CNB Financial (CCNE) 10-Q 2002 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

           For the quarterly period ended September 30, 2002

or

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

           For the transition period from                    to                    

Commission File Number 0-13396

CNB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania	25-1450605
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

County National Bank

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

The number of shares outstanding of the issuer’s common stock as of November 13, 2002:

COMMON STOCK: $1.00 PAR VALUE—3,640,714 SHARES

INDEX

PART I.

FINANCIAL INFORMATION

		Sequential Page Number
ITEM 1.—Financial Statements
	Consolidated Balance Sheets—September 30, 2002 and December 31, 2001	PAGE 3.
	Consolidated Statements of Income—Quarter ending September 30, 2002 and 2001	PAGE 4.
	Consolidated Statements of Income—Nine months ending September 30, 2002 and 2001	PAGE 5.
	Consolidated Statements of Comprehensive Income for the quarter and nine months ending September 30, 2002 and 2001	PAGE 6.
	Consolidated Statements of Cash Flows—Nine months ending September 30, 2002 and 2001	PAGE 7.
	Notes to Consolidated Financial Statements	PAGE 8.
ITEM 2—Management’s Discussion and Analysis
	Management’s Discussion and Analysis of Financial Condition and Results of Operations	PAGE 13.
ITEM 3—Quantitative and Qualitative Disclosures
	Quantitative and Qualitative Disclosures About Market Risk	PAGE 18.
ITEM 4—Controls and Procedures
	Controls and Procedures	PAGE 18.
PART II.	OTHER INFORMATION
ITEM 1	Legal Proceedings	PAGE 19
ITEM 2	Changes in Securities and Use of Proceeds	PAGE 19
ITEM 3	Defaults Upon Senior Securities	PAGE 19
ITEM 4	Submission of Matters for Security Holders Vote	PAGE 19
ITEM 5	Other Information	PAGE 19
ITEM 6	Exhibits and Reports on Form 8-K	PAGE 19
Signatures		PAGE 19

2

CONSOLIDATED BALANCE SHEETS

CNB FINANCIAL CORPORATION Consolidated Balance Sheets (unaudited) (Dollars in thousands)
	September 30, 2002			Dec. 31, 2001
ASSETS
Cash and due from banks	$	18,464		$	17,350
Interest bearing deposits with other banks		11,512			2,041
Total cash and cash equivalents		29,976			19,391
Securities available for sale		188,721			152,757
Loans held for sale		4,463			5,334
Loans and leases		408,452			388,455
Less: unearned discount		1,417			2,282
Less: allowance for loan losses		4,682			4,095
NET LOANS		402,353			382,078
FHLB and Federal Reserve Stock		4,111			1,932
Premises and equipment		11,947			12,485
Accrued interest receivable and other assets		6,897			6,420
Intangibles		1,340			1,576
Goodwill		10,821			10,821
TOTAL ASSETS	$	659,289		$	591,218
LIABILITIES
Deposits:
Non-interest bearing deposits	$	61,253		$	60,241
Interest bearing deposits		478,638			446,399
TOTAL DEPOSITS		539,891			506,640
Other borrowings		52,000			23,268
Accrued interest and other liabilities		7,895			7,992
TOTAL LIABILITIES		599,786			537,900
SHAREHOLDERS’ EQUITY
Common stock $1.00 par value Authorized 10,000,000 shares Issued 3,693,500 shares		3,694			3,694
Additional paid in capital		3,683			3,753
Retained earnings		51,247			47,731
Treasury stock, at cost		(1,094	)		(1,236	)
(52,786 shares for September 2002, and 53,568 for December 2001) Accumulated other comprehensive income		3,283			952
TOTAL SHAREHOLDERS’ EQUITY		60,813			54,894
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY	$	660,599		$	592,794

3

CONSOLIDATED STATEMENTS OF INCOME

CNB FINANCIAL CORPORATION

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended September 30,
	2002			2001
INTEREST INCOME
Loans including fees	$	7,601		$	7,797
Deposits with other banks		19			36
Federal funds sold		82			108
Securities:
Taxable		1,681			1,769
Tax-exempt		562			366
Dividends		106			144
TOTAL INTEREST AND DIVIDEND INCOME		10,051			10,220
INTEREST EXPENSE
Deposits		3,033			4,477
Borrowed funds		666			298
TOTAL INTEREST EXPENSE		3,699			4,775
Net interest and dividend income		6,352			5,445
Provision for loan losses		540			270
NET INTEREST INCOME AFTER PROVISION		5,812			5,175
OTHER INCOME
Trust & asset management fees		225			258
Service charges on deposit accounts		894			753
Other service charges and fees		114			120
Securities gains(losses)		(13	)		258
Gains (losses) on sale of loans		21			19
Other income		283			268
TOTAL OTHER INCOME		1,524			1,676
OTHER EXPENSES
Salaries		1,709			1,529
Employee benefits		527			500
Net occupancy expense		619			590
Amortization of intangible		79			79
Amortization of goodwill		—			360
Other		1,430			1,431
TOTAL OTHER EXPENSES		4,364			4,489
Income before income taxes		2,972			2,362
Applicable income taxes		684			627
NET INCOME	$	2,288		$	1,735
Earnings Per Share, Based on Weighted Average Shares Outstanding
Net income, basic	$	0.63		$	0.47
Net income, diluted	$	0.63		$	0.47
Cash dividends per share	$	0.26		$	0.23

