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 June 30, 2015

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.:

 

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 August 3, 2015

COMMON STOCK NO PAR VALUE PER SHARE: 14,405,117 SHARES

 

 

 


Table of Contents

INDEX

PART I.

FINANCIAL INFORMATION

 

     Page Number  

ITEM 1 – Financial Statements

  

Consolidated Balance Sheets – June 30, 2015 (unaudited) and December 31, 2014 (audited)

     1   

Consolidated Statements of Income – Three months ended June 30, 2015 and 2014 (unaudited)

     2   

Consolidated Statements of Income – Six months ended June 30, 2015 and 2014 (unaudited)

     3   

Consolidated Statements of Comprehensive Income (Loss) – Three and six months ended June  30, 2015 and 2014 (unaudited)

     4   

Consolidated Statements of Cash Flows – Six months ended June 30, 2015 and 2014 (unaudited)

     5   

Notes to Consolidated Financial Statements

     6   

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

     25   

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 quarterly report on Form 10-Q includes 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 our 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 the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” 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, (i) changes in general business, industry or economic conditions or competition; (ii) 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; (iii) adverse changes or conditions in capital and financial markets; (iv) changes in interest rates; (v) higher than expected costs or other difficulties related to integration of combined or merged businesses; (vi) the inability to realize expected cost savings or achieve other anticipated benefits in connection with business combinations and other acquisitions; (vii) changes in the quality or composition of our loan and investment portfolios; (viii) adequacy of loan loss reserves; (ix) increased competition; (x) loss of certain key officers; (xi) continued relationships with major customers; (xii) deposit attrition; (xiii) rapidly changing technology; (xiv) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xv) changes in the cost of funds, demand for loan products or demand for financial services; (xvi) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices; and (xvii) our success at managing the foregoing items. Some of these and other factors are discussed in our annual and quarterly reports filed with the Securities and Exchange Commission (SEC). Such factors could have an adverse impact on our financial position and our results of operations.

The forward-looking statements contained herein are based upon management’s beliefs and assumptions. Any forward-looking statement made herein speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.


Table of Contents

Part I Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except share data

 

 

     (unaudited)        
     June 30,     December 31,  
     2015     2014  
ASSETS     

Cash and due from banks

   $ 27,130      $ 24,520   

Interest bearing deposits with other banks

     3,270        3,408   
  

 

 

   

 

 

 

Total cash and cash equivalents

     30,400        27,928   

Interest bearing time deposits with other banks

     225        225   

Securities available for sale

     640,009        685,720   

Trading securities

     4,769        4,505   

Loans held for sale

     2,271        887   

Loans

     1,455,668        1,359,596   

Less: unearned discount

     (4,204     (4,307

Less: allowance for loan losses

     (17,504     (17,373
  

 

 

   

 

 

 

Net loans

     1,433,960        1,337,916   

FHLB and other equity interests

     13,042        6,695   

Premises and equipment, net

     38,171        35,378   

Bank owned life insurance

     40,410        39,845   

Mortgage servicing rights

     875        856   

Goodwill

     27,194        27,194   

Core deposit intangible

     2,885        3,403   

Accrued interest receivable and other assets

     19,578        18,661   
  

 

 

   

 

 

 

Total Assets

   $ 2,253,789      $ 2,189,213   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Non-interest bearing deposits

   $ 257,873      $ 244,743   

Interest bearing deposits

     1,604,875        1,602,336   
  

 

 

   

 

 

 

Total deposits

     1,862,748        1,847,079   

FHLB and other long-term borrowings

     75,589        75,715   

Other short-term borrowings

     76,055        35,980   

Subordinated debentures

     20,620        20,620   

Accrued interest payable and other liabilities

     26,040        21,271   
  

 

 

   

 

 

 

Total liabilities

     2,061,052        2,000,665   
  

 

 

   

 

 

 

Common stock, $0 par value; authorized 50,000,000 shares; issued 14,473,482 shares

     0        0   

Additional paid in capital

     77,488        78,022   

Retained earnings

     117,025        110,619   

Treasury stock, at cost (69,016 shares at June 30, 2015 and 69,066 shares at December 31, 2014)

     (1,170     (1,152

Accumulated other comprehensive income (loss)

     (606     1,059   
  

 

 

   

 

 

 

Total shareholders’ equity

     192,737        188,548   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,253,789      $ 2,189,213   
  

 

 

   

 

 

 

 

 

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  
     June 30,  
     2015     2014  

INTEREST AND DIVIDEND INCOME:

    

Loans including fees

   $ 17,339      $ 17,069   

Securities:

    

Taxable

     2,911        3,350   

Tax-exempt

     949        927   

Dividends

     107        72   
  

 

 

   

 

 

 

Total interest and dividend income

     21,306        21,418   
  

 

 

   

 

 

 

INTEREST EXPENSE:

    

Deposits

     2,165        2,077   

Borrowed funds

     805        713   

Subordinated debentures (includes $94 and $94 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2015 and 2014, respectively)

     185        185   
  

 

 

   

 

 

 

Total interest expense

     3,155        2,975   
  

 

 

   

 

 

 

NET INTEREST INCOME

     18,151        18,443   

PROVISION FOR LOAN LOSSES

     486        1,501   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     17,665        16,942   
  

 

 

   

 

 

 

NON-INTEREST INCOME:

    

Wealth and asset management fees

     751        753   

Service charges on deposit accounts

     1,094        1,145   

Other service charges and fees

     761        670   

Net realized gains on available-for-sale securities (includes $472 and $138 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2015 and 2014, respectively)

     472        138   

Net realized and unrealized gains (losses) on trading securities

     (29     99   

Mortgage banking

     207        183   

Bank owned life insurance

     289        239   

Other

     596        287   
  

 

 

   

 

 

 

Total non-interest income

     4,141        3,514   
  

 

 

   

 

 

 

NON-INTEREST EXPENSES:

    

Salaries and benefits

     7,506        6,443   

Net occupancy expense

     1,794        1,760   

Amortization of core deposit intangible

     259        301   

Data processing

     1,091        841   

State and local taxes

     474        454   

Legal, professional, and examination fees

     338        302   

Advertising

     419        431   

FDIC insurance premiums

     323        344   

Other

     1,917        1,732   
  

 

 

   

 

 

 

Total non-interest expenses

     14,121        12,608   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     7,685        7,848   

INCOME TAX EXPENSE (includes ($132) and ($15) income tax expense from reclassification items in 2015 and 2014, respectively)

     2,083        2,231   
  

 

 

   

 

 

 

NET INCOME

   $ 5,602      $ 5,617   
  

 

 

   

 

 

 

EARNINGS PER SHARE:

    

Basic

   $ 0.39      $ 0.39   

Diluted

   $ 0.39      $ 0.39   

DIVIDENDS PER SHARE:

    

Cash dividends per share

   $ 0.165      $ 0.165   

 

 

See Notes to Consolidated Financial Statements

 

2


Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

 

 

     Six months ended  
     June 30,  
     2015     2014  
              

INTEREST AND DIVIDEND INCOME:

    

Loans including fees

   $ 34,835      $ 34,154   

Securities:

    

Taxable

     5,850        6,690   

Tax-exempt

     1,887        1,836   

Dividends

     375        175   
  

 

 

   

 

 

 

Total interest and dividend income

     42,947        42,855   
  

 

 

   

 

 

 

INTEREST EXPENSE:

    

Deposits

     4,212        4,149   

Borrowed funds

     1,623        1,611   

Subordinated debentures (includes $189 and $191 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2015 and 2014, respectively)

     371        372   
  

 

 

   

 

 

 

Total interest expense

     6,206        6,132   
  

 

 

   

 

 

 

NET INTEREST INCOME

     36,741        36,723   

PROVISION FOR LOAN LOSSES

     1,429        2,520   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     35,312        34,203   
  

 

 

   

 

 

 

NON-INTEREST INCOME:

    

Wealth and asset management fees

     1,517        1,425   

Service charges on deposit accounts

     2,111        2,186   

Other service charges and fees

     1,385        1,238   

Net realized gains on available-for-sale securities (includes $491 and $204 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2015 and 2014, respectively)

     491        204   

Net realized and unrealized gains (losses) on trading securities

     (61     74   

Mortgage banking

     320        358   

Bank owned life insurance

     565        479   

Other

     910        755   
  

 

 

   

 

 

 

Total non-interest income

     7,238        6,719   
  

 

 

   

 

 

 

NON-INTEREST EXPENSES:

    

Salaries and benefits

     14,138        13,278   

Net occupancy expense

     3,593        3,521   

Amortization of core deposit intangible

     518        604   

Data processing

     2,128        1,944   

State and local taxes

     1,024        1,016   

Legal, professional, and examination fees

     650        744   

Advertising

     753        742   

FDIC insurance premiums

     619        684   

Other

     3,791        3,336   
  

 

 

   

 

 

 

