[CNB LOGO]
1999 ANNUAL REPORT
FINANCIAL SECTION
TABLE OF CONTENTS
1 Report of Independent Auditors
2 Consolidated Statements of Condition
3 Consolidated Statements of Income
4 Consolidated Statements of Cash Flows
5 Consolidated Statements of Changes in Shareholders' Equity
6 Notes to Consolidated Financial Statements
18 Selected Financial Data - Five Year Comparison
20 Maturity Distribution of Balance Sheet
20 Quarterly Summary of Earnings
21 Management Discussion and Analysis
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
CNB Financial Corporation
We have audited the accompanying consolidated statements of condition of CNB
Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of CNB Financial Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1998 and 1997 financial
statements of The First National Bank of Spangler, a wholly-owned subsidiary
acquired in 1999, which statements reflect total assets constituting 6.8% in
1998, and total revenues constituting 6.0% in 1998 and 6.6% in 1997 of the
related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, in so far as it relates
to data included for The First National Bank of Spangler, is based solely on the
report of other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of CNB Financial Corporation and
subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
February 15, 2000
Pittsburgh, Pennsylvania
1
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Consolidated Statements of Condition
(in thousands, except share data) December 31
-------------------------
Assets 1999 1998
--------- --------
Cash and due from banks $ 20,893 $ 11,082
Interest bearing deposits with other banks 321 256
Federal funds sold -- 14,755
Loans held for sale 2,381 4,299
Investment securities available for sale 136,945 105,808
Investment securities held to maturity, fair value of $6,652 at
December 31, 1999 and $8,052 at December 31, 1998 6,618 7,867
Loans and leases 367,711 315,711
Less: unearned discount 4,947 4,570
Less: allowance for loan and lease losses 3,890 3,314
--------- --------
NET LOANS 358,874 307,827
Premises and equipment, net 12,854 10,670
Accrued interest receivable 3,463 2,627
Intangible assets, net 15,899 2,522
Other assets 2,914 1,204
--------- --------
TOTAL ASSETS $561,162 $468,917
========= ========
Liabilities
Deposits:
Non-interest bearing deposits $ 54,891 $ 38,970
Interest bearing deposits 445,860 359,112
--------- --------
TOTAL DEPOSITS 500,751 398,082
Other borrowings 6,750 16,378
Accrued interest and other liabilities 6,018 5,083
--------- --------
TOTAL LIABILITIES 513,519 419,543
--------- --------
Shareholders' Equity
Common stock $1.00 par value for 1999 and 1998
Authorized 10,000,000 shares for 1999 and 1998
Issued 3,693,500 shares for 1999 and 1998 3,694 3,694
Additional paid in capital 3,717 3,693
Retained earnings 42,278 40,571
Treasury stock, at cost (29,191 shares for 1999 and 11,106 shares for 1998). (715) (112)
Accumulated other comprehensive income (1,331) 1,528
--------- --------
TOTAL SHAREHOLDERS' EQUITY 47,643 49,374
--------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $561,162 $468,917
========= ========
The accompanying notes are an integral part of these statements
2
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Consolidated Statements of Income
(in thousands, except per share data) Year ended December 31,
-----------------------------------------------
1999 1998 1997
------- -------- --------
Interest and Dividend Income
Loans including fees $28,148 $25,250 $23,208
Deposits with banks 60 12 1
Federal funds sold 386 369 271
Investment securities:
Taxable 4,665 4,101 3,488
Tax-exempt 1,888 1,414 1,307
Dividends 264 230 176
------- -------- --------
TOTAL INTEREST AND DIVIDEND INCOME 35,411 31,376 28,451
Interest Expense
Deposits 15,579 13,714 12,459
Borrowed funds 981 934 430
------- -------- --------
TOTAL INTEREST EXPENSE 16,560 14,648 12,889
------- -------- --------
Net interest income 18,851 16,728 15,562
Provision for loan losses 643 707 931
------- -------- --------
Net interest income after provision for loan losses 18,208 16,021 14,631
Other Income
Trust & asset management fees 797 758 612
Service charges - deposit accounts 1,703 1,211 978
Other service charges and fees 468 469 467
Realized security gains 36 350 529
Gain on sale of loans 73 31 26
Other 440 269 137
------- -------- --------
TOTAL OTHER INCOME 3,517 3,088 2,749
Other Expenses
Salaries 5,689 5,149 4,778
Employee benefits 1,929 1,577 930
Net occupancy expense of premises 2,056 1,822 1,748
Data processing 1,145 801 788
Amortization 1,072 329 315
Other 3,770 2,553 2,478
------- -------- --------
TOTAL OTHER EXPENSES 15,661 12,231 11,037
------- -------- --------
Income before income taxes 6,064 6,878 6,343
Applicable income taxes 1,460 1,835 1,648
------- -------- --------
Net income $ 4,604 $ 5,043 $ 4,695
======= ======== ========
EARNINGS AND DIVIDENDS*
Net income $ 1.26 $ 1.37 $ 1.27
Net income, fully diluted $ 1.25 $ 1.37 $ 1.27
Cash dividends per share $ 0.80 $ 0.72 $ 0.68
* 1998 and 1997 per share data are restated to reflect the 2 for 1 stock split
effective April 30, 1998
The accompanying notes are an integral part of these statements
3
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Consolidated Statements of Cash Flows
(in thousands) Year ended December 31,
--------------------------------------------
1999 1998 1997
-------- -------- --------
Cash Flows from Operating Activities:
Net income $ 4,604 $ 5,043 $ 4,695
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses 643 707 931
Depreciation and amortization 2,036 1,201 1,123
Amortization and accretion of deferred loan fees 61 (70) (580)
Deferred taxes 611 1,365 766
Security gains (36) (350) (529)
Gain on sale of loans (73) (31) (26)
Net losses (gains) on dispositions of acquired property 19 (98) --
Changes in:
Proceeds from sales of loans 13,914 15,977 3,175
Origination of loans for sale (11,923) (18,728) (3,583)
Interest receivable (823) (237) (40)
Other assets and intangibles (2,086) (278) (484)
Interest payable 517 1 270
Other liabilities 1,190 210 (281)
-------- -------- --------
Net cash provided by operating activities 8,654 4,712 5,437
Cash Flows from Investing Activities:
Proceeds from maturities of:
Securities held to maturity 2,325 6,322 5,235
Securities available for sale 26,035 25,566 15,098
Proceeds from sales of securities available for sale 17,513 4,888 5,925
Purchase of securities available for sale (79,392) (66,089) (22,102)
Net principal disbursed on loans (51,057) (24,850) (42,714)
Purchase of Federal Reserve Bank Stock and
Federal Home Loan Bank Stock (1,269) (499) (39)
Acquisitions, net of cash received (14,382) -- --
Purchase of premises and equipment (3,148) (2,306) (268)
Proceeds from the sale of foreclosed assets 277 192 18
-------- -------- --------
Net cash used in investing activities (103,098) (56,776) (38,847)
Cash Flows from Financing Activities:
Net change in:
Checking, money market and savings accounts 20,597 49,617 (1,372)
