International mutual funds

     288        288         —          —     

Equity securities – consumer discretionary

     238        238         —          —     

Large cap growth mutual funds

     174        174         —          —     

Equity securities – energy

     164        164         —          —     

Large cap value mutual funds

     108        108         —          —     

Corporate notes and bonds

     101        —           101        —     

Money market mutual funds

     84        84         —          —     

Real estate investment trust mutual funds

     66        66         —          —     

U.S. Government sponsored entities

     55        —           55        —     

Equity securities – consumer staples

     54        54         —          —     

Equity securities – materials

     38        38         —          —     

Equity securities – technology

     37        37         —          —     

Small cap mutual funds

     27        27         —          —     

Mid cap mutual funds

     27        27         —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $ 3,187      $ 3,031       $ 156      $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

         

Interest rate swaps

   $ (1,573   $ —         $ (1,573   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents
           Fair Value Measurements at December 31, 2011 Using  

Description

   Total     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

Assets:

         

Securities Available For Sale:

         

U.S. Treasury

   $ 8,130      $ —         $ 8,130      $ —     

U.S. Government sponsored entities

     107,492        2,000         105,492        —     

States and political subdivisions

     158,437        4,655         153,782        —     

Residential mortgage and asset backed

     300,126        8,577         291,549        —     

Commercial mortgage and asset backed

     2,122        —           2,122        —     

Corporate notes and bonds

     13,860        —           11,800        2,060   

Pooled trust preferred

     340        —           —          340   

Pooled SBA

     46,056        46,056         —          —     

Other securities

     1,544        1,544         —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities Available For Sale

   $ 638,107      $ 62,832       $ 572,875      $ 2,400   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities:

         

Equity securities – financial services

   $ 779      $ 779       $ —        $ —     

Equity securities – industrials

     324        324         —          —     

International mutual funds

     257        257         —          —     

Certificates of deposit

     255        255         —          —     

Money market mutual funds

     241        241         —          —     

Equity securities – health care

     204        204         —          —     

Equity securities – utilities

     197        197         —          —     

Large cap growth mutual funds

     145        145         —          —     

Equity securities – consumer staples

     145        145         —          —     

Equity securities – consumer discretionary

     126        126         —          —     

Large cap value mutual funds

     105        105         —          —     

Corporate notes and bonds

     100        —           100        —     

Equity securities – technology

     75        75         —          —     

Equity securities – energy

     72        72         —          —     

Real estate investment trust mutual funds

     68        68         —          —     

U.S. Government sponsored entities

     55        —           55        —     

Equity securities – materials

     37        37         —          —     

Small cap mutual funds

     25        25         —          —     

Mid cap mutual funds

     23        23         —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $ 3,233      $ 3,078       $ 155      $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

         

Interest rate swaps

   $ (1,669   $ —         $ (1,669   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

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 months ended March 31, 2012:

 

     Corporate
notes and
bonds
    Pooled
trust
preferred
 

Balance, January 1, 2012

   $ 2,060      $ 340   

Total gains or losses:

    

Included in other comprehensive income (unrealized)

     (20     —     
  

 

 

   

 

 

 

Balance, March 31, 2012

   $ 2,040      $ 340   
  

 

 

   

 

 

 

 

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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 months ended March 31, 2011:

 

     Residential
mortgage and
asset backed
    Corporate
notes and
bonds
     U.S. Gov’t
Sponsored
Entities
    Pooled
trust
preferred
 

Balance, January 1, 2011

   $ 2,269      $ 1,240       $ 2,000      $ 1,292   

Transfers out of Level 3 (a)(b)

     —          —           (2,000     —     

Total gains or losses:

         

Included in earnings (realized)

     —          —           —          (398

Included in other comprehensive income (unrealized)

     —          655         —          508   

Purchases, issuances, sales, and settlements:

         

Purchases

     1,917        —           —          —     

Settlements

     (80     —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, March 31, 2011

   $ 4,106      $ 1,895       $ —        $ 1,402   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) Transferred from Level 3 to Level 2 since observable market data became available to value the 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.

The unrealized losses reported in earnings for the three months ended March 31, 2011 for Level 3 assets that are still held at the balance sheet date relate to pooled trust preferred securities deemed to be other-than-temporarily impaired.

The following table presents quantitative information about Level 3 fair value measurements at March 31, 2012:

 

     Fair value     

Valuation

Technique

  

Unobservable

Inputs

  

Input

Utilized

Corporate notes and bonds

   $ 2,040      

Discounted

cash flow

  

Constant prepayment rate

Probability of default

Discount rate

  

0%

0%

9.3%

Pooled trust preferred

     340      

Discounted

cash flow

  

Collateral default rate

 

Discount rate

Recovery probability

Prepayment rate

  

2% annually for 2 years; 0.36% thereafter

20%

10%, lagged 2 years

5% for next 5 years

During the three months ended March 31, 2012 and 2011, 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:

 

     2012      2011  

U.S. Government sponsored entities

   $ 2,000       $ 2,000   

States and political subdivisions

     4,655         4,750   

Residential mortgage and asset backed

     8,577         20,405   
  

 

 

    

 

 

 

Total

   $ 15,232       $ 27,155   
  

 

 

    

 

 

 

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 three months ended March 31, 2011, two pooled SBA securities that were classified as Level 2 securities at December 31, 2010 were transferred to the Level 1 category. The fair value on the date of transfer was $3,437. These securities were transferred since the Corporation was able to access a quoted price for identical assets in an active market. There were no transfers of securities from the Level 2 category to the Level 1 category during the three months ended March 31, 2012. The Corporation’s policy for determining

 

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when a transfer between the Level 1 and Level 2 categories has occurred is to monitor and report such transfers as of each quarterly reporting period.

Assets and liabilities measured at fair value on a non-recurring basis are as follows at March 31, 2012 and December 31, 2011:

 

0000000 0000000 0000000 0000000
            Fair Value Measurements at March 31, 2012 Using  

Description

   Total      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

           

Impaired loans:

           

Commercial mortgages

   $ 7,388       $ —         $ —         $ 7,388   

Commercial, industrial, and agricultural

     2,715         —           —           2,715   

Residential real estate

     181         —           —           181   

 

0000000 0000000 0000000 0000000
            Fair Value Measurements at December 31, 2011 Using  

Description

   Total      Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

           

Impaired loans:

           

Commercial mortgages

   $ 7,219       $ —         $ —         $ 7,219   

Commercial, industrial, and agricultural

     3,190         —           —           3,190   

Residential real estate

     105         —           —           105   

Impaired loans, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a principal balance of $11,634 with a valuation allowance of $1,350 as of March 31, 2012, resulting in an additional provision for loan losses of $401 for the corresponding three month period. Impaired loans had a principal balance of $17,715 with a valuation allowance of $950 as of March 31, 2011, resulting in an additional provision for loan losses of $22 for the corresponding three month period.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2012:

 

     Fair value      Valuation
Technique
  

Unobservable

Inputs

  

Range

(Weighted Average)

Impaired loans – commercial mortgages

   $ 7,388       Sales comparison
approach
   Negative adjustment for selling costs and changes in market conditions since appraisal    1% - 64% (12.0%)