Total non-interest expenses

     27,214        25,869   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     15,336        15,053   

INCOME TAX EXPENSE (includes ($106) and ($5) income tax expense from reclassification items in 2015 and 2014, respectively)

     4,169        4,270   
  

 

 

   

 

 

 

NET INCOME

   $ 11,167      $ 10,783   
  

 

 

   

 

 

 

EARNINGS PER SHARE:

    

Basic

   $ 0.77      $ 0.75   

Diluted

   $ 0.77      $ 0.75   

DIVIDENDS PER SHARE:

    

Cash dividends per share

   $ 0.33      $ 0.33   

 

 

See Notes to Consolidated Financial Statements

 

3


Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

Dollars in thousands

 

 

     Three months ended     Six months ended  
     June 30,     June 30,  
     2015     2014     2015     2014  

NET INCOME

   $ 5,602      $ 5,617      $ 11,167      $ 10,783   

Other comprehensive income (loss), net of tax:

        

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

        

Unrealized gain (loss) on interest rate swaps, net of tax of ($1) and $37 for the three months ended June 30, 2015 and 2014, and $37 and $58 for the six months ended June 30, 2015 and 2014

     2        (68     (78     (107

Reclassification adjustment for losses recognized in earnings, net of tax of ($33) and ($33) for the three months ended June 30, 2015 and 2014, and ($66) and ($67) for the six months ended June 30, 2015 and 2014

     61        61        123        124   
  

 

 

   

 

 

   

 

 

   

 

 

 
     63        (7     45        17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized gains on securities available for sale:

        

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

        

Unrealized gains arising during the period, net of tax of ($90) and $0 for the three months ended June 30, 2015 and 2014, and ($90) and ($48) for the six months ended June 30, 2015 and 2014

     165        0        165        89   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on other securities available for sale:

        

Unrealized gains (losses) arising during the period, net of tax of $3,488 and ($1,762) for the three months ended June 30, 2015 and 2014, and $838 and ($4,032) for the six months ended June 30, 2015 and 2014

     (6,475     3,205        (1,556     7,488   

Reclassification adjustment for realized gains included in net income, net of tax of $165 and $48 for the three months ended June 30, 2015 and 2014, and $172 and $71 for the six months ended June 30, 2015 and 2014

     (307     (90     (319     (133
  

 

 

   

 

 

   

 

 

   

 

 

 
     (6,782     3,115        (1,875     7,355   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (6,554     3,108        (1,665     7,461   
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

   $ (952   $ 8,725      $ 9,502      $ 18,244   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

4


Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Dollars in thousands

 

 

     Six months ended  
     June 30,  
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 11,167      $ 10,783   

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

    

Provision for loan losses

     1,429        2,520   

Depreciation and amortization of premises and equipment, core deposit intangible, and mortgage servicing rights

     2,037        2,063   

Amortization and accretion of securities premiums and discounts, deferred loan fees and costs,net yield and credit mark on acquired loans, and unearned income

     31        153   

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

     (491     (204

Net realized and unrealized(gains) losses on trading securities

     61        (74

Proceeds from sale of trading securities

     625        0   

Purchase of trading securities

     (943     (210

Gain on sale of loans

     (268     (257

Net losses on dispositions of premises and equipment and foreclosed assets

     43        130   

Proceeds from sale of loans

     6,140        3,563   

Origination of loans held for sale

     (7,416     (3,942

Income on bank owned life insurance

     (565     (479

Stock-based compensation expense

     305        327   

Contribution of treasury stock

     48        60   

Changes in:

    

Accrued interest receivable and other assets

     (804     3,571   

Accrued interest payable and other liabilities

     5,671        (4,272
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     17,070        13,732   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Net decrease in interest bearing time deposits with other banks

     0        50   

Proceeds from maturities, prepayments and calls of available-for-sale securities

     40,100        34,335   

Proceeds from sales of available-for-sale securities

     48,529        29,128   

Purchase of available-for-sale securities

     (46,542     (62,868

Loan origination and payments, net

     (96,202     (13,006

Purchase of FHLB and other equity interests

     (6,347     (1,507

Purchase of premises and equipment

     (4,173     (2,482

Proceeds from the sale of premises and equipment and foreclosed assets

     48        301   
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (64,587     (16,049
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net change in:

    

Checking, money market and savings accounts

     (10,915     80,563   

Certificates of deposit

     26,584        (64,830

Purchase of treasury stock

     (868     (1,582

Cash dividends paid

     (4,761     (4,774

Repayment of long-term borrowings

     (126     (112

Proceeds from long-term borrowings

     0        950   

Net change in short-term borrowings

     40,075        (3,180
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     49,989        7,035   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     2,472        4,718   

CASH AND CASH EQUIVALENTS, Beginning

     27,928        29,633   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, Ending

   $ 30,400      $ 34,351   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 6,210      $ 6,197   

Income taxes

   $ 3,238      $ 4,076   

SUPPLEMENTAL NONCASH DISCLOSURES:

    

Transfers to other real estate owned

   $ 240      $ 161   

Grant of restricted stock awards from treasury stock

   $ 821      $ 609   

 

 

See Notes to Consolidated Financial Statements

 

5


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 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 June 30, 2015 and for the three and six month periods ended June 30, 2015 and 2014 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 and six month periods ended June 30, 2015 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, 2014 (the “2014 Form 10-K”). All dollar amounts are stated in thousands, except share and per share data and other amounts as indicated. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

2. 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 date. For independent directors, the vesting schedule is one-third of the granted options or restricted stock per year beginning one year after the grant date, with 100% vested on the third anniversary of the grant date.

At June 30, 2015, there was no unrecognized compensation cost related to nonvested stock options granted under this plan and no stock options were granted during the three and six month periods ended June 30, 2015 and 2014.

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 $148 and $305 for the three and six months ended June 30, 2015, and $119 and $327 for the three and six months ended June 30, 2014. As of June 30, 2015, there was $1,317 of total unrecognized compensation cost related to unvested restricted stock awards.

A summary of changes in nonvested restricted stock awards for the three months ended June 30, 2015 follows:

 

           

Per Share

Weighted Average

 
     Shares      Grant Date Fair Value  

Nonvested at beginning of period

     89,850       $ 17.00   

Granted

     0         0   

Vested

     0         0   
  

 

 

    

 

 

 

Nonvested at end of period

     89,850       $ 17.00   
  

 

 

    

 

 

 

 

6


Table of Contents

A summary of changes in nonvested restricted stock awards for the six months ended June 30, 2015 follows:

 

           

Per Share

Weighted Average

 
     Shares      Grant Date Fair Value  

Nonvested at beginning of period

     68,210       $ 16.82   

Granted

     48,300         17.00   

Vested

     (26,660      16.53   
  

 

 

    

 

 

 

Nonvested at end of period

     89,850       $ 17.00   
  

 

 

    

 

 

 

 

3. 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 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).

 

7


Table of Contents

Assets and liabilities measured at fair value on a recurring basis are as follows at June 30, 2015 and December 31, 2014:

 

           Fair Value Measurements at June 30, 2015 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. Government sponsored entities

   $ 151,870      $ 0       $ 151,870      $ 0   

States and political subdivisions

     182,130        0         182,130        0   

Residential and multi-family mortgage

     228,719        0         228,719        0   

Corporate notes and bonds

     19,762        0         19,762        0   

Pooled trust preferred

     1,160        0         0        1,160   

Pooled SBA

     55,367        0         55,367        0   

Other securities

     1,001        1,001         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities Available For Sale

   $ 640,009      $ 1,001       $ 637,848      $ 1,160   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities:

         

Corporate equity securities

   $ 3,257      $ 3,257       $ 0      $ 0   

Mutual funds

     1,048        1,048         0        0   

Certificates of deposit

     255        255         0        0   

Corporate notes and bonds

     155        0         155        0   

U.S. Government sponsored entities

     54        0         54        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $ 4,769      $ 4,560       $ 209      $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities,

         

Interest rate swaps

   $ (877   $ 0       $ (877   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

           Fair Value Measurements at December 31, 2014 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. Government sponsored entities

   $ 155,564      $ 0       $ 155,564      $ 0   

States and political subdivisions

     181,002        0         181,002        0   

Residential and multi-family mortgage

     265,164        0         265,164        0   

Corporate notes and bonds

     19,430        0         19,430        0   

Pooled trust preferred

     905        0         0        905   

Pooled SBA

     62,653        0         62,653        0   

Other securities

     1,002        1,002         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Securities Available For Sale

   $ 685,720      $ 1,002       $ 683,813      $ 905   
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading Securities:

         

Corporate equity securities

   $ 3,044      $ 3,044       $ 0      $ 0   

Mutual funds

     997        997         0        0   

Certificates of deposit

     253        253         0        0   

Corporate notes and bonds

     157        0         157        0   

U.S. Government sponsored entities

     54        0         54        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Trading Securities

