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CNB FINANCIAL CORP/PA - Quarter Report: 2013 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, 2013

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 May 6, 2013

COMMON STOCK NO PAR VALUE PER SHARE: 12,510,492 SHARES

 

 

 


Table of Contents

INDEX

PART I.

FINANCIAL INFORMATION

 

     Page Number  

ITEM 1 – Financial Statements

  

Consolidated Balance Sheets – March 31, 2013 (unaudited) and December 31, 2012 (audited)

     1   

Consolidated Statements of Income – Three months ended March 31, 2013 and 2012 (unaudited)

     2   

Consolidated Statements of Comprehensive Income – Three months ended March  31, 2013 and 2012 (unaudited)

     3   

Consolidated Statements of Cash Flows – Three months ended March 31, 2013 and 2012 (unaudited)

     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

     35   

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, including the previously announced acquisition of FC Banc Corp.; 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,
2013
    December 31,
2012
 

ASSETS

  

Cash and due from banks

   $ 35,188      $ 28,570   

Interest bearing deposits with other banks

     3,303        3,311   
  

 

 

   

 

 

 

Total cash and cash equivalents

     38,491        31,881   

Interest bearing time deposits with other banks

     275        225   

Securities available for sale

     760,945        737,311   

Trading securities

     5,066        4,459   

Loans held for sale

     956        2,398   

Loans

     936,005        931,225   

Less: unearned discount

     (3,309     (3,401

Less: allowance for loan losses

     (13,897     (14,060
  

 

 

   

 

 

 

Net loans

     918,799        913,764   

FHLB and other equity interests

     6,597        6,684   

Premises and equipment, net

     24,416        24,072   

Bank owned life insurance

     27,907        27,645   

Mortgage servicing rights

     674        714   

Goodwill

     10,946        10,946   

Accrued interest receivable and other assets

     14,775        12,980   
  

 

 

   

 

 

 

TOTAL

   $ 1,809,847      $ 1,773,079   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Non-interest bearing deposits

   $ 163,646      $ 175,239   

Interest bearing deposits

     1,381,799        1,309,764   
  

 

 

   

 

 

 

Total deposits

     1,545,445        1,485,003   

FHLB and other borrowings

     75,152        97,806   

Subordinated debentures

     20,620        20,620   

Accrued interest payable and other liabilities

     22,525        24,286   
  

 

 

   

 

 

 

Total liabilities

     1,663,742        1,627,715   
  

 

 

   

 

 

 

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

     0        0   

Additional paid in capital

     43,840        44,223   

Retained earnings

     91,193        88,960   

Treasury stock, at cost (90,314 shares at March 31, 2013 and 123,699 shares at December 31, 2012)

     (1,245     (1,743

Accumulated other comprehensive income

     12,317        13,924   
  

 

 

   

 

 

 

Total shareholders’ equity

     146,105        145,364   
  

 

 

   

 

 

 

TOTAL

   $ 1,809,847      $ 1,773,079   
  

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

1


Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

 

 

     Three months ended
March 31,
 
     2013      2012  

INTEREST AND DIVIDEND INCOME:

     

Loans including fees

   $ 12,302       $ 12,255   

Deposits with banks

     0         2   

Securities:

     

Taxable

     3,409         3,683   

Tax-exempt

     957         871   

Dividends

     36         13   
  

 

 

    

 

 

 

Total interest and dividend income

     16,704         16,824   
  

 

 

    

 

 

 

INTEREST EXPENSE:

     

Deposits

     2,234         3,149   

Borrowed funds

     829         797   

Subordinated debentures (includes $97 and $95 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2013 and 2012, respectively)

     190         201   
  

 

 

    

 

 

 

Total interest expense

     3,253         4,147   
  

 

 

    

 

 

 

NET INTEREST INCOME

     13,451         12,677   

PROVISION FOR LOAN LOSSES

     930         1,104   
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     12,521         11,573   
  

 

 

    

 

 

 

NON-INTEREST INCOME:

     

Wealth and asset management fees

     574         387   

Service charges on deposit accounts

     942         975   

Other service charges and fees

     430         432   

Net realized gains on available-for-sale securities (includes $76 and $566 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2013 and 2012, respectively)

     76         566   

Net realized and unrealized gains on trading securities

     303         320   

Mortgage banking

     255         265   

Bank owned life insurance

     262         261   

Other

     229         209   
  

 

 

    

 

 

 

Total non-interest income

     3,071         3,415   
  

 

 

    

 

 

 

NON-INTEREST EXPENSES:

     

Salaries and benefits

     5,197         4,725   

Net occupancy expense

     1,317         1,149   

Data processing

     767         725   

State and local taxes

     439         366   

Legal, professional, and examination fees

     400         228   

Advertising

     246         250   

FDIC insurance premiums

     279         259   

Other

     1,037         1,312   
  

 

 

    

 

 

 

Total non-interest expenses

     9,682         9,014   
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     5,910         5,974   

INCOME TAX EXPENSE (includes ($7) and $165 income tax expense from reclassification items in 2013 and 2012, respectively)

     1,613         1,627   
  

 

 

    

 

 

 

NET INCOME

   $ 4,297       $ 4,347   
  

 

 

    

 

 

 

EARNINGS PER SHARE:

     

Basic

   $ 0.34       $ 0.35   

Diluted

   $ 0.34       $ 0.35   

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,
 
     2013     2012  

NET INCOME

   $ 4,297      $ 4,347   

Other comprehensive loss, net of tax:

    

Net change in fair value of interest rate swap agreements designated as cash flow hedges:

    

Unrealized gain on interest rate swaps, net of tax of ($6) in 2013

     12        1   

Reclassification adjustment for losses recognized in earnings, net of tax of ($34) and ($33), respectively

     63        62   
  

 

 

   

 

 

 
     75        63   
  

 

 

   

 

 

 

Net change in unrealized gains on securities available for sale:

    

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

    

Unrealized losses arising during the period, net of tax of $15 in 2013

     (27     0   
  

 

 

   

 

 

 

Unrealized losses on other securities available for sale:

    

Unrealized losses arising during the period, net of tax of $865 and $647, respectively

     (1,606     (1,201

Reclassification adjustment for realized gains included in net income, net of tax of $27 and $198, respectively

     (49     (368
  

 

 

   

 

 

 
     (1,655     (1,569
  

 

 

   

 

 

 

Other comprehensive loss

     (1,607     (1,506
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 2,690      $ 2,841   
  

 

 

   

 

 

 

 

 

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,
 
     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 4,297      $ 4,347   

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

    

Provision for loan losses

     930        1,104   

Depreciation and amortization of premises and equipment

     554        522   

Amortization and accretion of securities premiums and discounts and deferred loan fees and costs

     1,126        992   

Net realized gains on sales of available-for-sale securities

     (76     (566

Net realized and unrealized gains on trading securities

     (303     (320

Proceeds from sale of securities for which fair value was elected

     1,567        1,749   

Purchase of securities for which fair value was elected

     (1,980     (1,457

Gain on sale of loans

     (243     (246

Net gains on dispositions of premises and equipment and foreclosed assets

     (2     (6

Proceeds from sale of loans

     11,072        6,996   

Origination of loans held for sale

     (9,417     (6,730

Income on bank owned life insurance

     (262     (261

Stock-based compensation expense

     83        59   

Contribution of treasury stock

     30        30   

Changes in:

    

Accrued interest receivable and other assets

     (876     5   

Accrued interest payable and other liabilities

     (1,646     117   
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     4,854        6,335   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Net increase in interest bearing time deposits with other banks