Impaired loans – commercial, industrial, and agricultural

     2,715       Income approach    Negative adjustment for selling costs and changes in net operating income expectations since appraisal    20% - 64% (43.5%)

Impaired loans – residential real estate

     181       Sales comparison
approach
   Negative adjustment for selling costs and changes in market conditions since appraisal    0% - 15% (8.7%)

 

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Table of Contents

Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at March 31, 2012:

 

     Carrying     Fair Value Measurement Using:     Total  
     Amount     Level 1     Level 2     Level 3     Fair Value  

ASSETS

          

Cash and cash equivalents

   $ 30,203      $ 30,203      $ —        $ —        $ 30,203   

Interest bearing time deposits with other banks

     275        —          281        —          281   

Securities available for sale

     721,586        120,968        598,238        2,380        721,586   

Trading securities

     3,187        3,031        156        —          3,187   

Loans held for sale

     1,347        —          1,347        —          1,347   

Net loans

     846,995        —          —          868,086        868,086   

FHLB and other equity interests

     6,461        N/A        N/A        N/A        N/A   

Accrued interest receivable

     6,851        685        3,390        2,776        6,851   

LIABILITIES

          

Deposits

   $ (1,436,988     (1,187,861     (252,387     —        $ (1,440,248

FHLB and other borrowings

     (74,417     —          (82,681     —          (82,681

Subordinated debentures

     (20,620     —          —          (10,828     (10,828

Interest rate swaps

     (1,573     —          (1,573     —          (1,573

Accrued interest payable

     (1,280     (713     (549     (18     (1,280

The following table presents the carrying amount and fair value of financial instruments at December 31, 2011:

 

     Carrying
Amount
    Fair
Value
 

ASSETS

    

Cash and cash equivalents

   $ 39,703      $ 39,703   

Interest bearing time deposits with other banks

     224        229   

Securities available for sale

     638,107        638,107   

Trading securities

     3,233        3,233   

Loans held for sale

     1,442        1,470   

Net loans

     837,268        862,389   

FHLB and other equity interests

     6,537        N/A   

Accrued interest receivable

     6,567        6,567   

LIABILITIES

    

Deposits

   $ (1,353,851   $ (1,357,415

FHLB and other borrowings

     (74,456     (83,042

Subordinated debentures

     (20,620     (10,906

Interest rate swaps

     (1,669     (1,669

Accrued interest payable

     (1,308     (1,308

The methods and assumptions, not otherwise presented, used to estimate fair values are described as follows:

Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

Interest bearing time deposits with other banks: The fair value of interest bearing time deposits with other banks is estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly maturities, resulting in a Level 2 classification.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

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Table of Contents

Loans: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values, resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

FHLB and other equity interests: It is not practical to determine the fair value of Federal Home Loan Bank stock and other equity interests due to restrictions placed on the transferability of these instruments.

Accrued interest receivable: The carrying amount of accrued interest receivable approximates fair value resulting in a classification that is consistent with the asset with which it is associated.

Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amount), resulting in a Level 1 classification. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits, resulting in a Level 2 classification.

FHLB and other borrowings: The fair values of the Corporation’s FHLB and other borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements, resulting in a Level 2 classification.

Subordinated debentures: The fair value of the Corporation’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of arrangements, resulting in a Level 3 classification.

Accrued interest payable: The carrying amount of accrued interest payable approximates fair value resulting in a classification that is consistent with the liability with which it is associated.

While 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 assets such as, among other things, the estimated earnings power of core deposits, the earnings potential of trust accounts, the trained workforce, and customer goodwill, which typically are not recognized on the balance sheet may have value but are not included in the fair value disclosures.

SECURITIES

Securities available for sale at March 31, 2012 and December 31, 2011 are as follows:

 

     March 31, 2012      December 31, 2011  
     Amortized      Unrealized     Fair      Amortized      Unrealized     Fair  
     Cost      Gains      Losses     Value      Cost      Gains      Losses     Value  

U.S. Treasury

   $ 8,050       $ 47       $ —        $ 8,097       $ 8,064       $ 66       $ —        $ 8,130   

U.S. Gov’t sponsored entities

     108,891         4,757         (3     113,645         102,258         5,249         (15     107,492   

State & political subdivisions

     150,768         7,981         (148     158,601         149,685         8,844         (92     158,437   

Residential mortgage & asset backed

     368,459         6,890         (667     374,682         292,297         8,043         (214     300,126   

Commercial mortgage & asset backed

     2,074         62         —          2,136         2,077         45         —          2,122   

Corporate notes & bonds

     16,360         30         (2,995     13,395         17,358         50         (3,548     13,860   

Pooled trust preferred

     800         —           (460     340         800         —           (460     340   

Pooled SBA

     47,882         1,328         (65     49,145         44,851         1,282         (77     46,056   

Other securities

     1,521         24         —          1,545         1,521         23         —          1,544   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 704,805       $ 21,119       $ (4,338   $ 721,586       $ 618,911       $ 23,602       $ (4,406   $ 638,107   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

At March 31, 2012, 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.

 

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Table of Contents

Trading securities accounted for under the fair value option at March 31, 2012 and December 31, 2011 are as follows:

 

     March 31,
2012
     December 31,
2011
 

Corporate equity securities

   $ 1,900       $ 1,959   

Certificates of deposit

     357         255   

International mutual funds

     288         257   

Large cap growth mutual funds

     174         145   

Large cap value mutual funds

     108         105   

Corporate notes and bonds

     101         100   

Money market mutual funds

     84         241   

Real estate investment trust mutual funds

     66         68   

U.S. Government sponsored entities

     55         55   

Small cap mutual funds

     27         25   

Mid cap mutual funds

     27         23   
  

 

 

    

 

 

 

Total

   $ 3,187       $ 3,233   
  

 

 

    

 

 

 

Securities with unrealized losses at March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

 

$122,700 $122,700 $122,700 $122,700 $122,700 $122,700
March 31, 2012    Less than 12 Months     12 Months or More     Total  

Description of Securities

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

U.S. Treasury

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

U.S. Gov’t sponsored entities

     10,545         (3     —           —          10,545         (3

State & political subdivisions

     5,566         (147     498         (1     6,064         (148

Residential mortgage & asset backed

     91,279         (626     10,692         (41     101,971         (667

Commercial mortgage & asset backed

     —           —          —           —          —           —     

Corporate notes & bonds

     1,948         (52     9,408         (2,943     11,356         (2,995

Pooled trust preferred

     —           —          340         (460     340         (460

Pooled SBA

     13,362         (65     —           —          13,362         (65

Other securities

     —           —          —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 122,700       $ (893   $ 20,938       $ (3,445   $ 143,638       $ (4,338
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

$122,700 $122,700 $122,700 $122,700 $122,700 $122,700
     Less than 12 Months     12 Months or More     Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

December 31, 2011

               

U.S. Treasury

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

U.S. Gov’t sponsored entities

     7,671         (15     —           —          7,671         (15

State & political subdivisions

     5,314         (92     —           —          5,314         (92

Residential mortgage & asset backed

       36,626         (162     9,485         (52       46,111         (214

Commercial mortgage & asset backed

     —           —          —           —          —           —     

Corporate notes & bonds

     2,860         (139     8,841         (3,409     11,701         (3,548

Pooled trust preferred

     —           —          340         (460     340         (460

Pooled SBA

     8,139         (77     —           —          8,139         (77

Other securities

     —           —          —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 60,610       $ (485   $ 18,666       $ (3,921   $ 79,276       $ (4,406
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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.