Certificates of deposit 82,072 2,706 50,013
Net acquisition of treasury stock (579) -- --
Cash dividends paid (2,897) (2,588) (2,430)
Net advances (repayments) from other borrowings (9,628) 8,307 (6,585)
-------- -------- --------
Net cash provided by financing activities 89,565 58,042 39,626
Net increase (decrease) in cash and cash equivalents (4,879) 5,978 6,216
Cash and cash equivalents at beginning of year 26,093 20,115 13,899
-------- -------- --------
Cash and cash equivalents at end of period $ 21,214 $ 26,093 $ 20,115
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to
certificate accounts) $ 17,077 $ 14,649 $ 13,159
Income taxes 2,125 755 1,359
Noncash Investing Activities
(Decrease) increase in net unrealized gain on
securities available for sale $ (2,859) $ 324 $ 538
The accompanying notes are an integral part of these statements
4
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Consolidated Statements of Changes
in Shareholders' Equity
(in thousands, except per share data)
Accumulated
Additional Other Total
Paid-In Retained Treasury Comprehensive Stockholders'
Common Stock Capital Earnings Stock Income Equity
--------------------------------------------------------------------------------
Balance January 1, 1997 $ 7,387 $ -- $35,851 $(100) $ 666 $43,804
Comprehensive income:
Net income for 1997 4,695 4,695
Net change in unrealized gains
on available for sale securities,
net of taxes of $276 and adjustment
for gains of $349 538 538
-------
Total comprehensive income 5,233
-------
Cash dividends declared (2,430) (2,430)
($0.68 and $0.36 per share, CNB and
Spangler, respectively)
--------------------------------------------------------------------------------
Balance December 31, 1997 7,387 -- 38,116 (100) 1,204 46,607
Comprehensive income:
Net income for 1998 5,043 5,043
Net change in unrealized gains
on available for sale securities,
net of taxes of $164 and adjustment
for gains of $231 324 324
-------
Total comprehensive income 5,367
-------
Issued 2 for 1 stock split (3,693) 3,693
Purchase of treasury stock
(774 shares) (12) (12)
Cash dividends declared (2,588) (2,588)
($0.72 and $0.45 per share, CNB and
Spangler, respectively)
--------------------------------------------------------------------------------
Balance December 31, 1998 3,694 3,693 40,571 (112) 1,528 49,374
Comprehensive income:
Net income for 1999 4,604 4,604
Net change in unrealized losses
on available for sale securities,
net of taxes of $1,473 and adjustment
for gains of $24 (2,859) (2,859)
-------
Total comprehensive income 1,745
-------
Treasury stock:
Purchase (19,600 shares) (617) (617)
Reissue (1,515 shares) 24 14 38
Cash dividends declared (2,897) (2,897)
($0.80 and $0.26 per share, CNB and
Spangler, respectively)
-------------------------------------------------------------------------------
Balance December 31, 1999 $ 3,694 $3,717 $42,278 $(715) $(1,331) $47,643
===============================================================================
The accompanying notes are an integral part of these statements.
5
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization:
CNB Financial Corporation (the "Corporation"), is headquartered in Clearfield,
Pennsylvania, and provides a full range of banking and related services through
its wholly owned subsidiary, County National Bank (the "Bank"). The Bank also
provides trust services, including the administration of trusts and estates,
retirement plans, and other employee benefit plans. The Bank serves individual
and corporate customers and is subject to competition from other financial
institutions and intermediaries with respect to these services. The Corporation
is also subject to examination by Federal regulators. The Corporation's market
area is in the central region of the state of Pennsylvania.
Basis of Financial Presentation:
The financial statements are consolidated to include the accounts of the
Corporation and its subsidiaries, County National Bank and CNB Investment
Corporation. These statements have been prepared in accordance with accounting
principles generally accepted in the United States. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results will differ from those estimates and such differences may be
material.
Operating Segments:
FAS No.131 requires disclosures about an enterprise's operating segments in
financial reports issued to shareholders. The Statement defines an operating
segment as a component of an enterprise that engages in business activities that
generate revenue and incur expense, and the operating results of which are
reviewed by the chief operating decision maker in the determination of resource
allocation and performance. The Corporation's business activities are currently
confined to one segment which is community banking.
Investment Securities:
When purchased, investments are classified as held to maturity, trading or
available for sale securities. Debt securities are classified as held to
maturity when the Corporation has the positive intent and ability to hold the
securities to maturity. Held to maturity securities are stated at amortized
cost. Debt or equity securities are classified as trading when purchased
principally for the purpose of selling them in the near term. Available for sale
securities are those securities not classified as held to maturity or trading
and are carried at their fair market value. Unrealized gains and losses, net of
tax, on securities classified as available for sale are recorded as other
comprehensive income. Unrealized gains and losses on securities classified as
trading are included in other income. Management has not classified any debt or
equity securities as trading.
The amortized cost of debt securities classified as held to maturity or
available for sale is adjusted for the amortization of premiums and the
accretion of discounts over the period through contractual maturity or, in the
case of mortgage-backed securities and collateralized mortgage obligations, over
the estimated life of the security. Such amortization is included in interest
income from investments. Realized gains and losses and declines in value judged
to be other than temporary are included in other income. The cost of securities
sold is based on the specific identification method.
Loans:
Interest income with respect to loans and leases is accrued on the principal
amount outstanding, except on certain installment loans on which interest income
is recognized over their terms using methods which approximate level yields. The
Bank discontinues the accrual of interest when, in the opinion of management,
there exists doubt as to the ability to collect such interest. Loan fees and
certain direct origination costs are deferred and the net amount amortized as an
adjustment to the related loan interest income yield over the terms of the
loans.
Direct Lease Financing:
Financing of equipment, principally consisting of automobiles, is provided to
customers under lease arrangements accounted for as direct financing leases.