     (50     (51

Proceeds from maturities, prepayments and calls of securities

     29,276        23,709   

Proceeds from sales of securities

     1,324        42,149   

Purchase of securities

     (57,812     (152,141

Loan origination and payments, net

     (5,967     (10,808

Redemption of FHLB and other equity interests

     87        76   

Purchase of premises and equipment

     (828     (491

Proceeds from the sale of premises and equipment and foreclosed assets

     0        260   
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (33,970     (97,297
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net change in:

    

Checking, money market and savings accounts

     62,167        102,063   

Certificates of deposit

     (1,725     (18,926

Proceeds from sale of treasury stock

     2        413   

Cash dividends paid

     (2,064     (2,049

Repayment of long-term borrowings

     (44     (39

Proceeds from long-term borrowings

     900        0   

Net change in short-term borrowings

     (23,510     0   
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     35,726        81,462   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     6,610        (9,500

CASH AND CASH EQUIVALENTS, Beginning

     31,881        39,703   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, Ending

   $ 38,491      $ 30,203   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 3,257      $ 4,175   

Income taxes

   $ 32      $ 225   

SUPPLEMENTAL NONCASH DISCLOSURES:

    

Transfers to other real estate owned

   $ 51      $ 15   

Grant of restricted stock awards from treasury stock

   $ 539      $ 419   

 

 

See Notes to Consolidated Financial Statements

 

4


Table of Contents

CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

1. 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, 2013 and for the three month periods ended March 31, 2013 and 2012 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, 2013 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, 2012 (the “2012 Form 10-K”). All dollar amounts are stated in thousands, except share and per share data.

 

2. ACQUISITION OF FC BANC CORP.

On March 26, 2013, the Corporation announced the signing of a definitive merger agreement to acquire FC Banc Corp. and its subsidiary, The Farmers Citizens Bank (“FC Bank”), for $30.00 per share in cash and stock, or approximately $40.4 million in the aggregate. FC Bank serves the northern Ohio markets of Bucyrus, Cardington, Fredericktown, Mount Hope and Shiloh, as well as the markets of Worthington and Upper Arlington in the greater Columbus, Ohio area, with 8 branch locations and a mortgage banking business headquartered in Dublin, Ohio. The transaction is expected to close in the fourth quarter of 2013, subject to customary closing conditions, including regulatory approvals and the approval of FC Banc Corp. shareholders.

 

3. 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, 2013, there was no unrecognized compensation cost related to nonvested stock options granted under this plan and no stock options were granted during the three month periods ended March 31, 2013 and 2012. At March 31, 2013 and December 31, 2012, the Corporation had 75,500 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. Nonvested restricted stock awards are recorded as a reduction of additional paid-in-capital in shareholders’ equity until earned. Compensation expense resulting from these restricted stock awards was $83 and $59 for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, there was $991 of total unrecognized compensation cost related to unvested restricted stock awards.

 

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Table of Contents

A summary of changes in nonvested restricted stock awards for the three months ended March 31, 2013 follows:

 

          

Per Share

Weighted Average

 
     Shares     Grant Date Fair Value  

Nonvested at beginning of period

     49,574      $ 15.37   

Granted

     31,500        17.10   

Vested

     (15,674     15.23   
  

 

 

   

 

 

 

Nonvested at end of period

     65,400      $ 16.24   
  

 

 

   

 

 

 

 

4. FAIR VALUE

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 held by the Corporation 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 about certain factors that market participants would use in pricing the securities, including bid/ask spreads and liquidity and credit premiums.

The Corporation’s structured pooled trust preferred security is 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 this security. 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 the security valuation. Due to the current market conditions as well as the limited trading activity of these types of securities, the market value of the Corporation’s structured pooled trust preferred security 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

Assets and liabilities measured at fair value on a recurring basis are as follows at March 31, 2013 and December 31, 2012:

 

           Fair Value Measurements at March 31, 2013 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

   $ 2,025      $ 0       $ 2,025      $ 0   

U.S. Government sponsored entities

     192,770        0         192,770        0   

States and political subdivisions

     184,154        0         184,154        0   

Residential and multi-family mortgage

     296,305        0         296,305        0   

Commercial mortgage

     1,264        0         1,264        0   

Corporate notes and bonds

     15,336        0         13,269        2,067   

Pooled trust preferred

     558        0         0        558   

Pooled SBA

     67,001        67,001         0        0   

Other securities

     1,532        1,532         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities Available For Sale

   $ 760,945      $ 68,533       $ 689,787      $ 2,625   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities:

         

Corporate equity securities

   $ 3,760      $ 3,760       $ 0      $ 0   

Certificates of deposit

     358        358         0        0   

International mutual funds

     261        261         0        0   

Large cap growth mutual funds

     158        158         0        0   

Money market mutual funds

     79        79         0        0   

Large cap value mutual funds

     106        106         0        0   

Corporate notes and bonds

     101        0         101        0   

Real estate investment trust mutual funds

     68        68         0        0   

U.S. Government sponsored entities

     57        0         57        0   

Small cap mutual funds

     59        59         0        0   

Mid cap mutual funds

     59        59         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $ 5,066      $ 4,908       $ 158      $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

         

Interest rate swaps

   $ (1,630   $ 0       $ (1,630   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

            Fair Value Measurements at December 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

   $ 4,036       $ 0       $ 4,036       $ 0   

U.S. Government sponsored entities

     163,781         0         163,781         0   

States and political subdivisions

     181,279         0         181,279         0   

Residential and multi-family mortgage

     316,822         0         316,822         0   

Commercial mortgage

     1,304         0         1,304         0   

Corporate notes and bonds

     15,024         0         13,044         1,980   

Pooled trust preferred

     600         0         0         600   

Pooled SBA

     52,927         52,631         296         0   

Other securities

     1,538         1,538         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities Available For Sale

   $ 737,311       $ 54,169       $ 680,562       $ 2,580   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Trading Securities:

         

Corporate equity securities

   $ 3,117      $ 3,117       $ 0      $ 0   

Certificates of deposit

     408        408         0        0   

International mutual funds

     287        287         0        0   

Large cap growth mutual funds

     157        157         0        0   

Money market mutual funds

     110        110         0        0   

Large cap value mutual funds

     104        104         0        0   

Corporate notes and bonds

     101        0         101        0   

Real estate investment trust mutual funds

     65        65         0        0   

U.S. Government sponsored entities

     58        0         58        0   

Small cap mutual funds

     26        26         0        0   

Mid cap mutual funds

     26        26         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $       4,459      $     4,300       $       159      $           0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

         

Interest rate swaps

   $ (1,745   $ 0       $ (1,745   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

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, 2013:

 

     Corporate
notes and
bonds
     Pooled
trust
preferred
 

Balance, January 1, 2013

   $ 1,980       $ 600   

Total gains or (losses):

     

Included in other comprehensive income

     87         (42
  

 

 

    

 

 

 

Balance, March 31, 2013

   $ 2,067       $ 558   
  

 

 

    

 

 

 

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

     (20     —     
  

 

 

   

 

 

 

Balance, March 31, 2012

   $ 2,040      $ 340   
  

 

 

   

 

 

 

The following table presents quantitative information about Level 3 fair value measurements at March 31, 2013:

 

     Fair
value
    

Valuation
Technique

  

Unobservable

Inputs

   Input
Utilized

Corporate notes and bonds

   $ 2,067      

Discounted

cash flow

  

Constant prepayment rate

Probability of default

Discount rate

   0%

0%

9.2%

Pooled trust preferred

   $ 558      

Discounted

cash flow

   Collateral default rate    2% in 2013; 1.5% in 2014;
1.0% in 2015; 0.5% in
2016 and thereafter
        

Yield

Prepayment speed

   12%

7.2% CPR in 2013; 2.0%
CPR in 2014 and thereafter

 

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

 

     Fair
value
    

Valuation
Technique

  

Unobservable

Inputs

   Input
Utilized

Corporate notes and bonds

   $ 1,980      

Discounted

cash flow

  

Constant prepayment rate

Probability of default

Discount rate

   0%

0%

9.6%

Pooled trust preferred

   $ 600      

Discounted

cash flow

  

Collateral default rate

 

Yield

Recovery probability

   2% annually for 2 years;
0.36% thereafter

13%

10%, lagged 2 years

The significant unobservable inputs used in the fair value measurement of the Corporation’s corporate notes and bonds are prepayment rates, probability of default, and discount rate. Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. At March 31, 2013, the significant unobservable inputs used in the fair value measurement of the Corporation’s pooled trust preferred security are collateral default rate, yield, and prepayment speed. At December 31, 2012, the significant unobservable inputs used in the fair value measurement of the Corporatin’s pooled trust preferred security are collateral default rate, yield, and recovery probability. Significant increases in specific-issuer default assumptions or decreases in specific-issuer recovery assumptions would result in a significantly lower fair value measurement. Conversely, decreases in specific-issuer default assumptions or increases in specific-issuer recovery assumptions would result in a higher fair value measurement.