4

CONSOLIDATED STATEMENTS OF INCOME

CNB FINANCIAL CORPORATION

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share data)

	Nine Months Ended September 30
	2002			2001
INTEREST AND DIVIDEND INCOME
Loans including fees	$	22,526		$	23,643
Deposits with other banks		66			132
Federal funds sold		221			355
Securities:
Taxable		4,976			5,081
Tax-exempt		1,583			1,219
Dividends		341			433
TOTAL INTEREST AND DIVIDEND INCOME		29,713			30,863
INTEREST EXPENSE
Deposits		9,983			14,017
Borrowed funds		1,639			883
TOTAL INTEREST EXPENSE		11,622			14,900
Net interest income		18,091			15,963
Provision for loan losses		1,260			810
NET INTEREST INCOME AFTER PROVISION		16,831			15,153
OTHER INCOME
Trust & asset management fees		685			753
Service charges on deposit accounts		2,526			2,038
Other service charges and fees		380			422
Securities gains(losses)		(1	)		244
Gains on sale of loans		108			23
Other		821			572
TOTAL OTHER INCOME		4,519			4,052
OTHER EXPENSES
Salaries		4,982			4,502
Employee benefits		1,665			1,562
Net occupancy expense		1,804			1,820
Amortization of intangible		236			236
Amortization of goodwill		—			1,058
Other		4,254			3,883
TOTAL OTHER EXPENSES		12,941			13,061
Income before income taxes		8,409			6,144
Applicable income taxes		2,098			1,524
NET INCOME	$	6,311		$	4,620
Earnings Per Share, Based on Weighted Average Shares Outstanding
Net income, basic	$	1.74		$	1.26
Net income, diluted	$	1.73		$	1.26
Cash dividends per share	$	0.76		$	0.69

5

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CNB FINANCIAL CORPORATION

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands, except per share data)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2002			2001		2002			2001
Net Income	$	2,288		$	1,735	$	6,311		$	4,620
Other comprehensive income, net of tax
Unrealized gains/(losses)on securities:
Unrealized gains/(losses) arising during the period		1,070			884		2,330			2,367
Reclassified adjustment for accumulated gains/(losses) included in net income, net of tax		(9	)		171		(1	)		161
Other comprehensive income		1,079			713		2,331			2,206
Comprehensive income	$	3,367		$	2,448	$	8,642		$	6,826

6

CONSOLIDATED STATEMENTS OF CASHFLOWS

CNB FINANCIAL CORPORATION

Consolidated Statements of Cash Flows (unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2002			2001
Cash flows from operating activities:
Net Income	$	6,311		$	4,620
Adjustments to reconcile net income to net cash provided by operations:
Provision for loan losses		1,260			810
Depreciation and amortization		1,206			2,243
Amortization and accretion and deferred loan fees		(197	)		(407	)
Deferred taxes		(1,277	)		(469	)
Security (gains) losses		1			(244	)
Gain on sale of loans		(108	)		(23	)
Proceeds from sale of loans		21,174			17,117
Origination of loans for sale		(20,194	)		(17,670	)
Net (gains) on dispositions of acquired property		(6	)		48
Changes in:
Interest receivable		(59	)		367
Other assets		(3,053	)		(104	)
Interest payable		(210	)		(142	)
Other liabilities		184			3,035
Net cash provided by operating activities		5,032			9,181
Cash flows from investing activities:
Proceeds from maturities of:
Securities available for sale		31,641			37,926
Proceeds from sales of securities available for sale		232			17,250
Purchase of securities available for sale		(64,646	)		(71,414	)
Net principal disbursed on loans		(20,992	)		(8,695	)
Purchase of premises and equipment		(332	)		(714	)
Proceeds from the sale of foreclosed assets		390			427
Net cash used in investing activities		(53,707	)		(25,220	)
Cash flows from financing activities:
Net change in:
Checking, money market and savings accounts		(3,702	)		17,990
Certificates of deposit		36,953			4,521
Cash dividends paid		(2,766	)		(2,532	)
Other borrowings		(1,268	)		(1,341	)
Proceeds from sale of treasury stock		392			105
Treasury stock purchased		(349	)		(35	)
Advances from long term borrowings		30,000			10,000
Repayments of long term borrowings		—			—
Net cash provided by financing activities		59,260			28,708
Net increase (decrease) in cash and cash equivalents		10,585			12,669
Cash and cash equivalents at beginning of year		19,391			17,973
Cash and cash equivalents at end of period	$	29,976		$	30,642
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to certificate accounts)	$	11,633		$	15,042
Income Taxes	$	2,530		$	1,770