These leases are reported in the consolidated statements of condition under the
loan caption as a net amount, consisting of the aggregate of lease payments
receivable and estimated residual values, less unearned income. Income is
recognized in a manner which results in an approximate level yield over the
lease term.
Allowance for Loan and Lease Losses:
The allowance for loan and lease losses is established through provisions for
loan losses which are charged against income. Loans which are deemed to be
uncollectible are charged against the allowance account. Subsequent recoveries,
if any, are credited to the allowance account.
Management determines the adequacy of the reserves based on historical patterns
of charge-offs and recoveries, industry experience, and other qualitative
factors relevant to the collectability of the loan portfolio. While management
believes that the allowance is adequate to absorb estimated potential loan
losses, future adjustments may be necessary due to circumstances that differ
substantially from the assumptions used in evaluating the adequacy of the
allowance for loan losses.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation of premises and equipment is computed principally by the straight
line method over the estimated useful lives of the various classes of assets.
6
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements (Continued)
Amortization of leasehold improvements is computed using the straight-line
method over useful lives of the leasehold improvements or the term of the lease,
whichever is shorter. Maintenance, repairs and minor renewals are charged to
expense as incurred.
Other Assets:
Other assets include real estate acquired through foreclosure or in settlement
of debt and is stated at the lower of the carrying amount of the indebtedness or
fair market value, net of selling costs. The property is evaluated regularly and
any decreases in the carrying amount are charged to expense.
Intangibles:
Intangible assets represent the present value of future net income to be earned
from deposits and are being amortized on an accelerated basis over a ten year
period. The excess of cost over the fair value of net assets acquired (goodwill)
is being amortized on a straight-line basis over a period of ten years.
Income Taxes:
The Corporation files a consolidated U. S. income tax return. Deferred taxes are
recognized for the expected future tax consequences of existing differences
between the financial reporting and tax reporting bases of assets and
liabilities using enacted tax laws and rates.
Mortgage Servicing Rights (MSR's):
Mortgage servicing assets are recognized as separate assets when servicing
rights are acquired through purchase or loan originations, when there is a
definitive plan to sell the underlying loan. Capitalized MSR's are reported in
other assets and are amortized into noninterest income in proportion to, and
over the period of, the estimated future net servicing income of the underlying
mortgage loans. Capitalized MSR's are evaluated for impairment based on the fair
value of those rights. Mortgage loans held for sale are separately classified
and carried at the lower of cost or estimated fair value. The MSR's recognized,
$168,000 in 1999 and $98,000 in 1998, are included in other assets.
Treasury Stock:
The purchase of the Corporation's common stock is recorded at cost. At the date
of subsequent reissue, the treasury stock account is reduced by the cost of such
stock on a first-in-first-out basis.
Stock Options:
FAS No. 123 defines a fair value-based method of accounting for stock-based
employee compensation plans. Under the fair value-based method compensation cost
is measured at the grant date based upon the value of the award and is
recognized over the service period. The standard encourages all entities to
adopt this method of accounting for all employee stock compensation plans.
However, it also allows an entity to continue to measure compensation costs for
its plans as prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Since the Corporation has elected to
use the accounting in ABP No. 25, pro forma disclosures of net income and
earnings per share are made as if the fair value method of accounting, as
defined by FAS No. 123, had been applied.
Comprehensive Income:
The Corporation presents comprehensive income as part of the Statement of
Changes in Stockholders' Equity. Other comprehensive income (losses) are
comprised exclusively of unrealized holding gains (losses) on the available for
sale securities portfolio.
Earnings per Share:
Basic earnings per share is determined by dividing net income by the weighted
average number of shares outstanding. Diluted earnings per share is determined
by dividing net income by the weighted average number of shares outstanding
increased by the number of shares that would be issued assuming the exercise of
stock options.
Cash and Cash Equivalents:
For purposes of the consolidated statement of cash flows, the Corporation
defines cash and cash equivalents as cash and due from banks, and Federal funds
sold.
New Accounting Standards:
Accounting for Derivative Instruments
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement provides for potential of investment
reclassification out of the held-to-maturity category. As amended by FAS No.
137, the standard is effective for fiscal years beginning after June 15, 2000
with earlier adoption permitted. The effect of this standard will depend upon
the nature and extent of derivative instruments in place at the time of
adoption. The Corporation had no derivative instruments as of December 31, 1999.
Reclassifications:
Certain prior year amounts have been reclassified for comparative purposes.
7
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements (Continued)
2. EARNINGS PER SHARE
Earnings per share (EPS) is calculated on the weighted average number of common
shares outstanding during the year. Currently a dual presentation of basic and
diluted EPS is required. The computation of basic and diluted EPS is shown
below:
Years Ended December 31
1999 1998 1997
-------- --------- ----------
Net income applicable to common stock $ 4,604 $ 5,043 $ 4,695
Weighted-average common shares outstanding 3,665 3,682 3,682
-------- --------- ----------
Basic earnings per share $ 1.26 $ 1.37 $ 1.27
-------- --------- ----------
Net income applicable to common stock $ 4,604 $ 5,043 $ 4,695
-------- --------- ----------
Weighted-average common shares outstanding 3,665 3,682 3,682
Common stock equivalents
due to effect of stock options 6 -- --
-------- --------- ----------
Total weighted-average common
shares and equivalents 3,671 3,682 3,682
-------- --------- ----------
Diluted earnings per share $ 1.25 $ 1.37 $ 1.27
======== ========= ==========
3. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of these reserve balances for the year ended
December 31, 1999, was approximately $4,343,000, which was maintained in vault
cash.
4. INVESTMENT SECURITIES
Investment securities at December 31, 1999 and 1998 were as follows (in
thousands):
December 31, 1999 December 31, 1998
------------------------------------ -----------------------------------------------
Unrealized Unrealized
Amortized -------------- Market Amortized ----------------- Market
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------ -----------------------------------------------
Securities available for sale:
U.S. Treasury $ 24,127 $ 1 $ 156 $ 23,972 $ 14,117 $ 160 $ -- $ 14,277
U.S. Government agencies
and corporations 27,867 -- 221 27,646 11,730 71 4 11,797
Obligations of States and
Political Subdivisions 35,822 151 1,111 34,862 33,721 1,013 -- 34,734
Other Debt Securities 47,923 116 1,145 46,894 40,081 304 184 40,201
Marketable Equity Securities 3,221 622 272 3,571 3,845 1,069 115 4,799
------------------------------------ -----------------------------------------------
Total securities available for sale $138,960 $ 890 $2,905 $136,945 $103,494 $2,617 $303 $105,808
==================================== ===============================================
Securities to be held to maturity:
Obligations of States and
Political Subdivisions $ 2,744 $ 40 $ 1 $ 2,783 $ 4,073 $ 152 $ -- $ 4,225
Other Debt Securities 999 -- 5 994 2,003 33 -- 2,036
Restricted Equity Securities 2,875 -- -- 2,875 1,791 -- -- 1,791
------------------------------------ -----------------------------------------------
Total securities to be held to
maturity $ 6,618 $ 40 $ 6 $ 6,652 $ 7,867 $ 185 $ -- $ 8,052
==================================== ===============================================
Other debt securities include corporate notes and bonds and collateralized
mortgage obligations.