 

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At March 31, 2012, 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 future estimated levels of deferrals and defaults by the underlying issuers, and discounting those cash flows at the 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 ongoing difficulties in the U.S. economy, management also added a baseline default rate of 2% annually for the next two years to 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. Management expects that credit markets have begun to 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 call their collateral in 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 as disclosed in the table that follows. 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 March 31, 2012 and for the three months ended March 31, 2012 and 2011:

 

     Adjusted
Amortized
Cost
     Unrealized
Gain (Loss)
    Fair
Value
     Credit Losses Realized
in Earnings Three
Months Ended
March 31, 2012
     Credit Losses Realized
in Earnings Three
Months Ended
March 31, 2011
 

ALESCO Preferred Funding V, Ltd.

   $ 800       $ (460   $ 340       $ —         $ —     

ALESCO Preferred Funding XII, Ltd.

     —           —          —           —           280   

ALESCO Preferred Funding XVII, Ltd.

     —           —          —           —           —     

Preferred Term Securities XVI, Ltd.

     —           —          —           —           118   

US Capital Funding VI, Ltd.

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 800       $ (460   $ 340       $ —         $ 398   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

A roll-forward of the other-than-temporary impairment amount related to credit losses for the three months ended March 31, 2012 is as follows:

 

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

   $ 4,054   

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

     —     
  

 

 

 

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

   $ 4,054   
  

 

 

 

 

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Table of Contents

A roll-forward of the other-than-temporary impairment amount related to credit losses for the three months ended March 31, 2011 is as follows:

 

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

   $ 3,656   

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

     398   
  

 

 

 

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

   $ 4,054   
  

 

 

 

At March 31, 2012, the Corporation held five 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 have 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 the securities that comprise corporate notes and bonds and the securities that are issued by state and political subdivisions, 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. Management also considers the length of time and extent to which fair value has been less than cost and the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

As of March 31, 2012 and December 31, 2011, management concluded that the securities described in the previous paragraph 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.

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.

Information pertaining to security sales is as follows:

 

     Proceeds      Gross Gains      Gross Losses  

Three months ended March 31, 2012

   $ 42,149       $ 636       $ (70

Three months ended March 31, 2011

     23,610         146         (72

 

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Table of Contents

The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at March 31, 2012:

 

     March 31, 2012  
     Amortized
Cost
     Fair
Value
 

1 year or less

   $ 18,990       $ 19,132   

1 year – 5 years

     81,542         83,710   

5 years – 10 years

     130,144         137,725   

After 10 years

     102,075         102,656   
  

 

 

    

 

 

 
     332,751         343,223   

Residential mortgage & asset backed securities

     368,459         374,682   

Commercial mortgage & asset backed securities

     2,074         2,136   
  

 

 

    

 

 

 

Total debt securities

   $ 703,284       $ 720,041   
  

 

 

    

 

 

 

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.

On March 31, 2012 and December 31, 2011, securities carried at $237,081 and $264,166, respectively, were pledged to secure public deposits and for other purposes as provided by law.

LOANS

Total net loans at March 31, 2012 and December 31, 2011 are summarized as follows:

 

     March 31,
2012
    December 31,
2011
 

Commercial, industrial, and agricultural

   $ 258,628      $ 253,324   

Commercial mortgages

     250,407        242,511   

Residential real estate

     295,510        298,628   

Consumer

     54,905        54,677   

Credit cards

     3,133        3,206   

Overdrafts

     308        423   

Less:  unearned discount

     (2,881     (2,886

 allowance for loan losses

     (13,015     (12,615
  

 

 

   

 

 

 

Loans, net

   $ 846,995      $ 837,268   
  

 

 

   

 

 

 

At March 31, 2012 and December 31, 2011, net unamortized loan costs and fees of $27 and ($7), 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.

 

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Table of Contents

Transactions in the allowance for loan losses for the three months ended March 31, 2012 were as follows:

 

     Commercial,
Industrial, and
Agricultural
    Commercial
Mortgages
    Residential
Real
Estate
    Consumer     Credit
Cards
    Overdrafts     Total  

Allowance for loan losses, January 1, 2012

   $ 4,511      $ 4,470      $ 1,991      $ 1,404      $ 71      $ 168      $ 12,615   

Charge-offs

     (225     (115     (87     (256     (19     (67     (769

Recoveries

     3        —          —          27        1        34        65   

Provision for loan losses

     653        22        93        260        43        33        1,104   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, March 31, 2012

   $ 4,942      $ 4,377      $ 1,997      $ 1,435      $ 96      $ 168      $ 13,015   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions in the allowance for loan losses for the three months ended March 31, 2011 were as follows:

 

     Commercial,
Industrial,
and
Agricultural
    Commercial
Mortgages
    Residential
Real
Estate
    Consumer     Credit
Cards
    Overdrafts     Total  

Allowance for loan losses, January 1, 2011

   $ 3,517      $ 3,511      $ 1,916      $ 1,561      $ 96      $ 219      $ 10,820   

Charge-offs

     (42     (47     (14     (260     (18     (53     (434

Recoveries

     1        —          —          24        2        34        61   

Provision (benefit) for loan losses

     256        415        (23     182        16        (69     777   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, March 31, 2011

   $ 3,732      $ 3,879      $ 1,879      $ 1,507      $ 96      $ 131      $ 11,224   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and is based on the Corporation’s impairment method as of March 31, 2012 and December 31, 2011:

 

March 31, 2012    Commercial,
Industrial, and
Agricultural
     Commercial
Mortgages
     Residential
Real

Estate
     Consumer      Credit
Cards
     Overdrafts      Total  

Allowance for loan losses:

                    

Ending allowance balance attributable to loans:

                    

Individually evaluated for impairment

   $ 605       $ 248       $ 32       $ —         $ —         $ —         $ 885   

Collectively evaluated for impairment

     4,337         3,352         1,965         1,435         96         168         11,353   

Modified in a troubled debt restructuring

     —           777         —           —           —           —           777   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,942       $ 4,377       $ 1,997       $ 1,435       $ 96       $ 168       $ 13,015   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 6,054       $ 7,611       $ 213       $ —         $ —         $ —         $ 13,878   

Loans collectively evaluated for impairment

     252,574         232,595         295,297         54,905         3,133         308         838,812   

Loans modified in a troubled debt restructuring

     —           10,201         —           —           —           —           10,201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 258,628       $ 250,407       $ 295,510       $ 54,905       $ 3,133       $ 308       $ 862,891   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011    Commercial,
Industrial, and
Agricultural
     Commercial
Mortgages
     Residential
Real