   $ 4,505      $ 4,294       $ 211      $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities,

         

Interest rate swaps

   $ (946   $ 0       $ (946   $ 0   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

8


Table of Contents

The table below presents a reconciliation of the fair value of securities available for sale measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2015 and June 30, 2014:

 

     2015      2014  

Balance, April 1

   $ 905       $ 798   

Total gains or (losses):

     

Included in other comprehensive income (unrealized)

     255         0   
  

 

 

    

 

 

 

Balance, June 30

   $ 1,160       $ 798   
  

 

 

    

 

 

 

The table below presents a reconciliation of the fair value of securities available for sale measured on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2015 and June 30, 2014:

 

     2015      2014  

Balance, January 1

   $ 905       $ 661   

Total gains or (losses):

     

Included in other comprehensive income (unrealized)

     255         137   
  

 

 

    

 

 

 

Balance, June 30

   $ 1,160       $ 798   
  

 

 

    

 

 

 

The following table presents quantitative information about Level 3 fair value measurements at June 30, 2015:

 

    

Fair
value

    

Valuation
Technique

  

Unobservable

Inputs

  

Input

Utilized

Pooled trust preferred

   $ 1,160      

Discounted

cash flow

  

Collateral default rate

   0.71% and declining to 0.5% over the remainder of 2015 and thereafter
        

Yield

Prepayment speed

  

9%

2.0% constant prepayment rate in 2015 and thereafter

The following table presents quantitative information about Level 3 fair value measurements at December 31, 2014:

 

    

Fair
value

    

Valuation
Technique

  

Unobservable

Inputs

  

Input

Utilized

Pooled trust preferred

   $ 905      

Discounted

cash flow

   Collateral default rate    1% in 2015; 0.5% in 2016 and thereafter
        

Yield

Prepayment speed

  

11%

2.0% constant prepayment rate in 2015 and thereafter

At June 30, 2015 and December 31, 2014, 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. 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.

 

9


Table of Contents

Assets and liabilities measured at fair value on a non-recurring basis are as follows at June 30, 2015 and December 31, 2014:

 

            Fair Value Measurements at June 30, 2015 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

   $ 2,246         0         0       $ 2,246   

Commercial, industrial, and agricultural

     2,668         0         0         2,668   

 

            Fair Value Measurements at December 31, 2014 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

   $ 2,353         0         0       $ 2,353   

Commercial, industrial, and agricultural

     2,820         0         0         2,820   

Impaired loans, which, if collateral dependent, are measured for impairment using the fair value of collateral, had a recorded investment of $7,030 with a valuation allowance of $2,116 as of June 30, 2015, resulting in an additional provision for loan losses of $60 and $63 for the corresponding three and six month period ended June 30, 2015. Impaired loans had a recorded investment of $7,423 with a valuation allowance of $2,250 as of December 31, 2014. Additional provision for loan losses were incurred of $280 and $630 for the three and six months ended June 30, 2014.

The estimated fair values of impaired collateral dependent loans such as commercial or residential mortgages are determined primarily by using third-party appraisals. When a collateral dependent loan, such as a commercial or residential mortgage loan, becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal, and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral and a further reduction for estimated costs to sell the property is applied, which results in an amount that is considered to be the estimated fair value. If a loan becomes impaired and management determines an updated appraisal is not necessary, an appropriate adjustment factor is applied based on experience with current valuations of similar collateral in determining the loan’s estimated fair value and resulting allowance for loan losses. Third-party appraisals are not customarily obtained in respect of unimpaired loans, unless in management’s view changes in circumstances warrant obtaining an updated appraisal.

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 June 30, 2015:

 

     Fair
value
     Valuation Technique   

Unobservable

Inputs

   Range
(Weighted Average)

Impaired loans – commercial

mortgages

   $ 2,246       Sales comparison
approach
  

Adjustment for differences

between the comparable sales

   32% - 100% (47%)

Impaired loans – commercial,

industrial, and agricultural

     2,668       Sales comparison
approach
  

Adjustment for differences

between the comparable sales

   4%

 

10


Table of Contents

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, 2014:

 

     Fair
value
     Valuation Technique     

Unobservable

Inputs

   Range
(Weighted Average)

Impaired loans – commercial

mortgages

   $ 2,353       Sales comparison
approach
    

Adjustment for differences

between the comparable sales

   34% - 100% (44%)

Impaired loans – commercial,

industrial, and agricultural

   $ 2,820       Sales comparison
approach
    

Adjustment for differences

between the comparable sales

   8% - 49% (13%)

Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at June 30, 2015:

 

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

ASSETS

          

Cash and cash equivalents

   $ 30,400      $ 30,400      $ 0      $ 0      $ 30,400   

Interest bearing time deposits with other banks

     225        0        225        0        225   

Securities available for sale

     640,009        1,001        637,848        1,160        640,009   

Trading securities

     4,769        4,560        209        0        4,769   

Loans held for sale

     2,271        0        2,353        0        2,353   

Net loans

     1,433,960        0        0        1,427,761        1,427,761   

FHLB and other equity interests

     13,042        n/a        n/a        n/a        n/a   

Accrued interest receivable

     7,258        5        3,336        3,917        7,258   

LIABILITIES

          

Deposits

   $ (1,862,748   $ (1,659,257   $ (203,056   $ 0      $ (1,862,313

FHLB and other borrowings

     (151,644     0        (151,849     0        (151,849

Subordinated debentures

     (20,620     0        (11,415     0        (11,415

Interest rate swaps

     (877     0        (877     0        (877

Accrued interest payable

     (903     (351     (537     (15     (903

The following table presents the carrying amount and fair value of financial instruments at December 31, 2014:

 

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

ASSETS

          

Cash and cash equivalents

   $ 27,928      $ 27,928      $ 0      $ 0      $ 27,928   

Interest bearing time deposits with other banks

     225        0        224        0        224   

Securities available for sale

     685,720        1,002        683,813        905        685,720   

Trading securities

     4,505        4,296        209        0        4,505   

Loans held for sale

     887        0        938        0        938   

Net loans

     1,337,916        0        0        1,337,537        1,337,537   

FHLB and other equity interests

     6,695        n/a        n/a        n/a        n/a   

Accrued interest receivable

     7,441        5        3,503        3,933        7,441   

LIABILITIES

          

Deposits

   $ (1,847,079   $ (1,670,172   $ (176,036   $ 0        (1,846,208

FHLB and other borrowings

     (111,695     0        (111,821     0        (111,821

Subordinated debentures

     (20,620     0        (11,395     0        (11,395

Interest rate swaps

     (946     0        (946     0        (946

Accrued interest payable

     (804     (358     (430     (16     (804

 

11


Table of Contents

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 re-price 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. The Level classification of accrued interest receivable is matched to the corresponding Level of 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 2 classification.

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

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

In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the disclosures. Also, non-financial assets such as, among other things, the estimated earning 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.

 

12


Table of Contents
4. SECURITIES

Securities available for sale at June 30, 2015 and December 31, 2014 are as follows:

 

     June 30, 2015      December 31, 2014  
     Amortized      Unrealized     Fair      Amortized      Unrealized     Fair  
     Cost      Gains      Losses     Value      Cost      Gains      Losses     Value  

U.S. Gov’t sponsored entities

   $ 151,385       $ 2,176       $ (1,691   $ 151,870       $ 155,482       $ 2,301       $ (2,219   $ 155,564   

State & political subdivisions

     177,405         5,489         (764     182,130         174,600         6,804         (402     181,002   

Residential & multi-family mortgage

     231,535         1,496         (4,312     228,719         265,678         2,291         (2,805     265,164   

Corporate notes & bonds

     20,792         193         (1,223     19,762         20,791         139         (1,500     19,430   

Pooled trust preferred

     800         360         0        1,160         800         105         0        905   

Pooled SBA

     55,428         831         (892     55,367         63,139         1,074         (1,560     62,653   

Other securities

     1,020         0         (19     1,001         1,020         0         (18     1,002   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 638,365       $ 10,545       $ (8,901   $ 640,009       $ 681,510       $ 12,714       $ (8,504   $ 685,720   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

At June 30, 2015 and December 31, 2014, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of shareholders’ equity. The Corporation’s residential and multi-family mortgage securities are issued by government sponsored entities.