On December 31, 1999 investment securities carried at $49,858,000 were pledged
to secure public deposits and for other purposes as provided by law.
The following is a schedule of the contractual maturity of investments excluding
equity securities, at December 31, 1999 (in thousands):
Available for Sale Held to Maturity
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
1 year or less $ 17,083 $ 17,024 $1,450 $1,465
1 year-5 years 54,213 53,672 2,293 2,312
5 years-10 years 16,604 16,513 -- --
After 10 years 20,225 19,396 -- --
---------------------------- ---------------------------
108,125 106,605 3,743 3,777
---------------------------- ---------------------------
Collateralized mortgage obligations
and other asset-backed securities 27,614 26,769 -- --
---------------------------- ---------------------------
Total investment securities $135,739 $133,374 $3,743 $3,777
---------------------------- ---------------------------
8
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements (Continued)
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.
Information pertaining to security sales is as follows (in thousands):
Proceeds Gross Gains Gross Losses
-------- ----------- ------------
1999 $17,513 $124 $88
1998 4,888 351 1
1997 5,925 556 27
5. LOANS
Total Loans at December 31, 1999 and 1998 are summarized as follows (in
thousands):
1999 1998
-------- --------
Commercial, Financial and Agricultural $ 78,588 $ 66,257
Residential Mortgage 159,884 134,998
Commercial Mortgage 49,549 46,701
Installment 43,772 38,393
Lease Receivables 35,918 29,362
-------- --------
$367,711 $315,711
======== ========
Lease receivables at December 31, 1999 and 1998 are summarized as follows (in
thousands):
1999 1998
-------- --------
Lease payment receivable $ 16,494 $ 13,676
Estimated residual values 19,424 15,686
-------- --------
Gross lease receivables 35,918 29,362
Less unearned income (4,902) (4,313)
-------- --------
Net lease receivables $ 31,016 $ 25,049
======== ========
At December 31, 1999 and 1998, net unamortized loan costs of $601,000 and
$264,000, respectively, have been included in the carrying value of loans.
The Bank's outstanding loans and related unfunded commitments are primarily
concentrated within Central Pennsylvania. The Bank attempts to limit
concentrations within specific industries by utilizing dollar limitations to
single industries or customers, and by entering into participation agreements
with third parties. Collateral requirements are established based on
management's assessment of the customer.
The recorded investment in loans that are considered impaired under SFAS No. 114
was $-0- and $537,590 at December 31, 1999 and 1998, respectively. The 1998
recorded amount of impaired loans, net of a write-down, does not require an
allowance for loan losses. The average recorded investments in impaired loans
during the year ended December 31, 1999 and 1998 was $0 and $569,457,
respectively. For the year ended December 31, 1998, the Corporation recognized
accrued interest income on impaired loans of $46,488.
Deposit accounts that have overdrawn their current balance, overdrafts, are
reclassified to loans. Overdrafts included in loans are $1,691,000 in 1999 and
$533,000 in 1998.
6. ALLOWANCE FOR LOAN AND LEASE LOSSES
Transactions in the Allowance for Loan and Lease Losses for the three years
ended December 31 were as follows (in thousands):
1999 1998 1997
------ ------ ------
Balance, Beginning of Year $3,314 $3,062 $2,683
Charge-offs (616) (594) (670)
Recoveries 193 139 118
------ ------ ------
Net Charge-offs (423) (455) (552)
Provision for Loan and Lease Losses 643 707 931
Acquisition 356 -- --
------ ------ ------
Balance, End of Year $3,890 $3,314 $3,062
====== ====== ======
9
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements (Continued)
7. PREMISES AND EQUIPMENT
The following summarizes Premises and Equipment at December 31 (in thousands):
1999 1998
-------- --------
Land $ 1,527 $ 1,315
Premises and Leasehold Improvements 10,831 9,116
Furniture and Equipment 6,738 6,082
-------- --------
19,096 16,513
Less Accumulated Depreciation and Amortization (6,242) (5,843)
-------- --------
Premises and Equipment, Net $12,854 $10,670
======== ========
Depreciation on Premises and Equipment amounted to $957,000 in 1999, $872,000 in
1998, and $808,000 in 1997.
Rental expense, net of rental income, charged to occupancy expense for 1999,
1998, and 1997 was $184,000, $134,000 and $126,000, respectively.
8. INTANGIBLE
During 1999, the Corporation purchased the deposits, certain loans and the fixed
assets of five branches of super-regional competitors. In conjunction with this
transaction, the Corporation paid premiums totaling $14.4 million, which has
been identified as an intangible and is being amortized on a straight line basis
over a period of 10 years. The following table reflects the components of the
intangible assets at December 31, (in thousands):
1999 1998
--------- --------
Core deposit intangible $17,534 $3,152
Less: accumulated amortization (1,635) (630)
--------- --------
Core deposit intangible, net $15,899 $2,522
========= ========
9. DEPOSITS
The following table reflects time certificates of deposit and IRA accounts
included in total deposits and their remaining maturities at December 31, (in
thousands):
1999 1998
--------- --------
Within One Year $213,671 $141,805
Within Two Years 35,422 38,984
Within Three Years 16,454 4,864
Within Four Years 4,990 7,081
Within Five Years and Greater 12,618 2,456
--------- --------
$283,155 $195,190
========= ========
Certificates of Deposit of $100,000 or more totaled $38,029,000 and $25,929,000
at December 31, 1999 and 1998, respectively.