Estate
     Consumer      Credit
Cards
     Overdrafts      Total  

Allowance for loan losses:

                    

Ending allowance balance attributable to loans:

                    

Individually evaluated for impairment

   $ 462       $ 784       $ 19       $ —         $ —         $ —         $ 1,265   

Collectively evaluated for impairment

     4,182         3,325         1,972         1,404         71         168         11,122   

Modified in a troubled debt restructuring

     —           228         —           —           —           —           228   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,644       $ 4,337       $ 1,991       $ 1,404       $ 71       $ 168       $ 12,615   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 6,115       $ 8,457       $ 124       $ —         $ —         $ —         $ 14,696   

Loans collectively evaluated for impairment

     247,209         226,366         298,504         54,677         3,206         423         830,385   

Loans modified in a troubled debt restructuring

     —           7,688         —           —           —           —           7,688   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 253,324       $ 242,511       $ 298,628       $ 54,677       $ 3,206       $ 423       $ 852,769   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following tables present information related to loans individually evaluated for impairment by portfolio segment as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011:

 

March 31, 2012    Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 4,242       $ 2,531       $ 605   

Commercial mortgage

     6,546         5,770         1,025   

Residential real estate

     316         213         32   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     4,168         3,523         —     

Commercial mortgage

     13,802         12,042         —     

Residential real estate

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 29,074       $ 24,079       $ 1,662   
  

 

 

    

 

 

    

 

 

 

 

December 31, 2011    Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 4,329       $ 2,815       $ 462   

Commercial mortgage

     4,724         4,065         1,012   

Residential real estate

     187         124         19   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     3,892         3,300         —     

Commercial mortgage

     13,839         12,080         —     

Residential real estate

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 26,971       $ 22,384       $ 1,493   
  

 

 

    

 

 

    

 

 

 

 

     Three Months Ended
March 31, 2012
     Three Months Ended
March 31, 2011
 
     Average
Recorded
Investment
     Interest
Income
Recognized
     Cash Basis
Interest
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
     Cash Basis
Interest
Recognized
 

With an allowance recorded:

                 

Commercial, industrial, and agricultural

   $ 2,673       $ 4       $ 4       $ 2,236       $ —         $ —     

Commercial mortgage

     4,918         —           —           10,404         2         2   

Residential real estate

     169         4         4         211         —           —     

With no related allowance recorded:

                 

Commercial, industrial, and agricultural

     3,412         —           —           1,949         —           —     

Commercial mortgage

     12,061         —           —           719         —           —     

Residential real estate

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,233       $ 8       $ 8       $ 15,519       $ 2       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still accruing interest by class of loans as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  
     Nonaccrual      Past Due
Over 90 Days
Still on Accrual
     Nonaccrual      Past Due
Over 90 Days
Still on Accrual
 

Commercial, industrial, and agricultural

   $ 6,523       $ —         $ 6,949       $ 10   

Commercial mortgages

     8,590         147         8,359         122   

Residential real estate

     1,645         27         1,254         157   

Consumer

     5         148         5         125   

Credit cards

     —           2         —           27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,763       $ 324       $ 16,567       $ 441   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans and loans past due over 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 and December 31, 2011 by class of loans. The recorded investment in loans excludes accrued interest and loan origination fees, net due to their insignificance.

 

March 31, 2012    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days

Past Due
     Total
Past Due
     Loans Not
Past Due
     Total  

Commercial, industrial, and agricultural

   $ 1,716       $ 10       $ 6,523       $ 8,249       $ 250,379       $ 258,628   

Commercial mortgages

     3,487         211         7,320         11,018         239,389         250,407   

Residential real estate

     1,198         276         1,672         3,146         292,364         295,510   

Consumer

     292         237         153         682         54,223         54,905   

Credit cards

     23         23         2         48         3,085         3,133   

Overdrafts

     —           —           —           —           308         308   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,716       $ 757       $ 15,670       $ 23,143       $ 839,748       $ 862,891   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days

Past Due
     Total
Past Due
     Loans Not
Past Due
     Total  

Commercial, industrial, and agricultural

   $ 239       $ 53       $ 6,959       $ 7,251       $ 246,073       $ 253,324   

Commercial mortgages

     1,064         2,620         7,043         10,727         231,784         242,511   

Residential real estate

     1,816         682         1,411         3,909         294,719         298,628   

Consumer

     392         185         130         707         53,970         54,677   

Credit cards

     34         19         27         80         3,126         3,206   

Overdrafts

     —           —           —           —           423         423   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,545       $ 3,559       $ 15,570       $ 22,674       $ 830,095       $ 852,769   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without a loan modification. This evaluation is performed using the Corporation’s internal underwriting policies.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. All loans modified in troubled debt restructurings are performing in accordance with their modified terms as of March 31, 2012 and no principal balances were forgiven in connection with the loan restructurings.

 

19


Table of Contents

The Corporation has allocated $212 and $228 of specific reserves to one commercial mortgage customer whose loan terms have been modified in troubled debt restructurings as of March 31, 2012 and December 31, 2011, respectively. The interest rate on the original loan was 6.60%. Due to financial difficulties experienced by the customer, the interest rate was reduced to 4.19% in the third quarter of 2010, and the interest rate on this loan was further reduced to 4.07% in the third quarter of 2011. In the first quarter of 2012, the customer was granted interest-only terms for six months, resulting in an additional provision for loan losses that was insignificant for the three months ended March 31, 2012. This loan had a total recorded investment of $1,657 and $1,662 as of March 31, 2012 and December 31, 2011, respectively.

The Corporation has allocated $101 of specific reserves to one commercial mortgage customer with two loans whose terms have been modified in a troubled debt restructuring as of March 31, 2012. The interest rates on the original loans were 6.45% and 6.47%. Due to financial difficulties experienced by the customer, the interest rates on both loans were reduced to 5.75% in the first quarter of 2012, and the maturity dates were extended to 2020 and 2024, resulting in an additional provision for loan losses of $101 for the three months ended March 31, 2012. These loans had a total recorded investment of $1,840 as of March 31, 2012. This commercial customer has two additional mortgage loans that were deemed to be impaired as of December 31, 2011 and whose terms were modified in a troubled debt restructuring in the first quarter of 2012. The loan payments were modified to reflect a twenty year amortization with a balloon payment due after five years. These loans had a total recorded investment of $716 and $728 and specific reserves of $465 as of both March 31, 2012 and December 31, 2011, respectively. No additional provision for loan losses was required to be recorded during the three months ended March 31, 2012 in connection with the loan modifications.

The Corporation has a commercial mortgage customer whose loan relationships have interest-only terms that were extended during 2011. The original interest rates on the loans, which were also the market rates of interest at the time of the loan modification, were not reduced; therefore, no additional provision for loan losses was required to be recorded. These loans have a total recorded investment of $4,571 and $4,588 at March 31, 2012 and December 31, 2011, respectively.

In addition, the Corporation has a commercial mortgage customer whose loan relationship was restructured due to the forgiveness of accrued interest and late charges. The original interest rate on the loan, which was also the market rate of interest at the time of the loan modification, was not reduced; therefore, no additional provision for loan losses was required to be recorded. This loan has a recorded investment of $1,417 and $1,438 at March 31, 2012 and December 31, 2011.