Trading securities at June 30, 2015 and December 31, 2014 are as follows:

 

     June 30,
2015
     December 31,
2014
 

Corporate equity securities

   $ 3,257       $ 3,044   

Mutual funds

     1,048         997   

Certificates of deposit

     255         253   

Corporate notes and bonds

     155         157   

U.S. Government sponsored entities

     54         54   
  

 

 

    

 

 

 

Total

   $ 4,769       $ 4,505   
  

 

 

    

 

 

 

Securities with unrealized losses at June 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

June 30, 2015

 

     Less than 12 Months     12 Months or More     Total  

Description of Securities

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

U.S. Gov’t sponsored entities

   $ 51,164       $ (825   $ 55,559       $ (866   $ 106,723       $ (1,691

State & political subdivisions

     43,017         (637     4,285         (127     47,302         (764

Residential & multi-family mortgage

     106,961         (2,338     58,665         (1,974     165,626         (4,312

Corporate notes & bonds

     5,010         (24     8,210         (1,199     13,220         (1,223

Pooled SBA

     3,122         (16     28,724         (876     31,846         (892

Other securities

     0         0        1,001         (19     1,001         (19
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 209,274       $ (3,840   $ 157,604       $ (5,061   $ 366,878       $ (8,901
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

13


Table of Contents

December 31, 2014

 

     Less than 12 Months     12 Months or More     Total  

Description of Securities

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

U.S. Gov’t sponsored entities

   $ 26,069       $ (149   $ 85,016       $ (2,070   $ 111,085       $ (2,219

State & political subdivisions

     16,398         (179     12,363         (223     28,761         (402

Residential & multi-family mortgage

     70,360         (603     99,397         (2,202     169,757         (2,805

Corporate notes & bonds

     5,008         (30     7,935         (1,470     12,943         (1,500

Pooled SBA

     0         (0     34,608         (1,560     34,608         (1,560

Other securities

     0         (0     1,002         (18     1,002         (18
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 117,835       $ (961   $ 240,321       $ (7,543   $ 358,156       $ (8,504
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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.

A roll-forward of the other-than-temporary impairment amount related to credit losses for the three and six months ended June 30, 2015 and 2014 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   
  

 

 

 

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 monitors information from quarterly “call” report filings that are used to generate Uniform Bank Performance Reports. All other securities that were in an unrealized loss position at the balance sheet date were reviewed by management, and issuer-specific documents were reviewed, as appropriate given the following considerations. When reviewing securities for other-than-temporary impairment, 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 whether 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 June 30, 2015 and December 31, 2014, 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.

 

14


Table of Contents

Information pertaining to security sales on available for sale securities is as follows:

 

     Proceeds      Gross Gains      Gross Losses  

Three months ended June 30, 2015

   $ 15,580       $ 472       $ 0   

Six months ended June 30, 2015

     48,529         608         (117

Three months ended June 30, 2014

     16,177         138         0   

Six months ended June 30, 2014

     29,128         287         (83

The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at June 30, 2015:

 

     Amortized
Cost
     Fair Value  

1 year or less

   $ 27,693       $ 27,850   

1 year – 5 years

     188,690         192,742   

5 years – 10 years

     101,883         102,322   

After 10 years

     32,116         32,008   
  

 

 

    

 

 

 
     350,382         354,922   

Residential and multi-family mortgage

     231,535         228,719   

Pooled SBA

     55,428         55,367   
  

 

 

    

 

 

 

Total debt securities

   $ 637,345       $ 639,008   
  

 

 

    

 

 

 

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

On June 30, 2015 and December 31, 2014, securities carried at $344,036 and $325,799, respectively, were pledged to secure public deposits and for other purposes as provided by law.

 

5. LOANS

Total net loans at June 30, 2015 and December 31, 2014 are summarized as follows:

 

     June 30,
2015
     December 31,
2014
 

Commercial, industrial, and agricultural

   $ 439,810       $ 428,458   

Commercial mortgages

     399,255         352,752   

Residential real estate

     538,329         502,317   

Consumer

     71,584         69,648   

Credit cards

     5,130         5,233   

Overdrafts

     1,560         1,188   

Less: unearned discount

     (4,204      (4,307

allowance for loan losses

     (17,504      (17,373
  

 

 

    

 

 

 

Loans, net

   $ 1,433,960       $ 1,337,916   
  

 

 

    

 

 

 

At June 30, 2015 and December 31, 2014, net unamortized loan fees and costs of $(165) and $483, 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 and Central Ohio. 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. The Corporation maintains lending policies to control the quality of the loan portfolio. These policies delegate the authority to extend loans under specific guidelines and underwriting standards. These policies are prepared by the Corporation’s management and reviewed and ratified annually by the Corporation’s Board of Directors.

 

15


Table of Contents

All relevant documentation, such as the loan application, financial statements and tax returns, required under the lending policies is summarized and provided to management in connection with the loan approval process. Such documentation is subsequently electronically archived in the Corporation’s document management system. Pursuant to the Corporation’s lending policies, management considers a variety of factors when determining whether to extend credit to a customer, including loan-to-value ratios, FICO scores, quality of the borrower’s financial statements, and the ability to obtain personal guarantees.

Commercial, industrial, and agricultural loans comprised 31% and 32% of the Corporation’s total loan portfolio at June 30, 2015 and December 31, 2014, respectively. Commercial mortgage loans comprised 28% and 26% of the Corporation’s total loan portfolio at June 30, 2015 and December 31, 2014. Management assigns a risk rating to all commercial loans in excess of $250,000. The loan-to-value policy guidelines for commercial, industrial, and agricultural loans are generally a maximum of 80% of the value of business equipment, a maximum of 75% of the value of accounts receivable, and a maximum of 60% of the value of business inventory. The loan-to-value policy guideline for commercial mortgage loans is generally a maximum of 85% of the appraised value of the real estate.

Residential real estate loans comprised 38% and 37% of the Corporation’s total loan portfolio at June 30, 2015 and December 31, 2014, respectively. The loan-to-value policy guidelines for residential real estate loans vary depending on the collateral position and the specific type of loan. Higher loan-to-value terms may be approved with the appropriate private mortgage insurance coverage. The Corporation also originates and prices loans for sale into the secondary market through Freddie Mac. Loans originated for sale into the secondary market are classified as loans held for sale and are excluded from residential real estate loans reported above. The rationale for these sales is to mitigate interest rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio and to generate fee revenue from sales and servicing the loan. The Corporation also offers a variety of unsecured and secured consumer loan and credit card products which represent less than 10% of the total loan portfolio at both June 30, 2015 and December 31, 2014. Terms and collateral requirements vary depending on the size and nature of the loan.

CNB has not underwritten any hybrid loans, payment option loans, or low documentation/no documentation loans. Variable rate loans are generally underwritten at the fully indexed rate. Loan underwriting policies and procedures have not changed materially between any periods presented.

Transactions in the allowance for loan losses for the three months ended June 30, 2015 were as follows:

 

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

Allowance for loan losses, April 1, 2015

   $ 7,223      $ 5,296       $ 2,786      $ 2,129      $  74      $ 174      $ 17,682   

Charge-offs

     (65     0         (90     (477     (44     (48     (724

Recoveries

     12        0         0        26        2        20        60   

Provision (benefit) for loan losses

     (572     632         (84     440        66        4        486   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, June 30, 2015

   $ 6,598      $ 5,928       $ 2,612      $ 2,118      $ 98      $ 150      $ 17,504   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions in the allowance for loan losses for the six months ended June 30, 2015 were as follows:

 

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

Allowance for loan losses, January 1, 2015

   $ 7,114      $ 5,310       $ 2,479      $ 2,205      $ 71      $ 194      $ 17,373   

Charge-offs

     (139     0         (156     (1,000     (86     (105     (1,486

Recoveries

     27        50         1        55        5        50        188   

Provision (benefit) for loan losses

     (404     568         288        858        108        11        1,429   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, June 30, 2015

   $ 6,598      $ 5,928       $ 2,612      $ 2,118      $  98      $ 150      $ 17,504   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

Transactions in the allowance for loan losses for the three months ended June 30, 2014 were as follows:

 

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

Allowance for loan losses, April 1, 2014

   $ 8,278      $ 3,704       $ 2,455      $ 1,972      $ 68      $ 197      $ 16,674   

Charge-offs

     (319     0         (76     (369     (2     (64     (830

Recoveries

     1        10         0        31        1        27        70   

Provision for loan losses

     136        867         88        362        21        27        1,501   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, June 30, 2014

   $ 8,096      $ 4,581       $ 2,467      $ 1,996      $ 88      $ 187      $ 17,415   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions in the allowance for loan losses for the six months ended June 30, 2014 were as follows:

 

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

Allowance for loan losses, January 1, 2014

   $ 8,212      $ 3,536      $ 2,450      $ 1,763      $ 66      $ 207      $ 16,234   

Charge-offs

     (319     (50     (198     (768     (23     (122     (1,480

Recoveries

     1        10        19        53        3        55        141   

Provision for loan losses

     202        1,085        196        948        42        47        2,520   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, June 30, 2014

   $ 8,096      $ 4,581      $ 2,467      $ 1,996      $ 88      $ 187      $ 17,415   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30, 2015 and December 31, 2014. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

June 30, 2015

 

     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

   $ 282       $ 490       $ 190       $ 0       $ 0       $ 0       $ 962   

Collectively evaluated for impairment

     5,655         2,987         2,422         2,118         98         150         13,430   