During the three months ended March 31, 2013 and 2012, 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:

 

     2013      2012  

U.S. Government sponsored entities

   $  0       $ 2,000   

States and political subdivisions

     0         4,655   

Residential mortgage and asset backed

     0         8,577   
  

 

 

    

 

 

 

Total

   $ 0       $ 15,232   
  

 

 

    

 

 

 

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. The Corporation’s policy for determining 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.

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. Management also adjusts appraised values based on the length of time that has passed since the appraisal date and other factors. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

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Table of Contents

Assets and liabilities measured at fair value on a non-recurring basis are as follows at March 31, 2013 and December 31, 2012:

 

            Fair Value Measurements at March 31, 2013 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

   $ 8,256       $ 0       $ 0       $ 8,256   

Commercial, industrial, and
agricultural

     1,661         0         0         1,661   

Residential real estate

     165         0         0         165   
            Fair Value Measurements at December 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

   $ 8,422       $ 0       $ 0       $ 8,422   

Commercial, industrial, and
agricultural

     1,973         0         0         1,973   

Residential real estate

     402         0         0         402   

Impaired loans, which are measured for impairment using the fair value of collateral for collateral dependent loans, had a principal balance of $11,325 with a valuation allowance of $1,243 as of March 31, 2013, resulting in an additional provision for loan losses of $201 for the corresponding three month period. Impaired loans had a principal balance of $12,535 with a valuation allowance of $1,738 as of December 31, 2012, and an additional provision for loan losses of $401 was recorded for the three months ended March 31, 2012.

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, 2013:

 

     Fair value     

Valuation

Technique

  

Unobservable

Inputs

   Range
(Weighted Average)

Impaired loans – commercial mortgages

   $ 8,256       Sales comparison approach    Adjustment for differences between the comparable sales    1% - 39% (19%)

Impaired loans – commercial, industrial, and agricultural

   $ 1,661       Income approach    Adjustment for differences in net operating income    27% - 32% (28%)

Impaired loans – residential real estate

   $ 165       Sales comparison approach    Adjustment for differences between the comparable sales    17% - 26% (23%)

 

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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 December 31, 2012:

 

     Fair value     

Valuation

Technique

  

Unobservable

Inputs

   Range
(Weighted Average)

Impaired loans – commercial mortgages

   $ 8,422       Sales comparison approach    Adjustment for differences between the comparable sales    1% - 39%(19%)

Impaired loans – commercial, industrial, and agricultural

     1,973       Income approach    Adjusting for differences in net operating income    24% - 38%(27%)

Impaired loans – residential real estate

     402       Sales comparison approach    Adjustment for differences between the comparable sales    10% - 15%(11%)

Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at March 31, 2013:

 

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

ASSETS

          

Cash and cash equivalents

   $ 38,491      $ 38,491      $ 0      $ 0      $ 38,491   

Interest bearing time deposits with other banks

     275        0        281        0        281   

Securities available for sale

     760,945        68,533        689,787        2,625        760,945   

Trading securities

     5,066        4,908        158        0        5,066   

Loans held for sale

     956        0        981        0        981   

Net loans

     918,799        0        0        922,845        922,845   

FHLB and other equity interests

     6,597        n/a        n/a        n/a        n/a   

Accrued interest receivable

     7,451        385        3,879        3,187        7,451   

LIABILITIES

          

Deposits

   $ (1,545,445   $ (1,334,227   $ (213,177   $ 0      $ (1,547,404

FHLB and other borrowings

     (75,152     0        (82,624     0        (82,624

Subordinated debentures

     (20,620     0        (10,999     0        (10,999

Interest rate swaps

     (1,630     0        (1,630     0        (1,630

Accrued interest payable

     (971     (283     (671     (17     (971

 

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

 

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

ASSETS

          

Cash and cash equivalents

   $ 31,881      $ 31,881      $ 0      $ 0      $ 31,881   

Interest bearing time deposits with other banks

     225        0        230        0        230   

Securities available for sale

     737,311        54,169        680,562        2,580        737,311   

Trading securities

     4,459        4,300        159        0        4,459   

Loans held for sale

     2,398        0        2,460        0        2,460   

Net loans

     913,764        0        0        917,785        917,785   

FHLB and other equity interests

     6,684        n/a        n/a        n/a        n/a   

Accrued interest receivable

     6,863        278        3,498        3,087        6,863   

LIABILITIES

          

Deposits

   $ (1,485,003   $ (1,272,060   $ (215,485   $ 0      $ (1,487,545

FHLB and other borrowings

     (97,806     0        (105,850     0        (105,850

Subordinated debentures

     (20,620     0        (10,682     0        (10,682

Interest rate swaps

     (1,745     0        (1,745     0        (1,745

Accrued interest payable

     (1,022     (301     (707     (14     (1,022

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.

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.

 

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Table of Contents

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.

 

5. SECURITIES

Securities available for sale at March 31, 2013 and December 31, 2012 are as follows:

 

     March 31, 2013      December 31, 2012  
     Amortized
Cost
     Unrealized     Fair
Value
     Amortized      Unrealized     Fair
Value
 
      Gains      Losses        Cost      Gains      Losses    

U.S. Treasury

   $ 2,013       $ 12       $ 0      $ 2,025       $ 4,018       $ 18       $ 0      $ 4,036   

U.S. Gov’t sponsored entities

     187,548         5,615         (393     192,770         157,965         5,977         (161     163,781   

State & political subdivisions

     174,115         10,198         (159     184,154         170,223         11,113         (57     181,279   

Residential & multi-family mortgage

     289,153         7,932         (780     296,305         308,800         8,724         (702     316,822   

Commercial mortgage

     1,267         0         (3     1,264         1,275         29         0        1,304   

Corporate notes & bonds

     17,371         93         (2,128     15,336         17,368         26         (2,370     15,024   

Pooled trust preferred

     800         0         (242     558         800         0         (200     600   

Pooled SBA

     65,069         2,071         (139     67,001         50,667         2,277         (17     52,927   

Other securities

     1,521         11         0        1,532         1,521         17         0        1,538   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 738,857       $ 25,932       $ (3,844   $ 760,945       $ 712,637       $ 28,181       $ (3,507   $ 737,311   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

At March 31, 2013, 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.