The Corporation has a commercial customer with five loans whose terms were modified in a troubled debt restructuring in the first quarter of 2012 due to financial difficulties experienced by the customer. The outstanding balances on the five loans, which ranged in maturity from 2012 to 2014, were combined into one new loan with a five year term. The blended original interest rates on the loans, which were also the market rates of interest at the time of the loan modification, were not reduced; therefore no additional provision for loan losses was required to be recorded. This loan has a total recorded investment of $310 at March 31, 2012.

The Corporation has no further loan commitments to customers whose loans are classified as a troubled debt restructuring, and there have been no payment defaults on loans modified in a troubled debt restructuring.

Credit Quality Indicators

The Corporation classifies commercial, industrial, and agricultural loans and commercial mortgage loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. Loans with an outstanding balance greater than $1 million are analyzed at least bi-annually and loans with an outstanding balance of less than $1 million are analyzed at least annually.

The Corporation uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Corporation’s credit position at some future date.

 

20


Table of Contents

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not rated as special mention, substandard, or doubtful are considered to be pass rated loans. All loans included in the following tables have been assigned a risk rating within 12 months of the balance sheet date.

 

March 31, 2012    Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 229,534       $ 4,329       $ 24,577       $ 188       $ 258,628   

Commercial mortgages

     224,108         3,383         22,200         716         250,407   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 453,642       $ 7,712       $ 46,777       $ 904       $ 509,035   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011    Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 223,457       $ 4,176       $ 25,490       $ 201       $ 253,324   

Commercial mortgages

     214,098         3,172         24,513         728         242,511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 437,555       $ 7,348       $ 50,003       $ 929       $ 495,835   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”), a subsidiary that offers small balance unsecured and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics than are typical in the Bank’s consumer loan portfolio, are considered to be subprime loans. Holiday’s loan portfolio is summarized as follows at March 31, 2012 and December 31, 2011:

 

     March 31,
2012
    December 31,
2011
 

Consumer

   $ 17,896      $ 18,176   

Residential real estate

     1,005        1,056   

Less: unearned discount

     (2,881     (2,886
  

 

 

   

 

 

 

Total

   $ 16,020      $ 16,346   
  

 

 

   

 

 

 

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate, consumer, and credit card loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  
     Residential
Real Estate
     Consumer      Credit
Cards
     Residential
Real Estate
     Consumer      Credit
Cards
 

Performing

   $ 293,838       $ 54,752       $ 3,131       $ 297,217       $ 54,547       $ 3,179   

Non-performing

     1,672         153         2         1,411         130         27   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 295,510       $ 54,905       $ 3,133       $ 298,628       $ 54,677       $ 3,206   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 March 31, 2012, the Corporation held $5,514 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. In 2011, the FHLB began repurchasing a limited amount of excess stock owned by its member banks, and on February 22, 2012, the FHLB declared its first dividend since the third quarter of 2008.

FHLB stock is held as a long-term investment, is valued at its cost basis and is analyzed for impairment 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 March 31, 2012 and December 31, 2011 are summarized as follows (in thousands):

 

     Percentage
Change
    March 31, 2012      December 31, 2011  

Checking, non-interest bearing

     8.5%      $ 165,743       $ 152,732   

Checking, interest bearing

     (1.4%     301,754         305,960   

Savings accounts

     14.9%        720,364         627,106   

Certificates of deposit

     (7.1%     249,127         268,053   
    

 

 

    

 

 

 
     6.1%      $ 1,436,988       $ 1,353,851   
    

 

 

    

 

 

 

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 months ended March 31, 2012 and 2011, 37,500 and 84,250 shares issuable under stock compensation plans, respectively, were excluded from the diluted earnings per share calculations since they were anti-dilutive.

 

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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.

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

 

     Three months ended
March 31,
 
     2012     2011  

Net income per consolidated statements of income

   $ 4,347      $ 3,277   

Net earnings allocated to participating securities

     (16     (11
  

 

 

   

 

 

 

Net earnings allocated to common stock

   $ 4,331      $ 3,266   
  

 

 

   

 

 

 

Basic earnings per common share computation:

    

Distributed earnings allocated to common stock

   $ 2,041      $ 2,017   

Undistributed earnings allocated to common stock

     2,290        1,249   
  

 

 

   

 

 

 

Net earnings allocated to common stock

   $ 4,331      $ 3,266   
  

 

 

   

 

 

 

Weighted average common shares outstanding, including shares considered participating securities

     12,402        12,263   

Less: Average participating securities

     (40     (38
  

 

 

   

 

 

 

Weighted average shares

     12,362        12,225   
  

 

 

   

 

 

 

Basic earnings per common share

   $ 0.35      $ 0.27   
  

 

 

   

 

 

 

Diluted earnings per common share computation:

    

Net earnings allocated to common stock

   $ 4,331      $ 3,266   
  

 

 

   

 

 

 

Weighted average common shares outstanding for basic earnings per common share

     12,362        12,225   

Add: Dilutive effects of assumed exercises of stock options

     4        8   
  

 

 

   

 

 

 

Weighted average shares and dilutive potential common shares

     12,366        12,233   
  

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.35      $ 0.27   
  

 

 

   

 

 

 

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 and an effective date of September 15, 2008 in order to hedge $10 million of a subordinated note that was issued 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 from August 1, 2008 to September 15, 2013 without exchange of the

 

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underlying notional amount. At March 31, 2012, the variable rate on the subordinated debt was 2.02% (LIBOR plus 155 basis points) and the Corporation was paying 5.84% (4.29% fixed rate plus 155 basis points).

In anticipation of the expiration of the 5 year interest rate swap agreement discussed immediately above, on May 3, 2011, the Corporation executed an interest rate swap agreement with a 5 year term and an effective date of September 15, 2013 which as of that effective date, will hedge $10 million of the subordinated note discussed immediately above. As with the prior interest rate swap 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 from September 15, 2013 to September 15, 2018 without exchange of the underlying notional amount. On the effective date, the variable rate on the subordinated debt will be LIBOR plus 155 basis points and the Corporation will be paying 5.57% (4.02% fixed rate plus 155 basis points).

As of March 31, 2012, 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 swaps designated as cash flow hedges within the Corporation’s consolidated balance sheet and statement of income as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011 (in thousands):

 

     Liability Derivative  
          Fair value  
     Balance Sheet
Location
   March 31,
2012
    December 31,
2011
 

Interest rate contract

   Accrued interest and other liabilities    ($ 1,573   ($ 1,669

 

For the Three Months Ended March 31, 2012    (a)      (b)    (c)     (d)    (e)  

Interest rate contract

   $ 63      

Interest expense – subordinated debentures

   ($ 95   Other income    $ —     
For the Three Months Ended March 31, 2011    (a)      (b)    (c)     (d)    (e)  

Interest rate contract

   $ 67      

Interest expense – subordinated debentures

   ($ 100   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 twelve months are expected to be $372.