Acquired with deteriorated credit quality

     0         0         0         0         0         0         0   

Modified in a troubled debt restructuring

     661         2,451         0         0         0         0         3,112   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 6,598       $ 5,928       $ 2,612       $ 2,118       $ 98       $ 150       $ 17,504   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Individually evaluated for impairment

   $ 4,106       $ 490       $ 400       $ 0       $ 0       $ 0       $ 4,996   

Collectively evaluated for impairment

     431,721         384,841         537,929         71,584         5,130         1,560         1,432,765   

Acquired with deteriorated credit quality

     0         704         0         0         0         0         704   

Modified in a troubled debt restructuring

     3,983         13,220         0         0         0         0         17,203   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 439,810       $ 399,255       $ 538,329       $ 71,584       $ 5,130       $ 1,560       $ 1,455,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2014                     
      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

   $ 254       $ 294       $ 197       $ 0       $ 0       $ 0       $ 745   

Collectively evaluated for impairment

     6,703         2,503         2,282         2,205         71         194         13,958   

Acquired with deteriorated credit quality

     0         0         0         0         0         0         0   

Modified in a troubled debt restructuring

     157         2,513         0         0         0         0         2,670   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 7,114       $ 5,310       $ 2,479       $ 2,205       $ 71       $ 194       $ 17,373   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Individually evaluated for impairment

   $ 3,394       $ 494       $ 657       $ 0       $ 0       $ 0       $ 4,545   

Collectively evaluated for impairment

     421,144         336,801         501,660         69,648         5,233         1,188         1,335,674   

Acquired with deteriorated credit quality

     0         719         0         0         0         0         719   

Modified in a troubled debt restructuring

     3,920         14,738         0         0         0         0         18,658   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 428,458       $ 352,752       $ 502,317       $ 69,648       $ 5,233       $ 1,188       $ 1,359,596   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of June 30, 2015 and December 31, 2014 and for the three and six months ended June 30, 2015 and 2014:

June 30, 2015

 

      Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 6,405       $ 6,405       $ 943   

Commercial mortgage

     9,554         9,022         2,941   

Residential real estate

     400         400         190   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     2,642         1,684         0   

Commercial mortgage

     4,687         4,688         0   

Residential real estate

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 23,688       $ 22,199       $ 4,074   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

 

      Unpaid Principal
Balance
     Recorded
Investment
     Allowance for Loan
Losses Allocated
 

With an allowance recorded:

        

Commercial, industrial, and agricultural

   $ 5,737       $ 5,737       $ 411   

Commercial mortgage

     10,651         10,212         2,807   

Residential real estate

     400         400         197   

With no related allowance recorded:

        

Commercial, industrial, and agricultural

     2,530         1,577         0   

Commercial mortgage

     5,020         5,020         0   

Residential real estate

     319         257         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 24,657       $ 23,203       $ 3,415   
  

 

 

    

 

 

    

 

 

 

 

     Three Months Ended June 30, 2015      Six Months Ended June 30, 2015  
     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

   $ 6,315       $ 7       $ 7       $ 6,071       $ 42       $ 42   

Commercial mortgage

     9,646         0         0         9,617         0         0   

Residential real estate

     400         11         11         400         13         13   

With no related allowance recorded:

                 

Commercial, industrial, and agricultural

     1,689         2         2         1,631         12         12   

Commercial mortgage

     4,719         0         0         4,854         0         0   

Residential real estate

     129         4         4         129         6         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,898       $ 24       $ 24       $ 22,702       $ 73       $ 73   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents
     Three Months Ended June 30, 2014      Six Months Ended June 30, 2014  
     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

   $ 4,318       $ 1       $ 1       $ 4,438       $ 2       $ 2   

Commercial mortgage

     5,402         0         0         5,416         0         0   

Residential real estate

     200         3         3         133         11         11   

With no related allowance recorded:

                 

Commercial, industrial, and agricultural

     2,234         0         0         2,167         0         0   

Commercial mortgage

     6,249         0         0         6,217         0         0   

Residential real estate

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,403       $ 4       $ 4       $ 18,371       $ 13       $ 13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015 and December 31, 2014:

 

     June 30, 2015      December 31, 2014  
     Nonaccrual      Past Due
Over 90 Days
Still on Accrual
     Nonaccrual      Past Due
Over 90 Days
Still on Accrual
 

Commercial, industrial, and agricultural

   $ 4,184       $ 0       $ 796       $ 0   

Commercial mortgages

     3,716         0         4,323         0   

Residential real estate

     3,359         50         3,026         213   

Consumer

     730         17         1,045         0   

Credit cards

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,989       $ 67       $ 9,190       $ 213   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

The following table presents the aging of the recorded investment in past due loans as of June 30, 2015 and December 31, 2014 by class of loans.

June 30, 2015

 

      30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days

Past Due
     Total Past
Due
     Loans Not
Past Due
     Total  

Commercial, industrial, and agricultural

   $ 1,012       $ 1,775       $ 1,106       $ 3,893       $ 435,917       $ 439,810   

Commercial mortgages

     1,136         0         3,716         4,852         394,403         399,255   

Residential real estate

     1,047         896         3,409         5,352         532,977         538,329   

Consumer

     287         159         747         1,193         70,391         71,584   

Credit cards

     0         0         0         0         5,130         5,130   

Overdrafts

     0         0         0         0         1,560         1,560   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,482       $ 2,830       $ 8,978       $ 15,290       $ 1,440,378       $ 1,455,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

December 31, 2014

 

                   Greater Than                       
     30-59 Days      60-89 Days      90 Days      Total      Loans Not         
     Past Due      Past Due      Past Due      Past Due      Past Due      Total  

Commercial, industrial, and agricultural

   $ 888       $ 588       $ 294       $ 1,770       $ 426,688       $ 428,458   

Commercial mortgages

     20         1,351         4,323         5,694         347,058         352,752   

Residential real estate

     2,719         1,191         3,239         7,149         495,168         502,317   

Consumer

     265         122         1,045         1,432         68,216         69,648   

Credit cards

     0         83         0         83         5,150         5,233   

Overdrafts

     0         0         0         0         1,188         1,188   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,083       $ 2,144       $ 8,901       $ 16,128       $ 1,343,468       $ 1,359,596   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015 and December 31, 2014.

 

     June 30, 2015      December 31, 2014  
     Number of
Loans
     Loan
Balance
     Specific
Reserve
     Number of
Loans
     Loan
Balance
     Specific
Reserve
 

Commercial, industrial, and agricultural

     7       $ 3,983       $ 661         7       $ 4,076       $ 179   

Commercial mortgages

     8         13,220         2,451         8         14,582         2,491   

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

     15       $ 17,203       $ 3,112         15       $ 18,658       $ 2,670   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans modified as troubled debt restructurings during the three or six months ended June 30, 2015 or June 30, 2014.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. All loans modified in troubled debt restructurings are performing in accordance with their modified terms as of June 30, 2015 and December 31, 2014 and no principal balances were forgiven in connection with the loan restructurings.

In order to determine whether a borrower is experiencing financial difficulty, the Corporation performs an evaluation using the its internal underwriting policies of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without a loan modification. The Corporation has no further loan commitments to customers whose loans are classified as a troubled debt restructuring.

Generally, non-performing troubled debt restructurings are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

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 outstanding balances greater than $1 million are analyzed at least semiannually and loans with outstanding balances of less than $1 million are analyzed at least annually.

 

20


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.

June 30, 2015

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 418,471       $ 3,824       $ 17,237       $ 278       $ 439,810   

Commercial mortgages

     386,302         0         12,520         433         399,255   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 804,773       $ 3,824       $ 29,757       $ 711       $ 839,065   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial, industrial, and agricultural

   $ 402,923       $ 6,703       $ 18,525       $ 307       $ 428,458   

Commercial mortgages

     328,614         0         23,699         439         352,752   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 731,537       $ 6,703       $ 42,224       $ 746       $ 781,210   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015 and December 31, 2014:

 

     June 30, 2015      December 31, 2014  
     Residential
Real Estate
     Consumer      Credit
Cards
     Residential
Real Estate
     Consumer      Credit
Cards
 

Performing

   $ 534,920       $ 70,837       $ 5,130       $ 499,078       $ 68,603       $ 5,233   

Non-performing

     3,409         747         0         3,239         1,045         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 538,329       $ 71,584       $ 5,130       $ 502,317       $ 69,648       $ 5,233   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”) are considered to be subprime loans. Holiday is 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.