7

CNB FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

BASIS OF PRESENTATION

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

In the opinion of Management of the registrant, the accompanying consolidated financial statements for the quarter and nine month periods ended September 30, 2002 and 2001 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the period. The financial performance reported for the Corporation for the three and nine-month periods ended September 30, 2002 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 to shareholders and Form 10-K for the period ended December 31, 2001.

COMMON STOCK PLAN

The Corporation has a common stock plan for key employees and independent directors. The Stock Incentive Plan, which is administered by a disinterested committee of the Board of Directors, provides for 250,000 shares of common stock in the form of qualified options, nonqualified options, stock appreciation rights or restrictive stock. Beginning in 2002, the Corporation adopted Financial Accounting Standards Board No. 123, which requires the recognition of expense at the time options are granted based on their fair value. The Corporation has not granted any options through the first nine months of 2002 and therefore has recognized no expense. In 2001, the Corporation applied Accounting Principles Board Opinion 25 and related interpretations in accounting for its common stock plan. Accordingly, no compensation expense has been recognized for the plans.

EARNINGS PER SHARE

Earnings-per-share is calculated on the weighted average number of common shares outstanding during the year. The number of shares used for basic and diluted was 3,636,222 and 3,644,031 for the three and nine month periods ended September 30, 2002 and 3,669,184 for basic and diluted for the three and nine month periods ended September 30, 2001. Stock options for 69,000 shares of common stock were considered in computing diluted earnings per common share.

8

SECURITIES

Securities available for sale at:

	September 30, 2002									December 31, 2001
	Amortized		Unrealized					Fair		Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
U.S. Treasury	$	10,126	$	146	$	—		$	10,272	$	14,046	$	263	$	(1	)	$	14,308
U.S. Government agencies and corporations:		28,141		491		—			28,632		24,073		503		(7	)		24,569
Obligations of States and Political Subdivisions		48,534		2,351		—			50,885		25,450		478		(175	)		25,753
Mortgage-backed Securities		45,002		899		(21	)		45,880		39,073		238		(308	)		39,003
Corporate Notes and Bonds		43,328		1,882		(524	)		44,686		40,563		967		(514	)		41,016
Marketable equity Securities		8,617		246		(497	)		8,366		8,115		97		(104	)		8,108
Total securities available for sale	$	183,748	$	6,015	$	(1,042	)	$	188,721	$	151,320	$	2,546	$	(1,109	)	$	152,757

On September 30, 2002 investment securities carried at $31,274 were pledged to secure public deposits and for other purposes provided by law.

The following is a schedule of the contractual maturity of investments excluding equity securities, at September 30, 2002:

	Available for Sale
	Amortized Cost		Fair Value
1 year or less	$	30,762	$	31,233
1 year-5 years		36,803		38,035
5 years-10 years		12,701		14,089
After 10 years		49,863		51,118
		130,129		134,475
Mortgage-backed securities		45,002		45,880
Total securities	$	175,131	$	180,355

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

9

OTHER BORROWINGS

Other borrowings include $2,000 and $308 of demand notes payable to the US Treasury Department at September 30, 2002 and December 31, 2001. These notes are issued under the US Treasury Department’s program of investing the treasury tax and loan account balances in interest bearing demand notes insured by depository institutions. These notes bear interest at a rate of .25 percent less than the average Federal funds rate as computed by the Federal Reserve Bank. The Corporation has available a $5 million line of credit with an unaffiliated institution. Terms of the line are floating at 30 day LIBOR plus 180 basis points. The outstanding balance on the loan at September 30 was $0 and $710 at year end 2001. The Corporation issued $10 million of trust-preferred securities. The issue is callable on June 25, 2007 in whole or in part and matures on June 25, 2032. Interest is variable and adjusts quarterly based on the 3 month LIBOR plus 345 basis points. The interest rate at September 30, 2002 was 5.24%. At September 30, 2002, the Bank had remaining borrowing capacity with the Federal Home Loan Bank of Pittsburgh (FHLB) of $177 million. Borrowings with the FHLB are secured by a blanket pledge of selected securities in the amount of $77,115 and certain mortgage loans with a value of $159,696. Also other borrowings include advances from the FHLB at September 30, 2002 and December 31, 2001 as follows:

Interest Rate	Maturity	September 30, 2002		December 31, 2001
Overnight	Daily	$	—	$	2,250
[a]	3/1/10		10,000		10,000
[b]	1/3/11		10,000		10,000
[c]	1/24/12		20,000		—
Total FHLB borrowed funds		$	40,000	$	22,250

[a] Interest rate is fixed for one year at which time FHLB has option to float the interest rate based on the 3 month LIBOR + .16, the interest rate was 6.09% at September 30, 2002.