Trading securities at March 31, 2013 and December 31, 2012 are as follows:

 

     March 31,
2013
     December 31,
2012
 

Corporate equity securities

   $ 3,760       $ 3,117   

Certificates of deposit

     358         408   

International mutual funds

     261         287   

Large cap growth mutual funds

     158         157   

Money market mutual funds

     79         110   

Large cap value mutual funds

     106         104   

Corporate notes and bonds

     101         101   

Real estate investment trust mutual funds

     68         65   

U.S. Government sponsored entities

     57         58   

Small cap mutual funds

     59         26   

Mid cap mutual funds

     59         26   
  

 

 

    

 

 

 

Total

   $ 5,066       $ 4,459   
  

 

 

    

 

 

 

 

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Table of Contents

Securities with unrealized losses at March 31, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

March 31, 2013

 

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

U.S. Treasury

   $ 0       $ 0      $ 0       $ 0      $ 0       $ 0   

U.S. Gov’t sponsored entities

     60,309         (393     0         0        60,309         (393

State & political subdivisions

     16,547         (155     482         (4     17,029         (159

Residential & multi-family mortgage

     43,505         (774     878         (6     44,383         (780

Commercial mortgage

     1,264         (3     0         0        1,264         (3

Corporate notes & bonds

     0         0        11,236         (2,128     11,236         (2,128

Pooled trust preferred

     0         0        558         (242     558         (242

Pooled SBA

     9,501         (139     0         0        9,501         (139

Other securities

     0         0        0         0        0         0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 131,126       $ (1,464   $ 13,154       $ (2,380   $ 144,280       $ (3,844
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2012

 

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

U.S. Treasury

   $ 0       $ 0      $ 0       $ 0      $ 0       $ 0   

U.S. Gov’t sponsored entities

     41,715         (161     0         0        41,715         (161

State & political subdivisions

     7,857         (57     0         0        7,857         (57

Residential & multi-family mortgage

     32,159         (688     4,254         (14     36,413         (702

Commercial mortgage

     0         0        0         0        0         0   

Corporate notes & bonds

     0         0        13,002         (2,370     13,002         (2,370

Pooled trust preferred

     0         0        600         (200     600         (200

Pooled SBA

     3,521         (17     0         0        3,521         (17

Other securities

     0         0        0         0        0         0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 85,252       $ (923   $ 17,856       $ (2,584   $ 103,108       $ (3,507
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

At March 31, 2013, the Corporation held one structured pooled trust preferred security with an adjusted amortized cost of $800 and a fair value of $558. The Corporation evaluated this security for other-than-temporary impairment by estimating the cash flows expected to be received, taking into account future estimated levels of deferrals and defaults by the underlying issuers, and discounting those cash flows at the appropriate accounting yield. For the three months ended March 31, 2013, and March 31, 2012, no other-than-temporary impairment was required to be realized in earnings. At March 31, 2013 and December 31, 2012, the Corporation held four structured pooled trust preferred securities with an adjusted amortized cost of zero.

A roll-forward of the other-than-temporary impairment amount related to credit losses for the three months ended March 31, 2013 and 2012 is as follows:

 

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

   $ 4,054   

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

     0   

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

     0   
  

 

 

 

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

   $ 4,054   
  

 

 

 

 

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Due to the insignificance of the adjusted amortized cost balance, no further disclosures are required with respect to the Corporation’s structured pooled trust preferred securities.

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 management does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.

As of March 31, 2013 and December 31, 2012, 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.

 

   

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 timely received.

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, 2013

   $ 1,324       $ 76       $ 0   

Three months ended March 31, 2012

     42,149         636         (72

The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at March 31, 2013:

 

     Amortized         
     Cost      Fair Value  

1 year or less

   $ 35,468       $ 35,749   

1 year – 5 years

     121,517         124,627   

5 years – 10 years

     176,162         185,331   

After 10 years

     48,700         49,136   
  

 

 

    

 

 

 
     381,847         394,843   

Residential and multi-family mortgage

     289,153         296,305   

Pooled SBA

     65,069         67,001   

Commercial mortgage

     1,267         1,264   
  

 

 

    

 

 

 

Total debt securities

   $ 737,336       $ 759,413   
  

 

 

    

 

 

 

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, 2013 and December 31, 2012, securities carried at $263,391 and $264,813, respectively, were pledged to secure public deposits and for other purposes as provided by law.

 

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Table of Contents
6. LOANS

Total net loans at March 31, 2013 and December 31, 2012 are summarized as follows:

 

     March 31,
2013
    December 31,
2012
 

Commercial, industrial, and agricultural

   $ 259,355      $ 257,091   

Commercial mortgages

     266,021        261,791   

Residential real estate

     347,197        347,904   

Consumer

     57,882        58,668   

Credit cards

     4,604        4,800   

Overdrafts

     946        971   

Less:     unearned discount

     (3,309     (3,401

              allowance for loan losses

     (13,897     (14,060
  

 

 

   

 

 

 

        Loans, net

   $ 918,799      $ 913,764   
  

 

 

   

 

 

 

At March 31, 2013 and December 31, 2012, net unamortized loan costs of $144 and $232, 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.

Transactions in the allowance for loan losses for the three months ended March 31, 2013 were as follows:

 

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

Allowance for loan losses, January 1, 2013

   $ 4,940       $ 4,697      $ 2,466      $ 1,699      $ 83      $ 175      $ 14,060   

Charge-offs

     0         (607     (172     (331     (12     (47     (1,169

Recoveries

     0         1        1        41        2        31        76   

Provision (benefit) for loan losses

     331         208        100        298        4        (11     930   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, March 31, 2013

   $ 5,271       $ 4,299      $ 2,395      $ 1,707      $ 77      $ 148      $ 13,897   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Commercial,           Residential                          
     Industrial, and     Commercial     Real           Credit              
     Agricultural     Mortgages     Estate     Consumer     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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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, 2013 and December 31, 2012. The recorded investment in loans excludes accrued interest due to its insignificance.

March 31, 2013

 

      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

   $ 541       $ 151       $ 28       $ 0       $ 0       $ 0       $ 720   

Collectively evaluated for impairment

     4,730         3,512         2,367         1,707         77         148         12,541   

Modified in a troubled debt restructuring

     0         636         0         0         0         0         636   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 5,271       $ 4,299       $ 2,395       $ 1,707       $ 77       $ 148       $ 13,897   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 2,307       $ 10,678       $ 201       $ 0       $ 0       $ 0       $ 13,186   

Loans collectively evaluated for impairment

     255,662         246,847         346,996         54,573         4,604         946         909,628   

Loans modified in a troubled debt restructuring

     1,386         8,496         0         0         0         0         9,882   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 259,355       $ 266,021       $ 347,197       $ 54,573       $ 4,604       $ 946       $ 932,696   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 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

   $ 541       $ 131       $ 81       $ 0       $ 0       $ 0       $ 753   

Collectively evaluated for impairment

     4,399         3,467         2,385         1,699         83         175         12,208   

Modified in a troubled debt restructuring

     0         1,099         0         0         0         0         1,099   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,940       $ 4,697       $ 2,466       $ 1,699       $ 83       $ 175       $ 14,060   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 2,623       $ 10,683       $ 593       $ 0       $ 0       $ 0       $ 13,899   

Loans collectively evaluated for impairment

     253,048         240,907         347,311         55,267         4,800         971         902,304   

Loans modified in a troubled debt restructuring

     1,420         10,201         0         0         0         0         11,621   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 257,091       $ 261,791       $ 347,904       $ 55,267       $ 4,800       $ 971       $ 927,824   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present information related to loans individually evaluated for impairment by portfolio segment as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012:

March 31, 2013

 

      Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 2,219       $ 1,468       $ 541   

Commercial mortgage

     5,879         4,885         787   

Residential real estate

     127         123         28   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     2,752         2,225         0   

Commercial mortgage

     16,062         14,289         0   

Residential real estate

     158         78         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 27,197       $ 23,068       $ 1,356   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2012

 

      Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 2,542       $ 1,792       $ 541   

Commercial mortgage

     5,870         5,329         1,230   

Residential real estate

     416         381         81   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     2,804         2,251         0   