 

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RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued Accounting Standards Update No. 2011-4, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” Some amendments in this update clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this update are effective during interim and annual reporting periods beginning after December 15, 2011. The effect of adopting this new guidance did not have a material effect on the Corporation’s financial statements.

In June 2011, the FASB issued Accounting Standards Update No. 2011-5, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income.” This update amends the FASB Accounting Standards Codification (Codification) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and retrospective application is required. The effect of adopting this new guidance did not have a material effect on the Corporation’s financial statements.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment.” The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than fifty percent. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The effect of adopting this new guidance did not have a material effect on the Corporation’s financial statements.

In December 2011, the FASB issued Accounting Standards Update No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately within their respective components of net income and other comprehensive income. As such, the amendments in this update supersede only those paragraphs in Accounting Standards Update No. 2011-05 that pertain to how and where reclassification adjustments are presented. The amendments were effective at the same time as the amendments in Accounting Standards Update 2011-05. The effect of adopting this new guidance did not have a material effect on the Corporation’s financial statements.

 

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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 Pennsylvania counties of Cambria, Cameron, Clearfield, Elk, Indiana, and McKean. It also includes a portion of western Centre County including Philipsburg Borough, Rush Township and the western portions of Snow Shoe and Burnside Townships and a portion of Jefferson County, consisting of the boroughs of Brockway, Falls Creek, Punxsutawney, Reynoldsville and Sykesville, and the townships of Washington, Winslow and Henderson. ERIEBANK, a division of CNB Bank, provides financial services to individuals and businesses in the northwestern Pennsylvania counties of Erie, Crawford, and Warren.

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 of the Corporation and its consolidated subsidiaries are not necessarily indicative of future performance. CNB Securities Corporation is incorporated in Delaware and currently maintains investments in debt and equity securities. County Reinsurance Company 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. When we use the terms “we”, “us” and “our”, we mean CNB Financial Corporation and its subsidiaries. Management’s discussion and analysis should be read in conjunction with the Corporation’s consolidated financial statements and related notes.

GENERAL OVERVIEW

The Bank expanded its ERIEBANK division by opening a full service office in Meadville, Pennsylvania in the second quarter of 2010, and the Corporation has obtained regulatory approval for second Meadville location that is expected to open in the third quarter of 2012. In addition, a CNB Bank loan production office was opened in Indiana, Pennsylvania in the third quarter of 2011. A CNB Bank loan production office in Johnstown, Pennsylvania was closed in the third quarter of 2011. Management believes that the Corporation’s ERIEBANK division, along with the traditional CNB Bank market areas, should provide the Bank with moderate loan growth during the remainder of 2012. Deposit growth was $191 million during the year ended December 31, 2011 and $83 million during the quarter ended March 31, 2012.

Management concentrates on return on average equity and earnings per share metrics, plus other methods, to measure the performance of the Corporation. The interest rate environment will continue to play an important role in the future earnings of the Corporation. Some compression of the net interest margin was experienced in 2011 and some additional compression is expected in 2012 as a result of the current interest rate environment. During the past several years, measures have been taken 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. In addition, interest rates were decreased on certain deposit products during 2011 and the first quarter of 2012. Non-interest costs are expected to increase with the growth of the Corporation; however, management’s growth strategies are expected to result in an increase in earning assets as well as enhanced non-interest income which is expected to more than offset increases in non-interest expenses in 2012 and beyond. While past results are not an indication of future earnings, management believes the Corporation is well-positioned to sustain core earnings during 2012.

On July 21, 2010, the Dodd-Frank Wall Street and Consumer Protection Act (the “Dodd-Frank Act”) was enacted and this law could impact the performance of the Corporation in future periods. The Dodd-Frank Act includes numerous provisions designed to strengthen the financial industry, enhance consumer protection, expand disclosures and provide for transparency. Some of these provisions included changes to FDIC insurance coverage, which has now been increased to $250,000. Additional provisions created a Consumer Financial 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

 

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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 Dodd-Frank Act, the full impact of the entire Dodd-Frank Act will not be known until the full implementation is completed.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled $30.2 million at March 31, 2012 compared to $39.7 million at December 31, 2011. Cash and cash equivalents fluctuate based on the timing and amount of liquidity events that occur in the normal course of business.

Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable the Corporation to meet cash obligations and off-balance sheet commitments as they come due.

SECURITIES

Securities available for sale and trading securities have combined to increase $83.4 million or 13.0% since December 31, 2011. The increase is primarily due to the purchases of residential mortgage and asset backed securities issued by government sponsored entities and resulted from deposit growth not reinvested in loans. See the notes to the consolidated financial statements for additional detail concerning the composition of the Corporation’s securities portfolio, the process for evaluating securities for other-than-temporary impairment, and for valuation of structured pooled trust preferred securities.

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 meetings of the Asset/Liability Committee of the Corporation’s Board of Directors (“ALCO”). The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the securities portfolio, a sufficient level of liquidity is maintained to satisfy depositor requirements and various credit needs of our customers.

LOANS

The Corporation experienced an increase in loans, net of unearned discount, of $10.1 million, or 1.2%, during the first quarter of 2012. Lending efforts are 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 moderate loan demand throughout the remainder of 2012.

 

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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):

 

    Three months ending
March 31,  2012
    Year ending
December 31, 2011
    Three months ending
March 31,  2011
 

Balance at beginning of period

  $ 12,615      $ 10,820      $ 10,820   

Charge-offs:

     

Commercial, industrial, and agricultural

    225        1,796        42   

Commercial mortgages

    115        175        47   

Residential real estate

    87        217        14   

Consumer

    256        907        260   

Credit cards

    19        39        18   

Overdrafts

    67        222        53   
 

 

 

   

 

 

   

 

 

 
    769        3,356        434   
 

 

 

   

 

 

   

 

 

 

Recoveries:

     

Commercial, industrial, and agricultural

    3        9        1   

Commercial mortgages

    —          —          —     

Residential real estate

    —          13        —     

Consumer

    27        88        24   

Credit cards

    1        10        2   

Overdraft deposit accounts

    34        94        34   
 

 

 

   

 

 

   

 

 

 
    65        214        61   
 

 

 

   

 

 

   

 

 

 

Net charge-offs

    (704     (3,142     (373
 

 

 

   

 

 

   

 

 

 

Provision for loan losses

    1,104        4,937        777   
 

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 13,015      $ 12,615      $ 11,224   
 

 

 

   

 

 

   

 

 

 

Loans, net of unearned

  $ 860,010      $ 849,883      $ 792,568   

Allowance to net loans

    1.51     1.48     1.42

Net charge-offs to average loans (annualized)

    0.33     0.38     0.19

Nonperforming assets

  $ 17,408      $ 17,513      $ 16,130   

Nonperforming % of total assets

    1.03     1.09     1.09

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; and

 

   

concentrations of credit.

The methodology described above was created using the experience of the Corporation’s credit administrator, guidance from the regulatory agencies, expertise of a third-party loan review provider, and discussions with 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 determines 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 to be 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 within its market areas.