[b] Interest rate is fixed for one year at which time FHLB has option to float the interest rate based on the 3 month LIBOR + .20, the interest rate was 4.95% at September 30, 2002.

[c] Interest rate is fixed until 1/26/04 at which time FHLB has option to float the interest rate based on the 3 month LIBOR + .18, the interest rate was 4.52% at September 30, 2002.

Following are maturities of borrowed funds as of September 30, 2002:

2002	$	2,000
2003
2004
2005
2006
Thereafter		50,000
Total Borrowed Funds	$	52,000

10

	Three Months Ended March 31, 2002				Three Months Ended June 30, 2002				Six Months Ended June 30, 2002
	Previously Reported		As Restated		Previously Reported		As Restated		Previously Reported		As Restated
Net Income	$	1,618,000	$	1,858,000	$	1,925,000	$	2,165,000	$	3,544,000	$	4,023,000
Earnings Per Share
Basic	$	0.45	$	0.51	$	0.53	$	0.60	$	0.98	$	1.11
Diluted	$	0.44	$	0.51	$	0.53	$	0.59	$	0.97	$	1.10

RECENT ACCOUNTING PRONOUNCEMENT

On October 1, 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 147,Acquisitions of Certain Financial Institutions, effective for all business combinations initiated after October 1, 2002. This Statement addresses the financial accounting and reporting for the acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. This Statement removes acquisitions of financial institutions, other than transactions between two or more mutual enterprises, from the scope of FAS No. 72,Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9,Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method. The acquisition of all or part of a financial institution that meets the definition of a business combination shall be accounted for by the purchase method in accordance with FAS No. 141,Business Combinations, and FAS No. 142,Goodwill and Other Intangible Assets.Upon adoption of this statement, the Corporation ceased the amortization of $10,821,000 in goodwill associated with branch acquisitions. The Corporation will continue to review the remaining goodwill on an annual basis for impairment. However, $1,340,000 in a purchased customer list intangible will continue to be amortized and reviewed for impairment in accordance with FAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets.The new requirement changes the accounting for goodwill from an amortization approach to an impairment-only approach as of the effective date that FAS No. 142 was adopted, which in the Corporation’s case was January 1, 2002. As a result of complying with FAS No. 147, the company is required to restate earnings for the first and second quarters of 2002. The following table details the changes in net income and earnings per share as a result of this restatement:

11

CONSOLIDATED YIELD COMPARISONS

CNB Financial Corporation

Average Balances and Net Interest Margin

(Dollars in thousands)

	September 30, 2002								September 30, 2001
	Average Balance			Annual Rate		Interest Inc./Exp.			Average Balance			Annual Rate		Interest Inc./Exp.
Assets
Interest-bearing deposits with banks	$	4,400		2.00	%		66			3,650		4.82	%		132
Federal funds sold and securities purchased under agreements to resell		14,724		2.00	%		221			11,593		4.08	%		355
Investment Securities:
Taxable		124,383		5.33	%		4,976			110,255		6.14	%		5,081
Tax-Exempt (1)		43,450		6.87	%		2,240			33,045		6.77	%		1,679
Equity Investments (1)		12,607		4.64	%		439			10,280		7.06	%		544
Total Investments		199,564		5.31	%		7,942			168,823		6.15	%	��	7,791
Loans
Commercial (1)		103,364		6.91	%		5,354			83,078		8.28	%		5,158
Mortgage (1)		237,878		7.83	%		13,966			223,528		8.66	%		14,526
Installment		40,037		8.41	%		2,524			39,939		9.36	%		2,804
Leasing		17,244		7.08	%		916			23,941		7.31	%		1,313
Total loans (2)		398,523		7.61	%		22,760			370,486		8.57	%		23,801
Total earning assets		598,087		6.84	%		30,702			539,309		7.81	%		31,592
Non Interest Bearing Assets
Cash & Due From Banks		13,335								13,354
Premises & Equipment		12,316								12,872
Other Assets		21,847								19,973
Allowance for Possible Loan Losses		(4,276	)							(4,023	)
Total Non-interest earning assets		43,222								42,176
Total Assets	$	641,309				$	30,702		$	581,485				$	31,592
Liabilities and Shareholders’ Equity
Interest-Bearing Deposits
Demand—interest-bearing		133,120		0.90	%		898			121,162		1.98	%		1,798
Savings		78,340		1.60	%		939	��		76,465		3.23	%		1,852
Time		260,472		4.17	%		8,147			246,809		5.60	%		10,368
Total interest-bearing deposits		471,932		2.82	%		9,984			444,436		4.21	%		14,018
Short-term borrowings		2,160		2.22	%		36			1,277		4.39	%		42
Long-term borrowings		42,611		5.01	%		1,602			19,963		5.61	%		840
Total interest-bearing liabilities		516,703		3.00	%		11,622			465,676		4.27	%		14,900
Demand—non-interest-bearing		55,909								53,372
Other liabilities		7,926								8,175
Total Liabilities		580,538		2.67	%		11,622			527,223		3.77	%		14,900
Shareholders’ equity		60,771								54,262
Total Liabilities and Shareholders’ Equity		641,309					11,622			581,485					14,900
Interest income/earning assets				6.84	%		30,702					7.81	%	$	31,592
Interest expense/interest bearing liabilities				3.00	%		11,622					4.27	%		14,900
Net Interest Spread				3.85	%	$	19,080					3.54	%	$	16,692
Interest Income/Interest Earning Assets				6.84	%	$	30,702					7.81	%	$	31,592
Interest expense/Interest Earning Assets				2.59	%		11,622					3.68	%		14,900
Net Interest Margin				4.25	%	$	19,080					4.13	%	$	16,692