Commercial mortgage

     17,285         15,555         0   

Residential real estate

     308         212         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 29,225       $ 25,520       $ 1,852   
  

 

 

    

 

 

    

 

 

 

 

     Three Months Ended
March 31, 2013
     Three Months Ended
March 31, 2012
 
     Average      Interest      Cash Basis      Average      Interest      Cash Basis  
     Recorded      Income      Interest      Recorded      Income      Interest  
     Investment      Recognized      Recognized      Investment      Recognized      Recognized  

With an allowance recorded:

                 

Commercial, industrial, and agricultural

   $ 1,630       $ 0       $ 0       $ 2,673       $ 4       $ 4   

Commercial mortgage

     5,107         3         3         4,918         0         0   

Residential real estate

     252         1         1         169         4         4   

With no related allowance recorded:

                 

Commercial, industrial, and agricultural

     2,238         0         0         3,412         0         0   

Commercial mortgage

     14,922         0         0         12,061         0         0   

Residential real estate

     145         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,294       $ 4       $ 4       $ 23,233       $ 8       $ 8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2013 and December 31, 2012:

 

     March 31, 2013      December 31, 2012  
     Nonaccrual      Past Due
Over 90 Days
Still on Accrual
     Nonaccrual      Past Due
Over 90 Days
Still on Accrual
 

Commercial, industrial, and agricultural

   $ 2,725       $ 0       $ 3,073       $ 0   

Commercial mortgages

     10,986         0         8,570         109   

Residential real estate

     2,467         0         2,792         18   

Consumer

     9         208         10         217   

Credit cards

     0         13         0         13   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,187       $ 221       $ 14,445       $ 357   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Table of Contents

The following table presents the aging of the recorded investment in past due loans as of March 31, 2013 and December 31, 2012 by class of loans.

March 31, 2013

 

      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

   $ 256       $ 6       $ 2,725       $ 2,987       $ 256,368       $ 259,355   

Commercial mortgages

     1,467         14         10,986         12,467         253,554         266,021   

Residential real estate

     765         338         2,467         3,570         343,627         347,197   

Consumer

     327         149         217         693         53,880         54,573   

Credit cards

     22         16         13         51         4,553         4,604   

Overdrafts

     0         0         0         0         946         946   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,837       $ 523       $ 16,408       $ 19,768       $ 912,928       $ 932,696   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 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

   $ 724       $ 157       $ 2,968       $ 3,849       $ 253,242       $ 257,091   

Commercial mortgages

     1,162         3,197         8,679         13,038         248,753         261,791   

Residential real estate

     1,390         641         2,700         4,731         343,173         347,904   

Consumer

     724         203         227         1,154         54,113         55,267   

Credit cards

     39         9         13         61         4,739         4,800   

Overdrafts

     0         0         0         0         971         971   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,039       $ 4,207       $ 14,587       $ 22,833       $ 904,991       $ 927,824   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

The terms of certain loans have been modified as troubled debt restructurings. The modification of the terms of such loans included either or both of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

The following table presents the number of loans, loan balances, and specific reserves for loans that have been restructured in a troubled debt restructuring as of March 31, 2013 and December 31, 2012.

 

     March 31, 2013      December 31, 2012  
     Number of
Loans
     Loan
Balance
     Specific
Reserve
     Number of
Loans
     Loan
Balance
     Specific
Reserve
 

Commercial, industrial, and agricultural

     2       $ 1,386       $ 0         2       $ 1,420       $ 0   

Commercial mortgages

     9         8,496         636         8         10,201         1,099   

Residential real estate

     0         0         0         0         0         0   

Consumer

     0         0         0         0         0         0   

Credit cards

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     11       $ 9,882       $ 636         10       $ 11,621       $ 1,099   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2013 and 2012:

 

     Three Months Ended March 31, 2013  
     Number of
Loans
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Commercial, industrial, and agricultural

     0       $ 0       $ 0   

Commercial mortgages

     1         346         403   

Residential real estate

     0         0         0   

Consumer

     0         0         0   

Credit cards

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 346       $ 403   
  

 

 

    

 

 

    

 

 

 

 

     Three Months Ended March 31, 2012  
     Number of
Loans
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Commercial, industrial, and agricultural

     0       $ 0       $ 0   

Commercial mortgages

     4         2,556         2,556   

Residential real estate

     0         0         0   

Consumer

     0         0         0   

Credit cards

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

     4       $ 2,556       $ 2,556   
  

 

 

    

 

 

    

 

 

 

The troubled debt restructurings described above increased the allowance for loan losses by $0 and $101 during the three months ended March 31, 2013 and 2012, respectively.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 4 to 15 years. Modifications involving an extension of the maturity date were for periods ranging from 4 to 18 years.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. Except as discussed below, all loans modified in troubled debt restructurings are performing in accordance with their modified terms as of March 31, 2013 and December 31, 2012 and no principal balances were forgiven in connection with the loan restructurings. During the three months ended March 31, 2013, the Corporation recorded a partial chargeoff of $595 for one commercial mortgage loan with a balance of $1,660 that had defaulted under its restructured terms in 2012 and was placed on nonaccrual status. The Corporation recorded an additional provision for loan losses of $135 on this loan during the three months ended March 31, 2013.

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. The Corporation has no further loan commitments to customers whose loans are classified as 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. Loans with an outstanding balance greater than $1 million are analyzed at least semiannually and loans with an outstanding balance of less than $1 million are analyzed at least annually.

 

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Table of Contents

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.

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, 2013

 

            Special                       
     Pass      Mention      Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 231,712       $ 7,975       $ 19,523       $ 145       $ 259,355   

Commercial mortgages

     233,224         9,487         22,612         698         266,021   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 464,936       $ 17,462       $ 42,135       $ 843       $ 525,376   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

 

             Special                       
     Pass      Mention      Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 234,835       $ 6,641       $ 15,459       $ 156       $ 257,091   

Commercial mortgages

     225,294         12,294         23,501         702         261,791   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 460,129       $ 18,935       $ 38,960       $ 858       $ 518,882   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, consumer, and credit card loans based on payment activity as of March 31, 2013 and December 31, 2012:

 

     March 31, 2013      December 31, 2012  
     Residential             Credit      Residential             Credit  
     Real Estate      Consumer      Cards      Real Estate      Consumer      Cards  

Performing

   $ 344,730       $ 54,356       $ 4,591       $ 345,094       $ 55,040       $ 4,787   

Non-performing

     2,467         217         13         2,810         227         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 347,197       $ 54,573       $ 4,604       $ 347,904       $ 55,267       $ 4,800   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation considers all overdraft loans to be performing loans given their short-term duration.

 

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Table of Contents

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, 2013 and December 31, 2012:

 

     March 31,     December 31,  
     2013     2012  

Consumer

   $ 20,756      $ 21,535   

Residential real estate

     1,012        954   

Less: unearned discount

     (3,309     (3,401
  

 

 

   

 

 

 

Total

   $ 18,459      $ 19,088   
  

 

 

   

 

 

 

 

7. DEPOSITS

Total deposits at March 31, 2013 and December 31, 2012 are summarized as follows (in thousands):

 

     Percentage               
     Change     March 31, 2013      December 31, 2012  

Checking, non-interest bearing

     (6.6 %)    $ 163,646       $ 175,239   

Checking, interest bearing

     5.7     355,992         336,911   

Savings accounts

     7.2     814,589         759,910   

Certificates of deposit

     (0.8 %)      211,218         212,943   
  

 

 

   

 

 

    

 

 

 
     4.1   $ 1,545,445       $ 1,485,003   
  

 

 

   

 

 

    

 

 

 

 

8. 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, 2013 and 2012, 37,500 shares issuable pursuant to outstanding stock options were excluded from the diluted earnings per share calculations because the strike prices associated with the options exceeded the market price of the Corporation’s common stock thus making the shares anti-dilutive.