During the three months ended March 31, 2012, the Corporation recorded a provision for loan losses of $1.1 million, as compared to a provision for loan losses of $777 thousand for the three months ended March 31, 2011. The increase was a result of increases in loss reserves, primarily in the commercial loan portfolio. One relationship comprising two commercial loans which became impaired in 2011 necessitated an additional loss reserve of $360 thousand in the first quarter of 2012 as a result of the revision in the valuation estimate of the loan collateral. Charge-offs attributable to this loan relationship totaled $200 thousand during the three months ended March 31, 2012, which was the primary factor in the increase in net loan charge-offs from $373 thousand during the three months ended March 31, 2011 to $705 thousand during the three months ended March 31, 2012.

Management believes that the allowance for loan losses is reasonable and adequate to absorb probable incurred losses in its portfolio at March 31, 2012.

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 $83.1 million from $1,353.9 million at December 31, 2011 to $1,437.0 million at March 31, 2012. The growth in deposits was primarily due to increases in savings accounts of $93.3 million over this period as a result of the Corporation’s marketing of a savings product which carries an annual percentage yield which is highly competitive in the current interest rate environment. This increase in savings accounts was offset by an expected decrease in time deposits of $18.9 million as customers who previously held certificates of deposit migrated to the savings product.

 

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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-term and long-term borrowings as an available funding source when deemed appropriate.

SHAREHOLDERS’ EQUITY AND CAPITAL RATIOS AND METRICS

The Corporation’s capital continued to provide a base for profitable growth through March 31, 2012. Total shareholders’ equity was $133.2 million at March 31, 2012 and $131.9 million at December 31, 2011. In the first three months of 2012, the Corporation earned $4.3 million and declared dividends of $2.0 million, a dividend payout ratio of 47.1% 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.

The Corporation’s capital ratios, book value per share and tangible book value per share as of March 31, 2012 and December 31, 2011 are as follows:

 

     March 31, 2012     December 31, 2011  

Total risk-based capital ratio

     15.14     15.14

Tier 1 capital ratio

     13.89     13.89

Leverage ratio

     8.09     8.22

Tangible common equity/tangible assets (1)

     7.30     7.61

Book value per share

   $ 10.71      $ 10.66   

Tangible book value per share (1)

     9.84        9.78   

 

(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 from the calculation of shareholders’ equity. Tangible assets is calculated by excluding the balance of goodwill 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 they are additional measures used to assess capital adequacy. 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).

 

     March 31, 2012     December 31, 2011  

Shareholders’ equity

   $ 133,183      $ 131,889   

Less goodwill

     10,821        10,821   
  

 

 

   

 

 

 

Tangible common equity

   $ 122,362      $ 121,068   
  

 

 

   

 

 

 

Total assets

   $ 1,686,620      $ 1,602,207   

Less goodwill

     10,821        10,821   
  

 

 

   

 

 

 

Tangible assets

   $ 1,675,799      $ 1,591,386   
  

 

 

   

 

 

 

Ending shares outstanding

     12,431,682        12,377,318   

Tangible book value per share

   $ 9.84      $ 9.78   

Tangible common equity/tangible assets

     7.30     7.61

LIQUIDITY

Liquidity measures an organization’s ability to meet cash obligations as they come due. The consolidated statement of cash flows 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 to be part of the Corporation’s liquid assets. The

 

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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 March 31, 2012 (in thousands):

 

Commitments to extend credit

   $ 233,064   

Standby letters of credit

     22,672   
  

 

 

 
   $ 255,736   
  

 

 

 

 

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CONSOLIDATED YIELD COMPARISONS

AVERAGE BALANCES AND NET INTEREST MARGIN FOR THE THREE MONTHS ENDED

Dollars in thousands

 

 

    March 31, 2012     March 31, 2011  
    Average
Balance
    Annual
Rate
    Interest
Inc./Exp.
    Average
Balance
    Annual
Rate
    Interest
Inc./Exp.
 

ASSETS:

           

Interest-bearing deposits with other banks

  $ 4,251        0.19   $ 2      $ 15,820        1.06   $ 42   

Securities:

           

Taxable (1)

    582,354        2.59     3,683        445,373        2.91     3,258   

Tax-Exempt (1,2)

    104,136        5.26     1,292        76,467        5.20     1,006   

Equity Securities (1,2)

    2,285        2.98     17        1,641        2.22     9   
 

 

 

     

 

 

   

 

 

     

 

 

 

Total securities

    688,775        2.98     4,992        523,481        3.24     4,273   
 

 

 

     

 

 

   

 

 

     

 

 

 

Loans:

           

Commercial (2)

    287,433        5.01     3,597        274,809        5.19     3,568   

Mortgage (2)

    518,893        5.45     7,069        469,886        5.71     6,704   

Consumer

    49,877        13.84     1,726        47,204        13.55     1,599   
 

 

 

     

 

 

   

 

 

     

 

 

 

Total loans (3)

    856,203        5.79     12,392        791,899        6.00     11,871   
 

 

 

     

 

 

   

 

 

     

 

 

 

Total earning assets

    1,549,229        4.55   $ 17,386        1,331,200        4.85   $ 16,186   
 

 

 

     

 

 

   

 

 

     

 

 

 

Non interest-bearing assets:

           

Cash and due from banks

    32,740            37,702       

Premises and equipment

    24,043            24,268       

Other assets

    54,767            60,053       

Allowance for loan losses

    (12,828         (11,105    
 

 

 

       

 

 

     

Total non interest-bearing assets

    98,722            110,918       
 

 

 

       

 

 

     

TOTAL ASSETS

  $ 1,647,951          $ 1,442,118       
 

 

 

       

 

 

     

LIABILITIES AND SHAREHOLDERS’ EQUITY:

           

Demand – interest-bearing

  $ 301,281        0.57     428      $ 286,168        0.81     583   

Savings

    681,672        0.97     1,649        401,413        1.14     1,148   

Time

    254,922        1.68     1,072        375,510        1.82     1,704   
 

 

 

     

 

 

   

 

 

     

 

 

 

Total interest-bearing deposits

    1,237,875        1.02     3,149        1,063,091        1.29     3,435   

Short-term borrowings

    2,183        0.18     1        17,009        0.21     9   

Long-term borrowings

    74,430        4.28     796        73,869        4.12     760   

Subordinated debentures

    20,620        3.90     201        20,620        3.71     191   
 

 

 

     

 

 

   

 

 

     

 

 

 

Total interest-bearing liabilities

    1,335,108        1.24   $ 4,147        1,174,589        1.50   $ 4,395   
     

 

 

       

 

 

 

Demand – non interest-bearing

    157,429            142,172       

Other liabilities

    21,268            14,392       
 

 

 

       

 

 

     

Total liabilities

    1,513,805            1,331,153       

Shareholders’ equity

    134,146            110,965       
 

 

 

       

 

 

     

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $ 1,647,951          $ 1,442,118       
 

 

 

       

 

 

     

Interest income/Earning assets

      4.55   $ 17,386          4.85   $ 16,186   

Interest expense/Interest-bearing liabilities

      1.24     4,147          1.50     4,395   
   

 

 

   

 

 

     

 

 

   

 

 

 

Net interest spread

      3.30   $ 13,239          3.35   $ 11,791   
   

 

 

   

 

 

     

 

 

   

 

 

 

Interest income/Earning assets

      4.55     17,386          4.85     16,186   

Interest expense/Earning assets

      1.07     4,147          1.32     4,395   
   

 

 

   

 

 

     

 

 

   

 

 

 

Net interest margin

      3.47   $ 13,239          3.53   $ 11,791   
   

 

 

   

 

 

     

 

 

   

 

 

 

 

(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

OVERVIEW OF THE INCOME STATEMENT

The Corporation had net income of $4.3 million in the first quarter of 2012 compared to $3.3 million for the same period of 2011. The earnings per diluted share were $0.35 in the first quarter of 2012 and $0.27 in the first quarter of 2011. The return on assets and return on equity for the first quarter of 2012 are 1.06% and 12.96% compared to 0.91% and 11.81% for the first quarter of 2011.