 

21


Table of Contents

Holiday’s loan portfolio is summarized as follows at June 30, 2015 and December 31, 2014:

 

     June 30,      December 31,  
     2015      2014  

Consumer

   $ 27,431       $ 27,916   

Residential real estate

     1,192         1,270   

Less: unearned discount

     (4,204      (4,307
  

 

 

    

 

 

 

Total

   $ 24,419       $ 24,879   
  

 

 

    

 

 

 

 

6. DEPOSITS

Total deposits at June 30, 2015 and December 31, 2014 are summarized as follows (in thousands):

 

     Percentage
Change
    June 30, 2015      December 31, 2014  

Checking, non-interest bearing

     5.4   $ 257,873       $ 244,743   

Checking, interest bearing

     1.4     459,463         453,102   

Savings accounts

     -3.1     941,921         972,327   

Certificates of deposit

     15.0     203,491         176,907   
  

 

 

   

 

 

    

 

 

 
     0.8   $ 1,862,748       $ 1,847,079   
  

 

 

   

 

 

    

 

 

 

 

7. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares issuable under certain stock compensation plans. For the three and six months ended June 30, 2015, there were no outstanding stock options to include in the diluted earnings per share calculations.

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

 

22


Table of Contents

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2015      2014      2015      2014  

Basic earnings per common share computation:

           

Net income per consolidated statements of income

   $ 5,602       $ 5,617       $ 11,167       $ 10,783   

Net earnings allocated to participating securities

     (33      (25      (62      (46
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings allocated to common stock

   $ 5,569       $ 5,592       $ 11,105       $ 10,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

Distributed earnings allocated to common stock

   $ 2,362       $ 2,375       $ 4,731       $ 4,751   

Undistributed earnings allocated to common stock

     3,207         3,217         6,374         5,986   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings allocated to common stock

   $ 5,569       $ 5,592       $ 11,105       $ 10,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, including shares considered participating securities

     14,404         14,450         14,410         14,447   

Less: Average participating securities

     (80      (60      (73      (56
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares

     14,324         14,390         14,337         14,391   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.39       $ 0.39       $ 0.77       $ 0.75   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share computation:

           

Net earnings allocated to common stock

   $ 5,569       $ 5,592       $ 11,105       $ 10,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding for basic earnings per common share

     14,324         14,390         14,366         14,391   

Add: Dilutive effects of assumed exercises of stock options

     0         1         0         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares and dilutive potential common shares

     14,324         14,391         14,366         14,393   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.39       $ 0.39       $ 0.77       $ 0.75   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

8. DERIVATIVE INSTRUMENTS

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 in order to hedge cash flows associated with $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 September 15, 2013 to September 15, 2018 without exchange of the underlying notional amount. At June 30, 2015, the variable rate on the subordinated debt was 1.84% (LIBOR plus 155 basis points) and the Corporation was paying 5.57% (4.02% fixed rate plus 155 basis points).

As of June 30, 2015 and December 31, 2014, 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.

 

23


Table of Contents

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 June 30, 2015 and December 31, 2014 and for the three and six months ended June 30, 2015 and 2014:

 

          Fair value as of  
     Balance Sheet    June 30,   December 31,  
     Location    2015   2014  

Interest rate contracts

   Accrued interest and

other liabilities

   ($877)   ($ 946

 

For the Three Months

          

Ended June 30, 2015

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

Interest rate contracts

   $ 63      Interest expense –

subordinated debentures

  ($ 94   Other
income
  $ 0   

For the Six Months

          

Ended June 30, 2015

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

Interest rate contracts

   $ 45      Interest expense –
subordinated debentures
  ($ 189   Other
income
  $ 0   

For the Three Months

          

Ended June 30, 2014

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

Interest rate contracts

   $ 17      Interest expense –
subordinated debentures
  ($ 95   Other
income
  $ 0   

For the Six Months

          

Ended June 30, 2014

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

Interest rate contracts

   ($ 7   Interest expense –
subordinated debentures
  ($ 191   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 $373. As of June 30, 2015 and December 31, 2014, a cash collateral balance in the amount of $1,400 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.

 

24


Table of Contents
9. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2014, the FASB issued Accounting Standards Update 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40)” (ASU 2014-04). The amendments in ASU 2014-04 clarify the circumstances under which an in substance repossession or foreclosure occurs and when a creditor is considered to have received physical possession of a residential real estate property collateralizing a residential real estate loan. The amendments in ASU 2014-04 also require interim and annual disclosure of the amount of foreclosed residential real estate property held by the creditor and the recorded investment in loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-04 is effective for reporting periods beginning after December 15, 2014. The effect of adopting ASU 2014-04 did not have a material effect on the Corporation’s financial statements.

In June 2014, the FASB issued ASU 2014-11 “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”. The amendments in ASU 2014-11 change the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. 2014-11 is effective for reporting periods beginning after December 15, 2014. The effect of adopting ASU 2014-11 did not have a material effect on the Corporation’s financial statements.

In June 2014, the FASB issued ASU 2014-12 “Compensation – Stock Compensation (Topic 718)”. ASU 2014-12 clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. No new disclosures are required under ASU 2014-12. The guidance is effective for reporting periods beginning after December 15, 2015. The effect of adopting ASU 2014-12 is not expected to have a material effect on the Corporation’s financial statements.

ITEM 2

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management’s assessment of financial results. The Corporation’s subsidiary, CNB Bank (the “Bank”), provides financial services to individuals and businesses primarily within its primary market area of the Pennsylvania counties of Blair, Cambria, Cameron, Centre, Clearfield, Crawford, Elk, Indiana, Jefferson, and McKean. As ERIEBANK, a division of CNB Bank, the Bank operates in the Pennsylvania counties of Crawford, Erie, and Warren, and the Ohio county of Ashtabula. As FCBank, a division of CNB Bank, the Bank operates in the Ohio counties of Crawford, Richland, Ashland, Wayne, Marion, Morrow, Knox, Holmes, Delaware, and Franklin.

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.

 

25


Table of Contents

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.

The following discussion should be read in conjunction with the Corporation’s Consolidated Financial Statements and Notes thereto, for the year ended December 31, 2014, included in its 2014 Form 10-K, and in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results for the full year ending December 31, 2015, or any future period.

GENERAL OVERVIEW

Management uses return on average equity, earnings per share, asset quality, and 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. During the past several years, in order to address the historically low interest rates that are primarily tied to short-term rates, such as the Prime Rate, the Corporation has taken a variety of measures including instituting rate floors on our commercial lines of credit and home equity lines.

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 2015 and beyond. While past results are not an indication of future earnings, management believes the Corporation is well-positioned to sustain earnings during 2015.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled $30.4 million at June 30, 2015 compared to $27.9 million at December 31, 2014. 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, Federal Home Loan Bank financing, and the portions of the securities and loan portfolios that mature within one year. The Corporation expects that these sources of funds will enable it to meet cash obligations and off-balance sheet commitments as they come due.

SECURITIES

Securities available for sale and trading securities decreased by $45.4 million, or 6.6% since December 31, 2014, and associated cash proceeds were used primarily to fund loan growth. The footnotes to the consolidated financial statements provide more detail concerning the composition of the Corporation’s securities portfolio, the process for evaluating securities for other-than-temporary impairment, and for valuation of structured pooled trust preferred securities.

The Corporation generally buys into the market over time and does not attempt to “time” its transactions. In doing this, the highs and lows of the market are averaged into the portfolio and the overall effect of different rate environments is minimized. The Corporation 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.

LOANS

The Corporation experienced an increase in loans, net of unearned discount, of $96.2 million, or 7.1%, during the first six months of 2015. Lending efforts 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. Although loan balances increased only slightly in the first quarter, the increase in loan demand was more significant in the second quarter and the Corporation expects solid loan growth throughout the remainder of 2015 across all of its market areas.

 

26


Table of Contents

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):

 

     Six months ending
June 30, 2015
    Year ending
December 31, 2014
    Six months ended
June 30,  2014
 

Balance at beginning of period

   $ 17,373      $ 16,234      $ 16,234   

Charge-offs:

      

Commercial, industrial, and agricultural

     (139     (618     (319

Commercial mortgages

     —          (50     (50

Residential real estate

     (156     (436     (198

Consumer

     (1,000     (1,744     (768

Credit cards

     (86     (78     (23

Overdrafts

     (105     (256     (122
  

 

 

   

 

 

   

 

 

 
     (1,486     (3,182     (1,480
  

 

 

   

 

 

   

 

 

 

Recoveries:

      

Commercial, industrial, and agricultural

     27        1        1   

Commercial mortgages

     50        210        10   

Residential real estate

     1        41        19   

Consumer

     55        93        53   

Credit cards

     5        25        3   

Overdraft deposit accounts

     50        111        55   
  

 

 

   

 

 

   

 

 

 
     188        481        141   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,298     (2,701     (1,339
  

 

 

   

 

 

   

 

 

 

Provision for loan losses

     1,429        3,840        2,520   
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 17,504      $ 17,373      $ 17,415   
  

 

 

   

 

 

   

 

 

 

Loans, net of unearned

   $ 1,451,464      $ 1,355,289      $ 1,308,331   

Allowance to net loans

     1.21     1.28     1.33

Net charge-offs to average loans (annualized)

     0.19     0.18     0.21

Nonperforming assets

   $ 13,087      $ 10,209      $ 13,367   

Nonperforming % of total assets

     0.58     0.47     0.62

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

 

27


Table of Contents

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 the following 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 and ability 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 considers numerous historical and other factors to analyze the adequacy of the allowance and current period charges against the provision for loan losses. Management uses the analysis to compare and plot 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. Management then determines the current adequacy of the allowance and 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 six months ended June 30, 2015, CNB recorded a provision for loan losses of $1.4 million, as compared to a provision for loan losses of $2.5 million for the six months ended June 30, 2014. The decrease in the provision for loan losses in the first six months of 2015 compared to the first six months of 2014 primarily reflects lower historical loss rates in all portfolio segments over the period of analysis. During the first quarter of 2015, a commercial and industrial loan that was modified in a troubled debt restructuring in 2014 deteriorated and resulted in an additional provision for loan losses of $620 thousand. This loan was placed on nonaccrual status in the second quarter of 2015, and no additional provision for loan losses was required in the second quarter.