(1) The amounts are reflected on a fully tax equity basis using the federal statutory rate of 34% in 2002 and 2001, adjusted for certain tax preferences

(2) 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 in not material.

12

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

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 primary subsidiary County National Bank (the “Bank”) provides financial services to individuals and businesses within the Bank’s market area made up of the west central Pennsylvania counties of Clearfield, Cambria, Centre, Elk, Jefferson, and McKean. County National Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (“OCC”).

The market area that County National Bank operates in is rural in nature. The customer makeup consists of small business and individuals. The health of the economy in the region is mixed with unemployment rates running high in our market area except Centre County.

OVERVIEW OF BALANCE SHEET

Total assets have grown 11.4% since year-end 2001 to $660.6 million. The growth has occurred in all areas of the balance sheet. The following comments will further explain the details of the asset fluctuation.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled $29,976,000 at September 30, 2002 compared to $19,391,000 on December 31, 2001. This increase resulted from continued increases in consumer deposit accounts. The Corporation continues to focus on reducing the cash balance into higher yielding earning assets during the year.

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

SECURITIES

Securities increased $36.0 million or 23.5% since December 31, 2001. A major portion of the increase resulted from an opportunity to borrow money from the Federal Home Loan Bank and invest in $20 million of state and municipal bonds having similar duration. As previously mentioned, the increase in cash has been fairly dramatic during 2002. The focus has been to get these cash equivalents into higher yielding assets as opportunities occur. In addition to the $20.0 million borrowed, approximately $16.0 million of cash equivalents have been placed into the securities portfolio.

Also, contributing to the increase was a change in the fair market valuation of the bond portfolio. In a declining interest rate environment, bond prices generally increase. This increase gave the Corporation an unrealized gain of $5.0 million, an increase of $3.5 million over year-end. The Corporation generally buys into the market over time and does not attempt to “time” its transactions. In using this approach, the highs and lows of the market are averaged into the portfolio and minimize the overall effect of different rate environments.

Management monitors the earnings performance and the effectiveness of the liquidity of the securities portfolio on a regular basis through Asset / Liability Committee (“ALCO’) meetings. The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management

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and analysis of the securities portfolio, the Corporation maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers.

LOANS

The Corporation’s loan demand was strong during the first nine months of 2002. The Corporation’s lending is focused in the west central Pennsylvania market and consists principally of retail lending, which includes single-family residential mortgages and other consumer lending, and commercial lending primarily to locally owned small businesses.

At September 30, 2002, the Corporation had $407,035,000 in loans and leases outstanding, net of unearned discount, an increase of $20,862,000 or 5.4% since December 31, 2001. The increase was caused by demand in commercial loans, including commercial mortgages. The Corporation has opened a loan production office in Cambria County to expand our abilities to lend primarily to commercial businesses. This office will primarily serve Cambria, Blair and Centre counties.

ALLOWANCE FOR LOAN AND LEASE LOSSES

The allowance for loan and lease losses as a percentage of loans increased from 1.06% at December 31, 2001 to 1.15% at September 30, 2002. The dollar amount of the reserve increased $587,000 since year-end 2001. The increase is a result of the provision of $1,260,000 expensed during the nine months less net charge-offs. The net charge-offs for the first nine months of 2002 totaled $673,000 compared to $688,000 for the same period of 2001. Increases in the provision were deemed necessary to cover the increase in loans, as well as, the loan production office focus on commercial and commercial real estate, which has contributed to a shift in our portfolio mix. Also, the overall health of the economy is not positive.