INTEREST INCOME AND EXPENSE

Net interest income totaled $12.7 million, an increase of $1.4 million, or 12.2%, over the first quarter of 2011. Total interest and dividend income increased by $1.1 million, or 7.2%, as compared to the first quarter of 2011. Net interest margin on a fully tax equivalent basis was 3.47% for the three months ended March 31, 2012, compared to 3.53% for the three months ended March 31, 2011.

Although the Corporation’s earning assets continue to grow, these increases have been offset by decreases in the yield on earning assets, primarily because the composition of earning assets has shifted to a greater percentage of investment securities as deposit growth has exceeded loan growth. Total interest expense decreased $248 thousand, or 5.6%, as compared to the first quarter of 2011 due to decreases in the cost of core deposits.

PROVISION FOR LOAN LOSSES

The Corporation recorded a provision for loan losses of $1.1 million in the first quarter of 2012 compared to $777 thousand in the first quarter of 2011. As disclosed in the Allowance for Loan Losses section of Management’s Discussion and Analysis, the Corporation increased its loan loss reserves in the commercial loan portfolio during the first quarter of 2012. In addition, total net loan chargeoffs were $704 thousand in the first quarter of 2012 compared to $373 thousand in the first quarter of 2011.

Management believes the provision for loan losses was appropriate and the allowance for loan losses is adequate to absorb probable incurred losses in our portfolio as of March 31, 2012.

NON-INTEREST INCOME

Excluding the effects of the securities transactions described below, non-interest income was $2.5 million for the three months ended March 31, 2012, compared to $2.4 million for the three months ended March 31, 2011. Net realized gains on available-for-sale securities were $566 thousand during the three months ended March 31, 2012, compared to $74 thousand during the three months ended March 31, 2011. Net realized and unrealized gains on securities for which fair value accounting was elected were $320 thousand and $113 thousand during the three months ended March 31, 2012 and 2011, respectively. An other-than-temporary impairment charge of $398 thousand was recorded in earnings on structured pooled trust preferred securities during the three months ended March 31, 2011.

NON-INTEREST EXPENSES

Total non-interest expenses increased $723 thousand, or 8.7%, during the three months ended March 31, 2012 compared to the three months ended March 31, 2011. Salaries and benefits expenses increased $482 thousand, or 11.4%, during the three months ended March 31, 2012 compared to the three months ended March 31, 2011, in part due to routine merit increases, an increase in average full-time equivalent employees, and increases in certain employee benefit expenses, such as health insurance premiums, which continue to increase in line with market conditions. In addition, other non-interest expenses increased from $2.4 million for the three months ended March 31, 2011 to $2.9 million for the three months ended March 31, 2012 as a result of CNB’s continued growth.

Total non-interest expenses on an annualized basis in relation to CNB’s average asset size declined from 2.30% for the three months ended March 31, 2011 to 2.19% for the three months ended March 31, 2012.

 

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INCOME TAX EXPENSE

Income tax expense was $1.6 million in the first quarter of 2012 as compared to $1.1 million in the first quarter of 2011, resulting in effective tax rates of 27.2% and 25.8% for the periods, respectively. The effective rates 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. The increase in the effective tax rate from 2011 to 2012 is attributable to a lower percentage of tax-exempt income in 2012 as compared to pre-tax income.

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 the Corporation’s financial position or results of operations. Note 1 (Summary of Significant Accounting Policies), Note 3 (Securities), and Note 4 (Loans), of the Corporation’s 2011 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, 2011.

ITEM 3

QUANTITATIVE AND 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 holding company, 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 they represent, in management’s opinion, a reasonable view of the Corporation’s interest rate risk position. The following discussion provides a summary of our analysis at December 31, 2011 based on the most recent data available.

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 December 31, 2011 was 11.83% of total earning assets compared to 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.

 

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EARNINGS SIMULATION: This model forecasts the projected change in net interest income resulting from increases or decreases in the interest rate curve, assuming a one time shock of plus or minus 200 basis points or 2%.

The model makes various assumptions about cash flows and reinvestments of these cash flows in 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 December 31, 2011:

 

Static 1-Year Cumulative Gap

     11.83

Earnings Simulation:

  

-200 bps vs. Stable Rate

     N/A   

+200 bps vs. Stable Rate

     16.93

The static 1-year cumulative gap at December 31, 2011 was asset sensitive. As the federal funds rate was at 0.25% on December 31, 2011, 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, management has determined the potential impact of these changes to be acceptable with modest effects on net income and equity given an interest rate shock of an increase in interest rates of 2.0%. Management continues to monitor the interest rate sensitivity through the ALCO and uses the data to make strategic decisions.

 

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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 the 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.

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 I, Item 1A. of the 2011 Form 10-K.

 

ITEM 6. EXHIBITS

 

Exhibit
No.

  

Description

    3.1    Amended and Restated Articles of Incorporation of the Corporation, filed as Appendix B to the 2005 Proxy Statement, filed with the SEC on March 24, 2006, and incorporated herein by reference.
    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.
  31.1    Rule 13a – 14(a)/15d – 14(a) Certification of the Principal Executive Officer
  31.2    Rule 13a – 14(a)/15d – 14(a) Certification of the Principal Financial Officer
  32.1    Section 1350 Certification
  32.2    Section 1350 Certification
101    The following financial information from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, furnished electronically herewith, and formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.*

 

* In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

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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: May 4, 2012    

/s/ Joseph B. Bower, Jr.

    Joseph B. Bower, Jr.
    President and Director
    (Principal Executive Officer)
DATE: May 4, 2012    

/s/ Brian W. Wingard

    Brian W. Wingard
    Treasurer
    (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit
No.

  

Description

    3.1    Amended and Restated Articles of Incorporation of the Corporation, filed as Appendix B to the 2005 Proxy Statement, filed with the SEC on March 24, 2006, and incorporated herein by reference.
    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.
  31.1    Rule 13a – 14(a)/15d – 14(a) Certification of the Principal Executive Officer
  31.2    Rule 13a – 14(a)/15d – 14(a) Certification of the Principal Financial Officer
  32.1    Section 1350 Certification
  32.2    Section 1350 Certification
101    The following financial information from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, furnished electronically herewith, and formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.*

 

* In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

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