10. OTHER BORROWINGS
Other borrowings include $1.8 million and $359,000 of demand notes payable to
the U.S. Treasury Department at December 31, 1999 and 1998, respectively. These
notes are issued under the U.S. 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. At year end, the Bank had remaining borrowing capacity with the FHLB of
$130 million. Also, other borrowings include advances from the Federal Home Loan
Bank (FHLB) at December 31, 1999, and 1998 as follows (in thousands):
December 31,
Interest Rate Maturity 1999 1998
----------------------------------------------------
Fixed
6.75% 9/27/11 $ -- $ 569
Variable
(a) 5/23/00 -- 5,000
(b) 1/11/09 -- 450
(c) 2/4/03 -- 10,000
(d) 1/20/09 5,000 --
-------- -------
Total borrowed funds $ 5,000 $16,019
======== =======
10
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements (Continued)
(a) Interest rate floats quarterly based on the 3 month LIBOR which was 5.44% at
December 31, 1998. (b) Interest rate ranges from 5.28% to 6.51% for 1998.
(c) Interest rate is fixed for one year at which time FHLB has option to float
the interest rate based on the 3 month LIBOR +.09, the interest rate was
5.17% at December 31, 1998.
(d) Interest rate is fixed for one year at which time FHLB has option to float
the interest rate based on the 3 month LIBOR +.15, the interest rate was
4.30% at December 31, 1999.
Following are maturities of borrowed funds as of December 31, 1999 (in
thousands):
2000 $1,750
2001 --
2002 --
2003 --
2004 --
Thereafter 5,000
------
Total Borrowed Funds $6,750
======
11. INCOME TAXES
The following is a summary of the tax provision (in thousands):
1999 1998 1997
------- ------- -------
Current $ 849 $ 470 882
Deferred 611 1,365 766
------- ------- -------
Net provision for Income Taxes $1,460 $ 1,835 $1,648
======= ======= ======
The applicable portion of the current year provision related to the gains on
sales of available for sale securities is $12,000, $119,000, and $180,000 in
1999, 1998 and 1997, respectively.
The components of the net deferred tax liability as of December 31, 1999 and
1998 are as follows (in thousands):
1999 1998
------- --------
Deferred tax assets
Allowance for loan losses $1,054 $ 828
Post-retirement benefits 71 49
Intangible 68 71
Deferred compensation 94 47
Merger costs 76 --
Unrealized loss on investment securities available for sale 685 --
Other 79 --
------- --------
2,127 995
Deferred tax liabilities
Premises and equipment 380 370
Vehicle leasing 3,505 2,617
Unrealized gain on investment securities available for sale. -- 815
Other 135 --
------- --------
4,020 3,802
------- --------
Net deferred tax liability $1,893 $2,807
======= ========
The reconciliation of income tax attributable to continuing operations at the
Federal statutory tax rates to income tax expense is as follows (in thousands):
1999 % 1998 % 1997 %
------ ----- ------ ----- ------ -----
Tax at statutory rate $2,062 34.0 $2,339 34.0 $2,157 34.0
Tax exempt income, net (749) (12.3) (579) (8.4) (516) (8.1)
Other 147 2.4 75 1.1 7 0.1
------ ----- ------ ----- ------ -----
Income tax provision $1,460 24.1 $1,835 26.7 $1,648 26.0
====== ===== ====== ===== ====== =====
11
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements (Continued)
12. STOCK INCENTIVE PLAN
The Corporation has a common stock plan for key employees and independent
directors. The Stock Incentive Plan, which is administered by a 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. The plan vesting schedule is one-fourth of granted options
per year beginning one year after the grant date with 100% vested on the fourth
anniversary.
The Corporation applies 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. Had compensation cost
for the plans been determined based on the fair values at the grant dates for
awards, consistent with the method of SFAS No. 123, net income and earnings per
share for 1999 would have been adjusted to the pro forma amounts indicated
below:
Net income As reported $4,604,000
Pro forma $4,541,000
Earnings Per Share-Basic As reported $ 1.26
Pro forma $ 1.24
For purposes of the pro forma calculations above, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions for grants issued:
Dividend Yield 3.5%
Volatility 17.3%
Risk-free interest rates 6.0%
Expected option lives 6 years
A summary of the status of the common stock plans, adjusted retroactively for
the effects of stock splits, is presented below:
Weighted - average Remaining
Shares Exercise Price Contractual Life
------- ------------------ ----------------
Outstanding, at January 1, 1999 -- --
Granted 18,250 28.25 10 years
Exercised -- --
Forfeited -- --
------ ------
Outstanding, at December 31, 1999 18,250 28.25
===== ======
Options exercisable at December 31, 1999 0
Fair value of options granted during the year $ 5.21
13. EMPLOYEE BENEFIT PLANS
The Bank provides a defined contribution retirement plan that covers all active
officers and employees twenty-one years of age or older, employed by the Bank
for one year. Contributions to the plan, based on current year compensation, are
9 percent of total compensation plus 5.7 percent of the compensation in excess
of $72,600. The Corporation recognized expense of $419,000 in 1999, $405,000 in
1998, and $350,000 in 1997.
In addition, the Bank sponsors a contributory defined contribution Section
401(k) plan in which substantially all employees participate. The plan permits
employees to make pre-tax contributions which are matched by the Bank at 0.25%
for every 1% contributed up to one percent of the employee's compensation. The
Bank's contributions were $40,000, $30,000, and $30,000 in 1999, 1998, and 1997,
respectively.
12
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements (Continued)
The Corporation provides certain health care benefits for retired employees and
their qualifying dependents. The following table sets forth the change in the
benefit obligation and funded status:
December 31 1999 1998
--------- ----------
Benefit obligation at beginning of year $ 463,107 $ 430,478
Interest cost 30,102 27,981
Service cost 25,279 23,383
Actual claim expense (26,499) (7,388)
Interest on claim expense (390) (310)
Actuarial gain (57,771) (11,037)
--------- ----------
Benefit obligation at end of year $ 433,828 $ 463,107
========= ==========
December 31 1999 1998
--------- ----------
Funded status of plan $(433,828) $(463,107)
Unrecognized actuarial (gain)/loss 4,777 63,262
Unrecognized prior service cost -- --
Unrecognized transition obligation 102,838 110,183
--------- ----------
Accrued pension cost $(326,213) $(289,662)
========= ==========
December 31 1999 1998 1997
--------- ---------- ----------
Net periodic post-retirement benefit cost:
Service cost $ 25,279 $ 23,383 $ 21,737
Interest cost 29,712 27,671 26,580
Amortization of transition obligation over 21 years 8,059 8,685 9,701
--------- ---------- ----------
$ 63,050 $ 59,739 $ 58,018
========= ========== ==========
The weighted average discount rate used to calculate net periodic benefit cost
and the accrued post-retirement liability was 7.50% and 6.50% in 1999 and 1998.
