CCNE

CNB Financial Corp. 10-Q Summary: Period Ended June 30, 2010

Business Context and Reporting Period

CNB Financial Corporation (CNB) is a Pennsylvania-based financial holding company operating primarily through its subsidiary, CNB Bank, serving west central and northwestern Pennsylvania. This report covers the quarterly period ended June 30, 2010. During the period, the company expanded its ERIEBANK franchise with a new full-service branch in Meadville, Pennsylvania, and completed a common stock offering on June 18, 2010, raising approximately $32.4 million net of issuance costs.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 25.6% for the quarter and 12.1% for the six-month period compared to the same periods in 2009. This growth was driven by higher net interest income and reduced non-interest expenses, partially offset by impairment charges.
• Capital Structure: Shareholders' equity increased significantly from $69.4 million at December 31, 2009, to $110.1 million at June 30, 2010, primarily due to the $32.4 million equity offering and retained earnings.
• Deposit Growth: Total deposits grew 14.4% year-over-year, with savings accounts increasing 32.0% and non-interest-bearing checking increasing 18.1%.
• Asset Quality: Nonperforming assets decreased to $12.0 million from $13.6 million at year-end 2009. The allowance for loan losses increased to $10.4 million (1.41% of net loans) from $9.8 million (1.37% of net loans) at year-end 2009.
• Securities Portfolio: The company recorded other-than-temporary impairment (OTTI) charges of $318,000 for the quarter and $1.1 million for the six months, primarily related to structured pooled trust preferred securities.

Guidance, Outlook, and Risks

Management Commentary: Management expects moderate loan growth for the remainder of 2010. While the low interest rate environment has compressed net interest margins, the company is actively managing deposit costs and has instituted rate floors on certain commercial lines. The company anticipates that growth in the ERIEBANK franchise and private banking will enhance non-interest income.

Risks and Contingencies:

• Securities Impairment: Significant unrealized losses exist in the securities portfolio, particularly in Level 3 structured pooled trust preferred securities. Management continues to monitor these for potential future OTTI charges.
• Interest Rate Risk: The company is asset-sensitive in the short term. A 200 basis point increase in interest rates is projected to increase net income by 2.53%.
• Regulatory Environment: The recent enactment of the Dodd-Frank Act may increase compliance costs and operational restrictions.
• Regional Economic Exposure: The loan portfolio is heavily concentrated in Pennsylvania markets, making the company susceptible to local economic downturns.

Investor Verification Checklist

• OTTI Charges: Verify the specific valuation assumptions used for the structured pooled trust preferred securities and the potential for further impairment charges in future quarters.
• Capital Ratios: Confirm that the recent equity raise has sustained regulatory capital ratios (Total Risk-Based Capital was 15.92% as of June 30, 2010) above required minimums.
• Loan Portfolio Quality: Review the composition of nonperforming assets and the adequacy of the allowance for loan losses given the regional economic concentration.
• Deposit Stability: Assess the sustainability of the rapid deposit growth, particularly in savings accounts, in a rising interest rate environment.
• Equity Offering Proceeds: Track the deployment of the $32.4 million raised in June 2010 to ensure it is generating expected returns.