Management believes that the allowance for loan losses is reasonable and adequate to absorb probable incurred losses in the Corporation’s portfolio at June 30, 2015.

FUNDING SOURCES

The Corporation considers deposits, short-term borrowings, and term debt when evaluating funding sources. Deposits increased $16 million from $1.847 billion at December 31, 2014 to $1.863 billion at June 30, 2015.

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.

 

28


Table of Contents

SHAREHOLDERS’ EQUITY AND CAPITAL RATIOS AND METRICS

The Corporation’s capital continued to provide a base for profitable growth through June 30, 2015. Total shareholders’ equity was $192.7 million at June 30, 2015 and $188.5 million at December 31, 2014. In the first six months of 2015, the Corporation earned $11.2 million and declared dividends of $4.8 million, resulting in a dividend payout ratio of 42.6% of net income.

The Corporation is required to comply with standards of capital adequacy mandated by banking regulators. On January 1, 2015, rules to implement Basel III capital requirements became effective for community banks. The June 30, 2015 regulatory capital ratios were prepared under the Basel III capital requirements. Prior year ratios were prepared under Basel I requirements. The Corporation exceeded all of its regulatory capital requirements under the applicable guidelines for the respective periods.

The Corporation’s capital ratios, book value per share and tangible book value per share as of June 30, 2015 and December 31, 2014 are as follows:

 

     June 30, 2015     December 31, 2014  

Total risk-based capital ratio

     14.00     14.30

Tier 1 capital ratio

     12.82     13.06

Tier 1 common equity ratio

     11.47     N/A   

Leverage ratio

     8.61     8.39

Tangible common equity/tangible assets (1)

     7.31     7.32

Book value per share

   $ 13.38      $ 13.09   

Tangible book value per share (1)

   $ 11.29      $ 10.97   

 

(1) Tangible common equity, tangible assets and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity is calculated by excluding the balance of goodwill and core deposit intangibles from the calculation of shareholders’ equity. Tangible assets is calculated by excluding the balance of goodwill and core deposit intangibles 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, in the case of the tangible common equity to tangible assets ratio, it is an additional measure used to assess capital adequacy, and, in the case of tangible book value per share, it is an additional measure used to assess the Corporation’s value. 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).

 

     June 30, 2015     December 31, 2014  

Shareholders’ equity

   $ 192,737      $ 188,548   

Less goodwill

     27,194        27,194   

Less core deposit intangible

     2,885        3,403   
  

 

 

   

 

 

 

Tangible common equity

   $ 162,658      $ 157,951   
  

 

 

   

 

 

 

Total assets

   $ 2,253,789      $ 2,189,213   

Less goodwill

     27,194        27,194   

Less core deposit intangible

     2,885        3,403   
  

 

 

   

 

 

 

Tangible assets

   $ 2,223,710      $ 2,158,616   
  

 

 

   

 

 

 

Ending shares outstanding

     14,404,466        14,404,416   

Tangible book value per share

   $ 11.29      $ 10.97   

Tangible common equity/tangible assets

     7.31     7.32

 

29


Table of Contents

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. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off balance sheet risk was as follows at June 30, 2015 and December 31, 2014:

 

     June 30, 2015      December 31, 2014  
     Fixed Rate      Variable Rate      Fixed Rate      Variable Rate  

Commitments to make loans

   $ 24,154       $ 254,273       $ 28,831       $ 254,269   

Unused lines of credit

     0         83,266         0         80,428   

Standby letters of credit

     0         15,914         0         15,132   

Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments have interest rates ranging from 1.69% to 18.00% and maturities ranging from 3 months to 20 years at both June 30, 2015 and December 31, 2014.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2015 and 2014

OVERVIEW OF THE INCOME STATEMENT

The Corporation had net income of $5.6 million in the second quarter of 2015 and 2014. The earnings per diluted share were $0.39 in the second quarter of 2015 and 2014. The annualized return on assets and return on equity for the second quarter of 2015 are 1.00% and 11.48% compared to 1.04% and 12.58% for the second quarter of 2014.

INTEREST INCOME AND EXPENSE

Net interest margin on a fully tax equivalent basis was 3.62% for the three months ended June 30, 2015, compared to 3.79% for the three months ended June 30, 2014. Net accretion included in loan interest income in the second quarter of 2015 was $288 thousand, which resulted in an increase in the June 30, 2015 net interest margin of 5 basis points and was $457 thousand for the three months ended June 30, 2014, which resulted in an increase to the net interest margin of 9 basis points. During the second quarter of 2015, the Corporation experienced net interest margin compression as a result of loans repricing and new loans being added with market yields below historical averages, which is consistent with the trends across the financial services industry in this historically low interest rate environment.

Total interest and dividend income was $21.3 million for the three months ended June 30, 2015, a decrease of $112 thousand, or 0.5%, compared to the three months ended June 30, 2014. During the three months ended June 30, 2015, total interest expense increased by $180 thousand, or 0.6%, compared to the three months ended June 30, 2014.

 

30


Table of Contents

PROVISION FOR LOAN LOSSES

The Corporation recorded a provision for loan losses of $486 thousand in the second quarter of 2015 compared to $1.5 million in the second quarter of 2014. The decrease in the provision for loan losses in the second quarter of 2015 compared to the second quarter of 2014 primarily reflects lower historical loss rates in all portfolio segments over the period of analysis.

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 June 30, 2015.

NON-INTEREST INCOME

Non-interest income was $4.1 million for the three months ended June 30, 2015, compared to $3.5 million for the three months ended June 30, 2014. This increase is due primarily to higher securities gains and higher interchange fees from debit and credit card transactions in the second quarter of 2015 as compared to the second quarter of 2014.

NON-INTEREST EXPENSES

Total non-interest expenses increased $1.5 million, or 12.0%, to $14.1 million during the three months ended June 30, 2015 compared to the three months ended June 30, 2014.

Salaries and benefits expenses increased $1.1 million, or 16.5%, to $7.5 million during the three months ended June 30, 2015 compared to the three months ended June 30, 2014 due to an increase in average full-time equivalent employees as well as routine merit increases and increases in certain employee benefit expenses, such as health insurance premiums, which continue to increase in line with market conditions. During the three months ended June 30, 2015, CNB hired 10 additional full-time equivalent staff to facilitate the Corporation’s continued growth.

INCOME TAX EXPENSE

Income tax expense was $2.1 million in the second quarter of 2015 and $2.2 million in the second quarter of 2014, resulting in effective tax rates of 27.1% and 28.4% 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.

 

31


Table of Contents

CONSOLIDATED YIELD COMPARISONS

AVERAGE BALANCES AND NET INTEREST MARGIN FOR THE SIX MONTHS ENDED

Dollars in thousands

 

 

     June 30, 2015      June 30, 2014  
     Average     Annual     Interest      Average     Annual     Interest  
     Balance     Rate     Inc./Exp.      Balance     Rate     Inc./Exp.  