The health care cost trend rate used to measure the expected costs of benefits
for 2000 is 9.0%, and 8.0% thereafter. A one percent increase in the health care
trend rates would result in an increase of $67,261 in the benefit obligation of
December 31, 1999, and would increase the service and interest costs by $10,776
in future periods. A similar one percent decrease in health care trend rates
would result in a decrease of $56,227 and $8,750 in the benefit obligation and
service and interest costs, respectively, at December 31, 1999. The presentation
above for the years 1999, 1998 and 1997 reflects a policy which grants
eligibility to these benefits to employees at least 60 years of age with 30
years of service.
14. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has transactions, including loans,
with its officers, directors and their affiliated companies. These transactions
were on substantially the same terms as those prevailing at the time for
comparable transactions with unaffiliated parties and do not involve more than
the normal risks. The aggregate of such loans totaled $4,431,000 on December 31,
1999 compared to $5,793,000 at December 31, 1998. During 1999, $20,896,000 of
new loans were made and repayments totaled $22,258,000.
The Bank entered into an operating lease with a director of the Corporation for
one year terms which can be renewed for one year. The annual lease payments were
determined based on prevailing terms in the market area. All ongoing operating
and general maintenance expenses will be the responsibility of the director.
15. REGULATORY MATTERS
The Corporation and Bank are subject to minimum capital requirements set by
Federal regulatory agencies, namely the Federal Reserve Bank and the Office of
the Comptroller of the Currency. Regulators require capital ratios of 4.0% Tier
1 capital to total risk based assets, 8.0% or more of total qualifying capital
to total risk weighted assets and total Tier 1 capital to total assets of 4.0%
for an institution to be considered adequately capitalized. The Corporation is
well capitalized while the Bank is reported as adequately capitalized under the
regulatory framework for prompt corrective action as of the most recent
notification of the regulators. There are no conditions or events since that
notification that management believes would change the Corporation's status.
13
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements (Continued)
The table below ($'s in thousands) summarizes the Corporation and Bank's
regulatory capital levels:
December 31,
Risk Based Capital 1999 1998
---------------------------------------------- ------------------------------------------------
Ratio to Ratio to
Regulatory Risk Minimum Well Regulatory Risk Minimum Well
Capital Assets Required Capitalized Capital Assets Required Capitalized
---------------------------------------------- ------------------------------------------------
Tier 1
CNB Financial Corporation $33,745 8.96% 4.0% 6.0% $45,355 14.73% 4.0% 6.0%
County National Bank 29,396 7.88% 4.0% 6.0% 36,111 11.93% 4.0% 6.0%
Tier 1 + Tier 2 Capital
CNB Financial Corporation 37,792 10.04% 8.0% 10.0% 48,669 15.81% 8.0% 10.0%
County National Bank 33,286 8.92% 8.0% 10.0% 39,425 13.02% 8.0% 10.0%
Leverage
CNB Financial Corporation 33,745 6.66% 4.0% 5.0% 45,355 10.66% 4.0% 5.0%
County National Bank 29,396 5.90% 4.0% 5.0% 36,111 8.59% 4.0% 5.0%
Failure to maintain the minimum capital level requirements can initiate
mandatory and possibly additional discretionary disciplinary actions by
regulators. In such an instance, if regulatory action was undertaken, the
results could have a direct effect on the Corporation's financial position.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of the Corporation's and the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Corporation's and the Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Certain restrictions exist regarding the ability of the Bank to transfer funds
to the Corporation in the form of cash dividends, loans or advances. Dividends
payable by the Bank to the Corporation without prior approval of the Office of
the Comptroller of the Currency (OCC) are limited to the Bank's retained net
profits for the preceding two calendar years plus retained net profits up to the
dividend declaration in the current calendar year. Retained net profits are
defined by the OCC as net income, less dividends declared during the periods
under regulatory accounting principles. As of December 31, 1999, $2.2 million of
undistributed earnings of the Bank, included in consolidated retained earnings,
was available for distribution to the Corporation as dividends, without prior
regulatory approval.
The Bank is also subject to certain restrictions under the Federal Reserve Act
which include restrictions on extensions of credit to its affiliates. Of note,
the Bank is prohibited from lending monies to the Corporation unless the loans
are secured by specific collateral. These secured loans and other regulated
transactions made by the Bank are limited in amount to ten percent of the Bank's
capital stock and surplus.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, to meet the financing needs of its customers,
the Bank enters into commitments involving financial instruments with off-
balance sheet risks. Commitments to extend credit are agreements to lend to a
customer at a future date, subject to the meeting of the contractual terms.
These commitments generally have fixed expiration dates (less than one year),
and require the payment of a fee. The Bank utilizes the same credit policies in
making these obligations as it does for on-balance-sheet instruments. The credit
risk involved in issuing these commitments is essentially the same as that
involved in extending loan facilities to customers. However, since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent actual future cash requirements
of the Bank. As of December 31, 1999, the Bank had $14.0 million of unused
credit card lines; $13.2 million of unfunded home equity lines of credit; $41.7
million in other outstanding loan commitments and $2.9 million in standby
letters of credit.
17. MERGER AND ACQUISITIONS
On August 18, 1999, the Corporation acquired The First National Bank of Spangler
("Spangler") located in Spangler, PA. The merger, which was accounted for as a
pooling of interest, was affected by issuing 237,500 shares of CNB Financial
Corporation common stock in exchange for 100% of the outstanding shares of
Spangler. After consummation of the merger, Spangler was merged into County
National Bank. All financial information has been restated to reflect the
merger.
14
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements (Continued)
The post merger combined operating results provided in the table below are
presented to show the 30 day period from September 1, through September 30, 1999
and 1998 as if the merger were in effect for both periods.