The adequacy of the allowance for loan and lease losses is subject to a formal analysis by the loan review staff of the Bank and is deemed to be adequate to absorb probable losses in the portfolio as of September 30, 2002. The Corporation has disclosed in its annual report on Form 10-K the process and methodology supporting the loan loss provision.

Management continues to closely monitor loan delinquency and loan losses. Non-performing assets, which include loans 90 or more days past due, non-accrual loans, and other real estate owned were $2,758,000 or 0.68% of total loans on September 30, 2002 compared to $2,098,000 or 0.54% on December 31, 2001.

FUNDING SOURCES

The Corporation considers deposits, short-term borrowings, and term debt when evaluating funding sources. Traditional deposits continue to be the main focus for source of funds in the Corporation reaching $539,891,000 at September 30, 2002. Deposits increased 6.6% since year-end 2001 primarily resulting from a major marketing strategy focusing on retail consumer customers as well as a general lack of consumer confidence in the economy which has pulled consumer savings dollars from mutual funds and stocks to bank deposits. The marketing strategy includes direct mailing offering consumers a free checking product as well as the offering of several new certificate of deposit products.

The Corporation utilizes term borrowings from the Federal Home Loan Bank (FHLB) to meet funding needs not accommodated by deposit growth. During 2002, the Corporation borrowed $20,000,000 to take advantage of opportunities existing in the bond market. Management plans to maintain access to short and long-term FHLB borrowings as an appropriate funding source. In addition, the Corporation issued $10,000,000 as part of a pooled trust preferred security. This debt issuance allowed the Corporation to provide additional capital to its subsidiary, County National Bank. The Bank needed the capital to fund its strong growth in recent periods as well as expected growth over the next several years.

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SHAREHOLDERS’ EQUITY

The Corporation’s capital continues to provide a base for profitable growth. Total shareholders’ equity was $60,813,000 at September 30, 2002 compared to $54,894,000 at December 31, 2001 an increase of $5,919,000 or 10.8%. In the first nine months of 2002, the Corporation earned $6,311,000 and declared dividends of $2,766,000, a dividend payout ratio of 43.9% of net income.

The securities in the Corporation’s portfolio are classified as available for sale making the Corporation’s balance sheet more sensitive to the changing market value of investments. Interest rates in the first nine months of 2002 have declined dramatically. This situation has caused a fairly significant increase of $2,331,000 in accumulated other comprehensive income, included in stockholders’ equity, since December 31, 2001.

The Corporation has also complied with the standards of capital adequacy mandated by the banking regulators. Bank regulators have established “risk-based” capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets), is assigned to each asset on the balance sheet. The Corporation’s total risk-based capital ratio of 13.04% at September 30, 2002 is above the well-capitalized standard of 10%. The Corporation’s Tier 1 capital ratio of 12.02% is above the well-capitalized minimum of 6%. The leverage ratio at September 30, 2002 was 8.66%, also above the well-capitalized standard of 5%. The Corporation is well capitalized as measured by the federal regulatory agencies. The ratios provide quantitative data demonstrating the strength and future opportunities for use of the Corporation’s capital base. Management continues to evaluate risk-based capital ratios and the capital position of the Corporation as part of its strategic decision making process.

LIQUIDITY AND INTEREST RATE SENSITIVITY

Liquidity measures an organizations’ ability to meet cash obligations as they come due. The Consolidated Statement of Cash Flows presented on page 7 of the accompanying financial statements provides analysis of the Corporation’s cash and cash equivalents. Additionally, management considers that portion of the loan and investment portfolio that matures within one year as part of the Corporation’s liquid assets. The Corporation’s liquidity is monitored by the ALCO Committee, which establishes and monitors ranges of acceptable liquidity. Management feels the Corporation’s current liquidity position is acceptable.

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RESULTS OF OPERATIONS

OVERVIEW OF THE INCOME STATEMENT

The Corporation had net income of $2,288,000 and $6,311,000 for the third quarter and first nine months of 2002, respectively. The earnings per diluted share for the respective periods were $0.63 and $1.73. Net income was $1,735,000 and $4,620,000 for the third quarter and first nine months of 2001, which equates to earnings per diluted share of $0.47 and $1.26, respectively. The return on average assets and the return on average equity for the nine months of 2002 are 1.32% and 14.50%.

INTEREST INCOME AND EXPENSE

Net interest income totaled $6,352,000 in the third quarter, an increase of 16.7% over the third quarter of 2001 and totaled $18,091,000 for the nine months of 2002, an increase of 13.3% compared to the prior year. Total interest income decreased during the quarter by $169,000 or 1.7% while interest expense decreased by $1,076,000 or 22.5% when compared to the third quarter of 2001. The decrease in interest income is a result of lower yields, 97 basis points, on earning assets caused by an overall decline in interest rates in the United States since June of 2001. As mentioned earlier, the rapid growth in deposits has not all been placed into higher yielding assets. Thus much of these funds are in lower yielding federal funds. Interest expense has declined significantly since the Corporation has adjusted deposit pricing to reflect the declining market rates.