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

 

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Table of Contents

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

 

     Three months ended
March 31,
 
     2013     2012  

Basic earnings per common share computation:

    

Net income per consolidated statements of income

   $ 4,297      $ 4,347   

Net earnings allocated to participating securities

     (20     (16
  

 

 

   

 

 

 

Net earnings allocated to common stock

   $ 4,277      $ 4,331   
  

 

 

   

 

 

 

Distributed earnings allocated to common stock

   $ 2,053      $ 2,041   

Undistributed earnings allocated to common stock

     2,224        2,290   
  

 

 

   

 

 

 

Net earnings allocated to common stock

   $ 4,277      $ 4,331   
  

 

 

   

 

 

 

Weighted average common shares outstanding, including shares considered participating securities

     12,493        12,402   

Less: Average participating securities

     (49     (40
  

 

 

   

 

 

 

Weighted average shares

     12,444        12,362   
  

 

 

   

 

 

 

Basic earnings per common share

   $ 0.34      $ 0.35   
  

 

 

   

 

 

 

Diluted earnings per common share computation:

    

Net earnings allocated to common stock

   $ 4,277      $ 4,331   
  

 

 

   

 

 

 

Weighted average common shares outstanding for basic earnings per common share

     12,444        12,362   

Add: Dilutive effects of assumed exercises of stock options

     1        4   
  

 

 

   

 

 

 

Weighted average shares and dilutive potential common shares

     12,445        12,366   
  

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.34      $ 0.35   
  

 

 

   

 

 

 

 

9. 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 underlying notional amount. At March 31, 2013, the variable rate on the subordinated debt was 1.83% (LIBOR plus 155 basis points) and the Corporation was paying 5.84% (4.29% fixed rate plus 155 basis points).

 

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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, 2013, 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, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012:

 

     Liability Derivative  
     Balance Sheet
Location
   Fair value as of  
        March 31,
2013
    December 31,
2012
 

Interest rate contracts

   Accrued interest and

other liabilities

   ($ 1,630   ($ 1,745

For the Three Months

Ended March 31, 2013

     (a)       (b)      (c)      (d)      (e)   

Interest rate contracts

   $ 75       Interest expense –
subordinated debentures
   ($ 97   Other
income
   $ 0   

For the Three Months

Ended March 31, 2012

     (a)       (b)      (c)      (d)      (e)   

Interest rate contracts

   $ 63       Interest expense –
subordinated debentures
   ($ 95   Other
income
   $ 0   

 

(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 $386.

 

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As of March 31, 2013 and December 31, 2012, a cash collateral balance in the amount of $1,950 was maintained with a counterparty to the interest rate swaps. These balances are included in interest bearing deposits with other banks on the consolidated balance sheet.

 

10. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASU 2013-02). ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about these amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. The effect of adopting ASU 2013-02 did not have a material effect on the Corporation’s financial statements.

In February 2013, the FASB issued Accounting Standards Update 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (ASU 2013-04). ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. ASU 2013-04 is effective for reporting periods beginning after December 15, 2013. The Corporation is evaluating the effect that the adoption of ASU 2013-04 will have on its 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 subsidiary, CNB Bank (the “Bank”), provides financial services to individuals and businesses primarily within its primary market area of the Pennsylvania counties of Cambria, Cameron, Clearfield, Crawford, Elk, Erie, Indiana, McKean and Warren. The Bank’s market area 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.

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 (“Holiday”), 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.

PENDING ACQUISITION

On March 26, 2013, the Corporation announced the signing of a definitive merger agreement to acquire FC Banc Corp. and its subsidiary, The Farmers Citizens Bank (“FC Bank”), for $30.00 per share in cash and stock, or approximately $40.4 million in the aggregate. FC Bank serves the northern Ohio markets of Bucyrus, Cardington, Fredericktown, Mount Hope and Shiloh, as well as the markets of Worthington and Upper Arlington in the greater Columbus, Ohio area, with 8 branch locations and a mortgage banking business headquartered in Dublin, Ohio. The transaction is expected to close in the fourth quarter of 2013, subject to customary closing conditions, including regulatory approvals and the approval of FC Banc Corp. shareholders. FC Bank will operate as a separate and distinctly branded division of CNB Bank, with local decision making and oversight.

GENERAL OVERVIEW

The Bank expanded its ERIEBANK division by opening a second full service office in Meadville, Pennsylvania in the third quarter of 2012. In addition, a CNB Bank loan production office in Indiana, Pennsylvania was made a full service branch location in the first quarter of 2013. The Corporation opened a ninth office for Holiday in Dubois, Pennsylvania in the third quarter of 2012. The Corporation also purchased a consumer discount company in Ebensburg, Pennsylvania during the third quarter of 2012, resulting in the acquisition of a loan portfolio of approximately $1 million with a purchase premium of $200 thousand. The Corporation is operating the acquired location as its tenth Holiday office. The Corporation anticipates opening an eleventh Holiday office in Indiana, Pennsylvania during 2013.

Management believes that the Corporation’s ERIEBANK market, along with the traditional CNB Bank and Holiday Financial Services Corporation market areas, should provide the Bank with sustained loan and deposit growth during the remainder of 2013.

Management concentrates on return on average equity and earnings per share metrics, plus other metrics, 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 2012 and the net interest margin has

 

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decreased six basis points in the first three months of 2013 compared to the first three months of 2012 as a result of the current interest rate environment. During the past several years, in order to address the historic lows on various key interest rates such as the Prime Rate and 3-month LIBOR, the Corporation has taken a variety of measures including instituting rate floors on our commercial lines of credit and home equity lines. In addition, the Corporation decreased interest rates on certain deposit products during 2012 and the first three months of 2013 but maintained deposit growth as a result of marketing a savings product which carries a highly competitive annual percentage yield. Non-interest costs are expected to increase with the growth of the Corporation; however, management’s growth strategies are expected to also 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 2013 and beyond. While past results are not an indication of future earnings, management believes the Corporation is well-positioned to sustain core earnings during 2013.

The Dodd-Frank Act, enacted into law on July 21, 2010, includes numerous provisions designed to strengthen the financial industry, enhance consumer protection, expand disclosures and provide for transparency, and significantly changed the bank regulatory structure and affected and will continue to affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act also created a Consumer Financial Protection Bureau (“CFPB”), which is authorized to write rules on a number of consumer financial products, and a Financial Services Oversight Council, which is empowered to determine which entities are systematically significant and require tougher regulations.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations and to prepare various studies and reports for Congress.

It is difficult to predict at this time what specific impact certain provisions of the Dodd-Frank Act and the implementing rules and regulations, many which have yet to be written, will have on the Corporation, including any regulations promulgated by the CFPB. The legislation and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and the Corporation’s ability to conduct business. The Corporation will have to apply resources to ensure that it is in compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase its costs of operations and adversely impact its earnings.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled $38.5 million at March 31, 2013 compared to $31.9 million at December 31, 2012. 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 $24.2 million or 3.3% since December 31, 2012. The increase is primarily due to the purchases of U.S. Government agency securities and pooled SBA securities 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 and the process for evaluating securities for other-than-temporary impairment.

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. Management monitors 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.

 

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LOANS

The Corporation experienced an increase in loans, net of unearned discount, of $4.9 million, or 0.5%, during the first three months of 2013. Lending efforts are focused in the west, central and northwest Pennsylvania markets and consist 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 sustained loan demand throughout the remainder of 2013.