1999 1998
------ ------
Net Interest Income $1,642 $1,377
Net Income $ 408 $ 401
Net Income per common share $ 0.11 $ 0.11
The following represents unaudited selected pro forma fiancial information
regarding the effects of the transactions as though the Corporation and Spangler
had been combined for all periods presented:
CNB Spangler Combined
----- ------- --------
Six months ended June 30, 1999
Net interest income $ 8,200 $ 558 $ 8,758
Net income 2,145 135 2,280
Earnings per share 0.63 0.57 0.62
Year ended December 31, 1998
Net interest income 15,604 1,124 16,728
Net income 4,747 296 5,043
Earnings per share 1.38 1.25 1.37
Year ended December 31, 1997
Net interest income 14,383 1,179 15,562
Net income 4,302 393 4,695
Earnings per share 1.25 1.66 1.27
December 31, 1998
Assets 436,852 32,065 468,917
Liabilities 392,071 27,472 419,543
Shareholders' equity 44,781 4,593 49,374
On February 12, 1999, the Corporation acquired the Punxsutawney branch from an
unaffiliated financial institution. This acquisition included deposits of $36
million, loans of $11 million and certain fixed assets. On September 24, 1999,
the Corporation acquired the Johnsonburg, Ridgway, Bradford and Kane branches
from an unaffiliated financial institution. This acquisition included deposits
of $116.2 million, loans of $21.7 million and certain fixed assets. These
acquisitions were accounted for under the purchase method of accounting and the
Corporation recorded $14.4 million as intangible assets. The consolidated
results include the operations of the acquired branches from the date of
acquisition.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates of the Corporation's financial instruments are made at
a point in time, based on the then current market information and available
financial information about the financial instrument. Fair market values are
quoted on market prices for financial instruments where prices exist. In cases
where quoted market prices are not available, fair values are derived from
estimates using discounted cash flow techniques. Generally, market prices do not
exist for a substantial portion of the Corporation's financial instruments, and
accordingly fair value estimates are based on judgments with regard to future
cash flow expectations, perceived credit risk, interest rate risk, prepayment
risk, local and national economic conditions and other factors. The estimates
are therefore subjective and may not reflect the amount that could be realized
upon immediate sale of the instrument. Changes in certain assumptions could also
significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term Assets:
The carrying amounts reported in the statement of condition for cash and short-
term assets approximates those assets' fair values primarily due to their short-
term nature. For purposes of this disclosure only, short-term assets include due
from banks, deposits with other banks, Federal funds sold, and accrued interest
receivable.
15
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements (Continued)
Investment Securities:
The fair value of investment securities are based on quoted market prices, where
available. For equity securities for which quoted market prices are not
available, fair value has been estimated to be the securities' carrying value.
The tables in Note 3 provide greater detail for investment securities at
December 31, 1999 and 1998.
Net Loans:
For demand and variable rate commercial, consumer loans, and residential
mortgages that reprice frequently, fair values are estimated by reducing
carrying amounts by estimated credit loss factors. For fixed rate commercial,
consumer and residential mortgage loans, including nonaccrual loans, fair values
are estimated using discounted cash flow analyses, with cash flows reduced by
estimated credit loss factors and discount rates equal to interest rates
currently being offered for similar loans. Lease arrangements are not considered
financial instruments.
Deposits:
The carrying amount for noninterest-bearing demand and interest-bearing money-
market and savings deposits approximates fair values. For certificates of
deposit fair value has been estimated using discounted cash flow analyses that
apply interest rates currently being offered on certificates with similar
maturities.
Advances from the Federal Home Loan Bank:
Fair value is determined by discounting the advances using current rates of
advances with comparable maturities.
Other Borrowings:
Other borrowings consist of short-term demand notes payable to the U.S. Treasury
Department under its program of investing treasury tax and loan account balances
with depository institutions. Because of their short-term nature carrying value
is considered to be fair value.
Accrued Interest Payable:
The carrying amounts reported in the statement of condition for accrued interest
payable approximates its fair value primarily due to its short-term nature.
Standby Letters of Credit:
The fair value of letters of credit are estimated based upon the amount of
deferred fees and the creditworthiness of the counterparties.
December 31, 1999 December 31, 1998
------------------------- ------------------------
(in thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------- ------------------------
ASSETS
Cash and short-term assets $ 21,214 $ 21,214 $ 26,093 $ 26,093
Investment securities 143,563 143,597 113,675 113,860
Net Loans 327,858 325,819 282,992 288,423
LIABILITIES
Deposits 500,751 503,075 398,082 400,778
Advances from the Federal Home Loan Bank 5,000 4,999 16,019 16,093
Other Borrowings 1,750 1,750 359 359
16
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Notes to Consolidated Financial Statements (Continued)
19. PARENT COMPANY ONLY FINANCIAL INFORMATION (in thousands)
BALANCE SHEETS December 31,
1999 1998
------- ---------
ASSETS
Cash $ 52 $ 388
Investment in bank subsidiary 44,231 39,447
Investment in non-bank subsidiary 3,449 5,115
Securities-available for sale -- 4,799
Other assets 926 7
------- ---------
TOTAL ASSETS $48,658 $49,756
======= =========
LIABILITIES
Income taxes payable $ (16) $ 30
Deferred tax liability (15) 345
Other liabilities 1,046 7
------- ---------
TOTAL LIABILITIES 1,015 382
TOTAL SHAREHOLDERS' EQUITY 47,643 49,374
------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $48,658 $49,756
======= =========
STATEMENTS OF INCOME Year ended December 31,
1999 1998 1997
------- -------- -------
Dividends from:
Bank subsidiary $ 2,544 $ 3,588 $ 2,937
Non bank subsidiary 750 -- --
Securities available for sale 35 130 99
Other 62 350 542