PROVISION FOR LOAN LOSSES

The Corporation recorded a provision for loan and lease losses in the third quarter of $540,000 compared to the third quarter of 2001 of $270,000 and $1,260,000 for the nine months of 2002 compared to $810,000 in 2001. Increases in the provision are deemed necessary to adequately reserve for the increase in loans outstanding of $20,862,000 and the shift in the portfolio towards commercial lending. While the Corporation has maintained its sound underwriting, the shift to move commercial lending with some outside our normal market area brings the possibility of more risk. Based on managements’ evaluation of problem loans, increased charge-offs, expected growth in the loan portfolio and the overall effects of the economy, management’s analysis indicates that the allowance provision appears to be adequate.

NON-INTEREST INCOME

Non-interest income decreased $152,000 (-9.1%) and increased $467,000 (11.5%) in the third quarter and nine months of 2002, respectively, when compared to the same periods in 2001. The decrease in the quarter results from a gain on sale of securities in 2001 of $258,000 with a corresponding loss in 2002 of $13,000. Increased deposit account service charges have been the primary source of the growth in non-interest income during the year. In the nine months, account service charges totaled $2,526,000 up $488,000 or 23.9% over last year. The increases in fee income were mainly derived from a new service that began in April 2001 and took approximately eight months to mature. This service provides customers with the assurance of having their checks paid and not returned when funds are not sufficient in their account. Also during 2002, income derived from the sale of mortgages is higher due to continued low mortgage rates and high levels of refinancing.

NON-INTEREST EXPENSE

Non-interest expense decreased $125,000 or 2.8% during the third quarter of 2002 and $120,000 or 0.9% in the nine months of 2002 when compared to the same periods in 2001. The decrease is attributable to SFAS No. 147 an accounting rule regarding accounting for goodwill and the related amortization expense. After adoption of the statement, the Corporation reduced amortization expense by $1,079,000 through nine months and $360,000 for the quarter.

RETURN ON ASSETS

For the nine months ended September 30, 2002, the Corporation’s return on average assets (“ROA”) totaled 1.32% up from the 1.06% recorded in 2001.

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RETURN ON EQUITY

The Corporation’s return on average shareholder’s equity (“ROE”) in the first nine months was 14.50% compared to 11.54% for 2001. The increase can be attributed to the Corporation’s improvement in core earnings. The continued increase in assets without adding additional capital will provide the shareholders more earnings from virtually the same capital base.

FEDERAL INCOME TAX EXPENSE

Federal income tax expense was $684,000 in the third quarter of 2002 compared to $627,000 in the third quarter of 2001. For the nine-month period comparisons, the federal tax expense was $2,098,000 in 2002 and $1,524,000 in 2001. These increases are the result of higher taxable earnings in both the third quarter and first nine months of 2002.

FUTURE OUTLOOK

Year-to-date core earnings improved when compared to the prior year and were consistent with management’s expectations. Management continues to focus on strong internal growth generated by increased market share, as well as, development of new markets via a loan production office that is serving several counties previously not in our market. The objective of this growth in earning assets and net income is increased shareholder value from future dividends and capital accumulation from retained earnings.

Loan demand was strong during the first nine months of 2002 and is anticipated to continue through the last quarter. Loan growth for the full year of 2002 is anticipated to be over 5% compared to yearend 2001. While loan growth is expected to continue, it may not keep pace with deposit growth, which increased at an annualized rate of 6.6% during the first half of 2002. As a result, we have implemented the previously mentioned plan to expand our commercial loan market into additional counties to help deploy these additional funds.

Consumer loan charge-offs in the third quarter continued to comprise the majority of the Corporation’s recent charge-offs. In the first nine months, total net charge-offs were $673,000 of which consumer net charge-offs totaled $406,000. The charge-off level for the remainder of 2002 is expected to remain constant when compared to the first nine months of 2002.

Enhanced non-interest income and controlled non-interest expense are important factors in the success of the Corporation and is measured in the financial services industry by the efficiency ratio, calculated according to the following: non-interest expense (less amortization of intangibles) as a percentage of fully tax equivalent net interest income and non-interest income (less non-recurring income). For the nine months ended September 30, 2002, the Corporation’s efficiency ratio was 52.46% compared to 57.08% for the same period last year.

The efficiency ratio improved as the level of non-interest income has increased and non-interest expense has decreased over the year. Management believes controlling the operating costs of the Corporation is imperative to the future increased profitability derived from core earnings. A strong focus by management continues to be placed on non-interest expenses during the remainder of 2002.