ASSETS:

             

Securities:

             

Taxable (1)

   $ 520,474        2.26   $ 5,850       $ 563,298        2.35   $ 6,690   

Tax-Exempt (1,2)

     136,080        4.27     2,830         128,771        4.35     2,752   

Equity Securities (1,2)

     11,603        8.72     506         11,438        4.13     236   
  

 

 

     

 

 

    

 

 

     

 

 

 

Total securities

     668,157        2.78     9,186         703,507        2.74     9,678   
  

 

 

     

 

 

    

 

 

     

 

 

 

Loans:

             

Commercial (2)

     448,758        4.77     10,699         425,057        4.81     10,230   

Mortgage (2)

     872,005        4.78     20,824         821,989        5.04     20,702   

Consumer

     72,215        10.16     3,668         51,415        13.88     3,569   
  

 

 

     

 

 

    

 

 

     

 

 

 

Total loans (3)

     1,392,978        5.05     35,191         1,298,461        5.31     34,501   
  

 

 

     

 

 

    

 

 

     

 

 

 

Total earning assets

   $ 2,061,135        4.32   $ 44,377       $ 2,001,968        4.40   $ 44,179   
  

 

 

     

 

 

    

 

 

     

 

 

 

Non interest-bearing assets:

             

Cash and due from banks

     28,178             30,938       

Premises and equipment

     36,653             32,501       

Other assets

     94,637             91,467       

Allowance for loan losses

     (17,792          (16,840    
  

 

 

        

 

 

     

Total non interest-bearing assets

     141,676             138,066       
  

 

 

        

 

 

     

TOTAL ASSETS

   $ 2,202,811           $ 2,140,034       
  

 

 

        

 

 

     

LIABILITIES AND SHAREHOLDERS’ EQUITY:

             

Demand—interest-bearing

   $ 450,979        0.35   $ 792       $ 447,921        0.36   $ 803   

Savings

     950,942        0.50     2,358         940,613        0.47     2,213   

Time

     199,353        1.07     1,062         222,452        1.02     1,133   
  

 

 

     

 

 

    

 

 

     

 

 

 

Total interest-bearing deposits

     1,601,274        0.53     4,212         1,610,986        0.52     4,149   

Short-term borrowings

     39,537        0.23     45         18,255        0.10     9   

Long-term borrowings

     75,717        4.17     1,578         75,570        4.24     1,602   

Subordinated debentures

     20,620        3.60     371         20,620        3.61     372   
  

 

 

     

 

 

    

 

 

     

 

 

 

Total interest-bearing liabilities

     1,737,148        0.71   $ 6,206         1,725,431        0.71   $ 6,132   
      

 

 

        

 

 

 

Demand—non interest-bearing

     248,862             217,581       

Other liabilities

     22,155             21,398       
  

 

 

        

 

 

     

Total liabilities

     2,008,165             1,964,410       

Shareholders’ equity

     194,646             175,624       
  

 

 

        

 

 

     

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 2,202,811           $ 2,140,034       
  

 

 

        

 

 

     

Interest income/Earning assets

       4.32   $ 44,377           4.40   $ 44,179   

Interest expense/Interest-bearing liabilities

       0.71     6,206           0.71     6,132   
    

 

 

   

 

 

      

 

 

   

 

 

 

Net interest spread

       3.61   $ 38,171           3.69   $ 38,047   
    

 

 

   

 

 

      

 

 

   

 

 

 

Interest income/Earning assets

       4.32   $ 44,377           4.40   $ 44,179   

Interest expense/Earning assets

       0.60     6,206           0.61     6,132   
    

 

 

   

 

 

      

 

 

   

 

 

 

Net interest margin

       3.72   $ 38,171           3.79   $ 38,047   
    

 

 

   

 

 

      

 

 

   

 

 

 

 

(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.

 

32


Table of Contents

Six Months Ended June 30, 2015 and 2014

OVERVIEW OF THE INCOME STATEMENT

The Corporation had net income of $11.2 million for the six months ended June 30, 2015, compared to $10.8 million for the same period of 2014. The earnings per diluted share were $0.77 for the six months ended June 30, 2015 and $0.75 for the six months ended June 30, 2014. The return on average assets and return on average equity for the six months ended June 30, 2015 are 1.01% and 11.47%, respectively, compared to 1.01% and 12.28%, respectively, for the same period of 2014.

INTEREST INCOME AND EXPENSE

The Corporation’s net interest margin on a fully tax equivalent basis was 3.72% for the six months ended June 30, 2015, compared to 3.79% for the six months ended June 30, 2014. Net accretion included in loan interest income in the six months ended June 30, 2015 was $1.3 million, resulting in an increase in the net interest margin of 14 basis points and was $457 thousand for the six months ended June 30, 2014, which resulted in an increase to the net interest margin of 9 basis points. During the first six months of 2015, the Corporation experienced net interest margin compression as a result of loans repricing and new loans with market yields significantly below historical averages, which is consistent with the trends across the financial services industry in this historically low interest rate environment.

Total interest and dividend income was $42.9 million for the six months ended June 30, 2015, an increase of $92 thousand, or 0.2%, as compared to the six months ended June 30, 2014. The Corporation’s total earning assets have grown and the asset mix has also shifted to a higher percentage of loans and less investments, which has resulted in higher levels of interest income. During the six months ended June 30, 2015, total interest expense increased by $74 thousand, or 1.2%, compared to the six months ended June 30, 2014.

PROVISION FOR LOAN LOSSES

The Corporation recorded a provision for loan losses of $1.4 million during the six months ended June 30, 2015 compared to $2.5 million during the six months ended June 30, 2014. Net charge-offs for the six months ended June 30, 2015 were $1.3 million, compared to net charge-offs of $1.3 million during the six months ended June 30, 2014. The decrease in the provision for loan losses in the first six months of 2015 compared to the first six months of 2014 primarily reflects lower historical loss rates in all portfolio segments over the period of analysis.

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 June 30, 2015.

NON-INTEREST INCOME

Total non-interest income was $7.2 million for the six months ended June 30, 2015, compared to $6.7 million for the six months ended June 30, 2014. Non-interest income as a percentage of average assets increased from 0.63% during the first six months of 2014 to 0.66% during the first six months of 2015. This increase is due primarily to higher securities gains and higher interchange fees from debit and credit card transactions in the first six months of 2015 as compared to the first six months of 2014.

NON-INTEREST EXPENSES

Total non-interest expenses increased $1.3 million, or 5.2%, to $27.2 million during the six months ended June 30, 2015 compared to the six months ended June 30, 2014.

Salaries and benefits expenses increased $860 thousand, or 6.5%, to $14.1 million during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 due to an increase in average full-time equivalent employees as well as routine merit increases and increases in certain employee benefit expenses, such as health insurance premiums, which continue to increase in line with market conditions. During the first six months of 2015, the Corporation hired 20 additional full-time equivalent staff to facilitate the Corporation’s continued growth. In addition, expenses associated with outsourced services increased $173 thousand during the six months ended June 30, 2015 compared to the six months ended June 30, 2014.

 

33


Table of Contents

INCOME TAX EXPENSE

Income tax expense was $4.2 million for the six months ended June 30, 2015 as compared to $4.3 million for the six months ended June 30, 2014, resulting in effective tax rates of 27.2% and 28.4% 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, earnings from bank owned life insurance, and nondeductible merger costs.

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. In addition, the fair value of assets acquired and liabilities assumed in connection with business combinations, including the associated goodwill that was recorded, required the use of material estimates. 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 2 (Business Combination), Note 4 (Securities), and Note 5 (Loans) of the Corporation’s 2014 Form 10-K provide detail with regard to the Corporation’s accounting for the allowance for loan losses, the fair value of securities, business combinations and loans. There have been no significant changes in the application of accounting policies since December 31, 2014.

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.

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,

 

34


Table of Contents

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. 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 change in the interest rate environment. Due to the historically low interest rate environment, the -300 and -400 scenarios have been excluded from the table.

 

June 30, 2015

 

December 31, 2014

Change in

Basis Points

 

% Change in Net

Interest Income

 

Change in

Basis Points

 

% Change in Net

Interest Income

400

  1.2%   400   -0.1%

300

  2.3%   300   1.1%

100

  1.5%   100   1.4%

(100)

  -2.8%   (100)   -2.9%

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 SEC 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.

 

35


Table of Contents

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS – None

 

ITEM 1A. RISK FACTORS – There have been no material changes to the risk factors disclosed in Part I, Item IA of the 2014 Form 10-K.

 

ITEM 6. EXHIBITS

 

Exhibit No.    Description
    3.1    Amended and Restated Articles of Incorporation of the Corporation, filed as Appendix B to the 2006 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 2006 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.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

36


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      CNB FINANCIAL CORPORATION
     

(Registrant)

DATE: August 6, 2015      

/s/ Joseph B. Bower, Jr.

      Joseph B. Bower, Jr.
      President and Director
      (Principal Executive Officer)
DATE: August 6, 2015      

/s/ Brian W. Wingard

      Brian W. Wingard
      Treasurer
      (Principal Financial Officer)

 

37


Table of Contents

EXHIBIT INDEX

 

Exhibit No.    Description
    3.1    Amended and Restated Articles of Incorporation of the Corporation, filed as Appendix B to the 2005 Proxy Statement, filed with the SEC on March 24, 2006, and incorporated herein by reference.
    3.2    By-Laws of the Corporation, as amended and restated, filed as Appendix C to the 2005 Proxy Statement, filed with the SEC on March 24, 2006, and incorporated herein by reference.
  31.1    Rule 13a – 14(a)/15d – 14(a) Certification of the Principal Executive Officer
  31.2    Rule 13a – 14(a)/15d – 14(a) Certification of the Principal Financial Officer
  32.1    Section 1350 Certification
  32.2    Section 1350 Certification
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

38