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, 2013
    Year ending
December 31, 2012
    Three months ending
March 31, 2012
 

Balance at beginning of period

   $ 14,060      $ 12,615      $ 12,615   

Charge-offs:

      

Commercial, industrial, and agricultural

     —          2,871        225   

Commercial mortgages

     607        401        115   

Residential real estate

     172        304        87   

Consumer

     331        1,279        256   

Credit cards

     12        78        19   

Overdrafts

     47        257        67   
  

 

 

   

 

 

   

 

 

 
     1,169        5,190        769   
  

 

 

   

 

 

   

 

 

 

Recoveries:

      

Commercial, industrial, and agricultural

     —          45        3   

Commercial mortgages

     1        —          —     

Residential real estate

     1        1        —     

Consumer

     41        91        27   

Credit cards

     2        18        1   

Overdraft deposit accounts

     31        99        34   
  

 

 

   

 

 

   

 

 

 
     76        254        65   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,093     (4,936     (704
  

 

 

   

 

 

   

 

 

 

Provision for loan losses

     930        6,381        1,104   
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 13,897      $ 14,060      $ 13,015   
  

 

 

   

 

 

   

 

 

 

Loans, net of unearned

   $ 932,696      $ 927,824      $ 860,010   

Allowance to net loans

     1.49     1.52     1.51

Net charge-offs to average loans (annualized)

     0.47     0.55     0.33

Nonperforming assets

   $ 16,784      $ 15,127      $ 17,408   

Nonperforming % of total assets

     0.93     0.85     1.03

 

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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

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 evaluates 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 recognizes and considers the fact that risk is more pronounced in these types of credits and is, to a greater degree than with other loans, driven by the economic environment in which the debtor’s business operates.

During the three months ended March 31, 2013, CNB recorded a provision for loan losses of $930 thousand, as compared to a provision for loan losses of $1.1 million for the three months ended March 31, 2012. A commercial mortgage loan that was impaired at December 31, 2012 was placed on nonaccrual status during the three months ended March 31, 2013, resulting in an increase in nonperforming assets of $2.9 million. No loan loss reserve was required for this loan as of March 31, 2013 or December 31, 2012. A loan modified in a troubled debt restructuring that was nonperforming at December 31, 2012 was partially charged off in the first quarter of 2013, resulting in a decrease in nonperforming assets of $595 thousand. An

 

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additional provision for loan losses of $135 thousand was recorded for this loan during the three months ended March 31, 2013.

Management believes that the allowance for loan losses is reasonable and adequate to absorb probable incurred losses in its portfolio at March 31, 2013.

PREMISES AND EQUIPMENT

In the second quarter of 2013, the Corporation entered into a contractual commitment to expand its main office facility in Clearfield, Pennsylvania at an approximate cost of $4 million. Construction will commence in the second quarter, with completion of the project expected by the end of the first quarter of 2014.

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 $60.4 million from $1.49 billion at December 31, 2012 to $1.55 billion at March 31, 2013. The growth in deposits was primarily due to increases in savings accounts of $54.7 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.

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.

SHAREHOLDERS’ EQUITY AND CAPITAL RATIOS AND METRICS

The Corporation’s capital continued to provide a base for profitable growth through March 31, 2013. Total shareholders’ equity was $146.1 million at March 31, 2013 and $145.4 million at December 31, 2012. In the first three months of 2013, the Corporation earned $4.3 million and declared dividends of $2.1 million, a dividend payout ratio of 48.0% 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, 2013 and December 31, 2012 are as follows:

 

     March 31, 2013     December 31, 2012  

Total risk-based capital ratio

     15.53     15.28

Tier 1 capital ratio

     14.28     14.03

Leverage ratio

     8.03     8.06

Tangible common equity/tangible assets (1)

     7.51     7.63

Book value per share

   $ 11.68      $ 11.65   

Tangible book value per share (1)

     10.80        10.77   

 

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(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 share and per share data).

 

     March 31, 2013     December 31, 2012  

Shareholders’ equity

   $ 146,105      $ 145,364   

Less goodwill

     10,946        10,946   
  

 

 

   

 

 

 

Tangible common equity

   $ 135,159      $ 134,418   
  

 

 

   

 

 

 

Total assets

   $ 1,809,847      $ 1,773,079   

Less goodwill

     10,946        10,946   
  

 

 

   

 

 

 

Tangible assets

   $ 1,798,901      $ 1,762,133   
  

 

 

   

 

 

 

Ending shares outstanding

     12,509,289        12,475,904   

Tangible book value per share

   $ 10.80      $ 10.77   

Tangible common equity/tangible assets

     7.51     7.63

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 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, 2013 (in thousands):

 

Commitments to extend credit

   $ 263,034   

Standby letters of credit

     13,075   
  

 

 

 
   $ 276,109   
  

 

 

 

 

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CONSOLIDATED YIELD COMPARISONS

AVERAGE BALANCES AND NET INTEREST MARGIN FOR THE THREE MONTHS ENDED

Dollars in thousands

 

 

     March 31, 2013      March 31, 2012  
     Average     Annual     Interest      Average     Annual     Interest  
     Balance     Rate     Inc./Exp.      Balance     Rate     Inc./Exp.  

ASSETS:

             

Interest-bearing deposits with other banks

   $ 3,884        0.00   $ —         $ 4,251        0.19   $ 2   

Securities:

             

Taxable (1)

     618,620        2.30     3,409         582,354        2.59     3,683   

Tax-Exempt (1,2)

     129,879        4.62     1,431         104,136        5.26     1,292   

Equity Securities (1,2)

     3,964        4.94     49         2,285        2.98     17   
  

 

 

     

 

 

    

 

 

     

 

 

 

Total securities

     752,463        2.71     4,889         688,775        2.98     4,992   
  

 

 

     

 

 

    

 

 

     

 

 

 

Loans:

             

Commercial (2)

     302,840        4.76     3,601         287,433        5.01     3,597   

Mortgage (2)

     580,638        4.85     7,034         518,893        5.45     7,069   

Consumer

     49,075        14.74     1,808         49,877        13.84     1,726   
  

 

 

     

 

 

    

 

 

     

 

 

 

Total loans (3)

     932,553        5.34     12,443         856,203        5.79     12,392   
  

 

 

     

 

 

    

 

 

     

 

 

 

Total earning assets

     1,688,900        4.18   $ 17,332         1,549,229        4.55   $ 17,386   
  

 

 

     

 

 

    

 

 

     

 

 

 

Non interest-bearing assets:

             

Cash and due from banks

     32,858             32,740       

Premises and equipment

     24,345             24,043       

Other assets

     57,327             54,767       

Allowance for loan losses

     (13,958          (12,828    
  

 

 

        

 

 

     

Total non interest-bearing assets

     100,572             98,722       
  

 

 

        

 

 

     

TOTAL ASSETS

   $ 1,789,472           $ 1,647,951       
  

 

 

        

 

 

     

LIABILITIES AND SHAREHOLDERS’ EQUITY:

             

Demand - interest-bearing

   $ 347,020        0.43   $ 370       $ 301,281        0.57   $ 428   

Savings

     796,417        0.57     1,137         681,672        0.97     1,649   

Time

     211,615        1.37     727         254,922        1.68     1,072   
  

 

 

     

 

 

    

 

 

     

 

 

 

Total interest-bearing deposits

     1,355,052        0.66     2,234         1,237,875        1.02     3,149   

Short-term borrowings

     4,717        0.59     7         2,183        0.18     1   

Long-term borrowings

     74,867        4.39     822         74,430        4.28     796   

Subordinated debentures

     20,620        3.69     190         20,620        3.90     201   
  

 

 

     

 

 

    

 

 

     

 

 

 

Total interest-bearing liabilities

     1,455,256        0.89   $ 3,253         1,335,108        1.24   $ 4,147   
      

 

 

        

 

 

 