The interest rate environment will continue to play an important role in the future earnings of the Corporation. The net interest margin has remained the central focus of management as competitive pressures in the form of reduced lending rates along with the search for low cost deposits has created pressure to the margin for the industry. The Corporation has been able to increase the margin slightly. This occurrence has been aided by the sharp steepening in the yield curve. Management expects further growth in interest income coupled with managed interest costs to provide the Corporation with improved net interest income for the remainder of 2002.

Management concentrates on return on average equity and earnings per share valuations, plus other methods, to measure and direct the performance of the Corporation. While past results are not an indication

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of future earnings, management feels the Corporation is positioned to enhance performance of normal operations through the remainder of 2002.

“SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements contained in the report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” “estimate” or “projected” and similar expressions as they relate to CNB Financial Corporation or its management are intended to identify such forward looking statements. CNB Financial Corporation’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.

ITEM 3

QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the course of conducting business activities, the Corporation is exposed to market risk, principally interest rate risk, through the operation of the Bank. Interest rate risk arises from market driven fluctuations in interest rates, which affect cash flows, income, expense and values of all financial instruments. Management and the ALCO Committee of the Board monitor the Corporation’s interest rate risk position. No material changes have occurred during the period in the Bank’s market risk strategy or position, a discussion of which can be found in the SEC Form-10K filed for the period ended December 31, 2001.

ITEM 4

CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing date of this report, an evaluation was carried out under the supervision and with the participation of the Corporation’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14^© and 15d-14^© under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Corporation’s in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in the Corporation’s internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS - None
ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4.	SUBMISSION OF MATTERS FOR SECURITY HOLDERS VOTE - None
ITEM 5.	OTHER INFORMATION - None
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K –

A Form 8-K was filed on September 25, 2002 announcing that CNB Financial Corporation and its wholly owned subsidiary, County National Bank, upon receipt of the executed agreement on September 24, 2002, announced the following in regards to pending litigation. On July 30, 2002, the United States District Court for the Western District of Pennsylvania entered an order dismissing an action filed by Penn Laurel Financial Corporation and CSB Bank as plaintiffs against CNB Financial Corporation, County National Bank, Omega Financial Corporation, Tucker Arensberg, P.C., Sherwood C. Moody, Timothy A. Anonick, Anonick Financial Corporation, and Clearfield Bank & Trust Company as defendants. Following the dismissal of the federal action, Penn Laurel, CSB and defendants entered into an agreement on August 27, 2002 in order to settle the disputes that had arisen under merger agreements between Penn Laurel and Clearfield dated December 31, 1998. As a result of the August 27, 2002 agreement, all state and federal litigation concerning the proposed merger of Clearfield and Penn Laurel has been terminated without any loss payment by any party.

SIGNATURES

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

		CNB FINANCIAL CORPORATION (Registrant)
DATE:	November 13, 2002	/s/    William F. Falger
		William F. Falger President and Director (Principal Executive Officer)
DATE:	November 13, 2002	/s/    Joseph B. Bower, Jr.
		Joseph B. Bower, Jr. Treasurer (Principal Financial Officer) (Principal Accounting Officer)

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CERTIFICATION

I, William F. Falger, certify:

1.  That I have reviewed the quarterly report on Form 10-Q for CNB Financial Corporation;

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statement were made, not misleading with respect to the period covered by this quarterly report.

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this quarterly report.

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b.)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c.)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a.)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b.)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/   WILLIAM F. FALGER

William F. Falger

President and Director

(Principal Executive Officer)

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CERTIFICATION

I, Joseph B. Bower, Jr. certify:

1.  That I have reviewed the quarterly report on Form 10-Q for CNB Financial Corporation;

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statement were made, not misleading with respect to the period covered by this quarterly report.

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this quarterly report.

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b.)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c.)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a.)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b.)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/   JOSEPH B. BOWER, JR.

Joseph B. Bower, Jr.

Treasurer

(Principal Financial Officer)

(Principal Accounting Officer)

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CERTIFICATE

As required by 18 U.S.C. 1350, the undersigned certify that this Report on Form 10-Q fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report on From 10-Q fairly presents, in all material respects, the financial condition and results of operations of the registrant.

/s/    William F. Falger

William F. Falger

President and Director

(Principal Executive Officer)

Dated: November 13, 2002

CERTIFICATE

As required by 18 U.S.C. 1350, the undersigned certify that this Report on Form 10-Q fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended, and that the information contained in this Report on From 10-Q fairly presents, in all material respects, the financial condition and results of operations of the registrant.

/s/    Joseph B. Bower, Jr.

Joseph B. Bower, Jr.

Treasurer

(Principal Financial Officer)

(Principal Accounting Officer)

Dated: November 13, 2002

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