Demand - non interest-bearing

     165,450             157,429       

Other liabilities

     22,580             21,268       
  

 

 

        

 

 

     

Total liabilities

     1,643,286             1,513,805       

Shareholders’ equity

     146,186             134,146       
  

 

 

        

 

 

     

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,789,472           $ 1,647,951       
  

 

 

        

 

 

     

Interest income/Earning assets

       4.18   $ 17,332           4.55   $ 17,386   

Interest expense/Interest-bearing liabilities

       0.89     3,253           1.24     4,147   
    

 

 

   

 

 

      

 

 

   

 

 

 

Net interest spread

       3.29   $ 14,079           3.30   $ 13,239   
    

 

 

   

 

 

      

 

 

   

 

 

 

Interest income/Earning assets

       4.18     17,332           4.55     17,386   

Interest expense/Earning assets

       0.77     3,253           1.07     4,147   
    

 

 

   

 

 

      

 

 

   

 

 

 

Net interest margin

       3.41   $ 14,079           3.47   $ 13,239   
    

 

 

   

 

 

      

 

 

   

 

 

 

 

(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 both the first quarter of 2013 and 2012. The earnings per diluted share were $0.34 in the first quarter of 2013 and $0.35 in the first quarter of 2012. The return on assets and return on equity for the first quarter of 2013 are 0.96% and 11.76% compared to 1.06% and 12.96% for the first quarter of 2012.

INTEREST INCOME AND EXPENSE

Net interest income totaled $13.5 million, an increase of $774 thousand, or 6.1%, over the first quarter of 2012. Total interest and dividend income decreased by $120 thousand, or 0.7%, as compared to the first quarter of 2012. Net interest margin on a fully tax equivalent basis was 3.41% for the three months ended March 31, 2013, compared to 3.47% for the three months ended March 31, 2012.

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 $894 thousand, or 21.6%, as compared to the first quarter of 2012 due to decreases in the cost of core deposits.

PROVISION FOR LOAN LOSSES

The Corporation recorded a provision for loan losses of $930 thousand in the first quarter of 2013 compared to $1.1 million in the first quarter of 2012. As disclosed in the Allowance for Loan Losses section of Management’s Discussion and Analysis, in the first quarter of 2013, the Corporation increased its loss reserve in connection with a nonperforming commercial mortgage loan that was modified in a troubled debt restructuring in a prior year.

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, 2013.

NON-INTEREST INCOME

Excluding the effects of the securities transactions described below, non-interest income was $2.7 million for the three months ended March 31, 2013, compared to $2.5 million for the three months ended March 31, 2012. Net realized gains on available-for-sale securities were $76 thousand during the three months ended March 31, 2013, and $566 thousand during the three months ended March 31, 2012. Net realized and unrealized gains on trading securities were $303 thousand and $320 thousand during the three months ended March 31, 2013 and 2012, respectively.

Wealth and asset management fees increased from $387 during the three months ended March 31, 2012 to $574 thousand during the three months ended March 31, 2013 due to increases in assets under management resulting from CNB’s strategic focus to grow its Wealth and Asset Management Division.

NON-INTEREST EXPENSES

Total non-interest expenses increased $668 thousand, or 7.4%, during the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Salaries and benefits expenses increased $472 thousand, or 10.0%, during the three months ended March 31, 2013 compared to the three months ended March 31, 2012, 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 costs, which continue to increase in line with market conditions.

Total non-interest expenses on an annualized basis in relation to CNB’s average asset size declined from 2.19% for the three months ended March 31, 2012 to 2.16% for the three months ended March 31, 2013.

 

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INCOME TAX EXPENSE

Income tax expense was $1.6 million in both the first quarter of 2013 and 2012, resulting in effective tax rates of 27.3% and 27.2% 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.

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 2012 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, 2012.

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a financial institution, the Corporation’s primary source of market risk is interest rate risk, which is the exposure to fluctuations in the Corporation’s future earnings resulting from changes in interest rates. This exposure is correlated to the repricing characteristics of the Corporation’s portfolio of assets and liabilities. Each asset or liability reprices either at maturity or during the life of the instrument.

The principal purpose of asset/liability management is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Net interest income is enhanced by increasing the net interest margin and by the growth in earning assets. As a result, the primary goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level.

The Corporation uses an asset-liability management model to measure the effect of interest rate changes on its net interest income. The Corporation’s management also reviews asset-liability maturity gap and repricing analyses regularly. The Corporation does not always attempt to achieve a precise match between interest sensitive assets and liabilities because it believes that an actively managed amount of interest rate risk is inherent and appropriate in the management of the Corporation’s profitability.

Asset-liability modeling techniques and simulation involve assumptions and estimates that inherently cannot be measured with precision. Key assumptions in these analyses include maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturing deposit sensitivity, and loan and deposit pricing. These assumptions are inherently uncertain due to the timing, magnitude, and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and provide a relative gauge of the Corporation’s interest rate risk position over time.

 

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Management reviews interest rate risk on a quarterly basis and reports to the ALCO. This review includes earnings shock scenarios whereby interest rates are immediately increased and decreased by 100, 300, and 400 basis points. These scenarios, detailed in the table below, indicate that there would not be a significant variance in net interest income over a one-year period due to interest rate changes; however, actual results could vary significantly. At March 31, 2013 and December 31, 2012, all interest rate risk levels according to the model were within the tolerance limits of ALCO approved policy of +/- 25%. In addition, the table does not take into consideration changes that management would make to realign its assets and liabilities in the event of an unexpected changing interest rate environment. Due to the historically low interest rate environment, the -300 and -400 scenarios have been excluded from the table.

 

March 31, 2013

 

December 31, 2012

Change in

Basis Points

 

% Change in Net

Interest Income

 

Change in

Basis Points

 

% Change in Net

Interest Income

400

  2.7%   400   -0.5%

300

  2.8%   300   -0.8%

100

  1.9%   100   2.3%

(100)

  -3.9%   (100)   -4.0%

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.

 

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PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS – None

 

ITEM 1A. RISK FACTORS – Management of the Corporation urges the reader to understand and consider the following updated risk factor in addition to those disclosed in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission on March 8, 2013.

The risks presented by acquisitions could adversely affect our financial condition and result of operations.

Any acquisitions, including our pending acquisition of FC Banc Corp., will be accompanied by the risks commonly encountered in acquisitions including, among other things: our ability to realize anticipated cost savings and avoid unanticipated costs relating to the merger, the difficulty of integrating operations and personnel, the potential disruption of our or the acquired company’s ongoing business, the inability of our management to maximize our financial and strategic position, the inability to maintain uniform standards, controls, procedures and policies, and the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management. These risks may prevent the Corporation from fully realizing the anticipated benefits of an acquisition or cause the realization of such benefits to take longer than expected.

 

ITEM 6. EXHIBITS

 

Exhibit
No.

  

Description

    2.1    Agreement and Plan of Merger, dated as of March 26, 2013, by and between the Corporation and FC Banc Corp., filed as Exhibit 2.1 to the Corporation’s Current Report on Form 8-K, filed with the SEC on March 27, 2013 and incorporated herein by reference.
    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, 2013, 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 9, 2013      

/s/ Joseph B. Bower, Jr.

      Joseph B. Bower, Jr.
      President and Director
      (Principal Executive Officer)
DATE: May 9, 2013      

/s/ Brian W. Wingard

      Brian W. Wingard
      Treasurer
      (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit
No.
   Description
    2.1    Agreement and Plan of Merger, dated as of March 26, 2013, by and between the Corporation and FC Banc Corp., filed as Exhibit 2.1 to the Corporation’s Current Report on Form 8-K, filed with the SEC on March 27, 2013 and incorporated herein by reference.
    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, 2013, 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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