------- -------- -------
TOTAL INCOME 3,391 4,068 3,578
------- -------- -------
EXPENSES (220) (234) (89)
INCOME BEFORE INCOME TAXES AND EQUITY
IN DISTRIBUTED NET INCOME OF SUBSIDIARY 3,171 3,834 3,489
Applicable income tax (obligation) benefit 50 (53) (166)
Equity in undistributed net income of bank subsidiary 1,919 1,251 1,372
Equity in undistributed net income of non-bank subsidiary (536) 11 --
------- -------- -------
NET INCOME $ 4,604 $ 5,043 $ 4,695
======= ======== =======
STATEMENTS OF CASH FLOWS Year ended December 31,
Cash flows from operating activities: 1999 1998 1997
------- -------- -------
Net income $ 4,604 $ 5,043 $ 4,695
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of bank subsidiary (1,919) (1,251) (1,372)
Equity in undistributed net income of non-bank subsidiary 536 (11) --
(Increase) Decrease in other assets (919) (7) 20
Increase (Decrease) in other liabilities 957 (131) 166
Gain on sale of available for sale securities -- (349) (539)
------- -------- -------
Net cash provided by operating activities 3,259 3,294 2,970
------- -------- -------
Cash flows from investing activities:
Purchase of securities available for sale (119) (1,976) (2,065)
Proceeds from the sale of securities available for sale -- 1,554 1,612
------- -------- -------
Net cash used in investing activities (119) (422) (453)
Cash flows from financing activities:
Dividends paid (2,897) (2,588) (2,430)
Net treasury stock activity (579) -- --
------- -------- -------
Net cash used in financing activities (3,476) (2,588) (2,430)
------- -------- -------
Net increase (decrease) in cash (336) 284 87
Cash beginning of year 388 104 17
------- -------- -------
Cash end of year $ 52 $ 388 $ 104
======= ======== =======
17
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Selected Financial Data
Year Ended December 31
(dollars in thousands, except per share data) 1999
----------
Interest income
Loans including fees $ 28,148
Deposits with banks 60
Federal funds sold 386
Investment securities:
U.S. treasury securities 989
Securities of U.S. government agencies and corporations 2,383
Obligations of states and political subdivisions 1,888
Other securities 1,557
----------
Total interest income 35,411
Interest expense
Deposits 15,579
Other borrowings 981
----------
Total interest expense 16,560
Net interest income 18,851
Provision for loan losses 643
----------
Net interest income after provision
for loan losses 18,208
Other income 3,517
Other expenses 15,661
----------
Income before taxes and cumulative effect adjustment 6,064
Applicable income taxes 1,460
----------
Income before cumulative effect adjustment 4,604
Cumulative effect adjustment --
----------
Net income $ 4,604
===========
Per share data
Income before cumulative effect adjustment $ 1.26
Cumulative effect adjustment $ --
Net income $ 1.26
*Net income, fully diluted $ 1.25
Dividends declared $ 0.80
Book value per share at year end $ 13.00
At end of period
Total assets $561,162
Investment securities 143,563
Loans, net of unearned discount 362,764
Allowance for loan losses 3,890
Deposits 500,751
Shareholders' equity 47,643
Key ratios
Return on average assets 0.91%
Return on average equity 9.50%
Loan to deposit ratio 71.67%
Dividend payout ratio 62.92%
Average equity to average assets ratio 9.59%
* Earnings per share in 1996 was calculated using the same weighted average
shares for basic and diluted computations.
18
CNB Financial Corporation and Subsidiaries 1999 Annual Report
Five Year Comparison
1998 1997 1996 1995
-------- ------- ------- -------
$ 25,250 $ 23,209 $ 19,802 $ 18,266
12 1 -- 2
369 271 196 147
1,134 1,366 1,290 1,235
2,503 1,663 1,756 1,480
1,414 1,307 1,301 1,229
694 634 838 1,038
-------- ------- ------- -------
31,376 28,451 25,183 23,397
13,714 12,459 10,421 9,883
934 430 376 277
-------- ------- ------- -------
14,648 12,889 10,797 10,160
16,728 15,562 14,386 13,237
707 931 625 410
-------- ------- ------- -------
16,021 14,631 13,761 12,827
3,088 2,749 1,916 1,997
12,231 11,037 9,541 9,311
-------- ------- ------- -------
6,878 6,343 6,136 5,513
1,835 1,648 1,639 1,340
-------- ------- ------- -------
5,043 4,695 4,497 4,173
-- -- 156 --
-------- ------- ------- -------
$ 5,043 $ 4,695 $ 4,653 $ 4,173
========= ======== ======= =======
$ 1.37 $ 1.27 $ 1.22 $ 1.13
$ -- $ -- $ 0.04 $ --
$ 1.37 $ 1.27 $ 1.26 $ 1.13
$ 1.37 $ 1.27 $ 1.26 $ 1.13
$ 0.72 $ 0.68 $ 0.62 $ 0.58
$ 13.41 $ 12.65 $ 11.89 $ 11.24
$468,917 $403,779 $358,388 $325,253
113,675 83,571 85,604 82,313
311,141 286,113 243,996 219,425
3,314 3,062 2,683 2,328
398,082 345,760 297,118 279,297
49,372 46,606 43,804 41,391
1.18% 1.23% 1.39% 1.36%
10.43% 10.44% 10.95% 10.50%
76.94% 81.86% 81.22% 77.73%
51.32% 51.76% 47.63% 49.68%
11.31% 11.81% 12.66% 12.91%
19
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Statistical Information
MATURITY DISTRIBUTION
Remaining maturity/earliest repricing as of December 31, 1999 ($'s in
thousands):
After Three After One
Within Months But Year But After
Three Within One Within Five Five
Months Year Years Years Total
---------------------------------------------------------------
Interest earning assets:
Investment securities $ 14,670 $ 21,883 $ 60,521 $46,489 $143,563
Interest bearing deposits 321 -- -- -- 321
Loans (net) 140,551 47,976 130,278 40,069 358,874
--------- -------- -------- ------- --------
Total $155,542 $ 69,859 $190,799 $86,558 502,758
Interest bearing
liabilities:
Interest bearing deposits $ 6,081 $ 24,323 $ 63,239 $27,972 $121,615
Savings 10,214 -- 35,522 27,269 73,005
Time 70,815 110,388 63,937 6,100 251,240
Borrowed funds 6,750 -- -- -- 6,750
--------- -------- -------- ------- --------
Total $ 93,860 $134,711 $162,698 $61,341 $452,610
--------- -------- -------- ------- --------
Gap $ 61,682 $(64,852) $ 28,101 $25,217 $ 50,148
Cumulative gap $ 61,682 $ (3,170) $ 24,931 $50,148
Sensitivity ratio 1.66 .52 1.17 1.41 1.11
Cumulative sensitivity ratio 1.66 .98 1.06 1.11
QUARTERLY SUMMARY OF EARNINGS
The unaudited quarterly results of operations for the years ended December 1999
and 1998 are as follows (in thousands, except per share data):
Quarters Ended
1999
March 31 June 30 Sept. 30 Dec. 31
------------ --------- --------- ----------
Total interest income $ 8,264 $ 8,375 $ 8,837 $ 9,935
Net interest income 4,288 4,470 4,887 5,206
Provision for loan losses 154 153 153 183
Other income 703 890 915 1,009
Other expense 3,507 3,602 3,911 4,641
Net income 1,062 1,218 1,293 1,031
Net income per share 0.29 0.33 0.35 0.28
Net income per share, fully 0.29 0.33 0.35 0.28
diluted
Quarters Ended
1998
March 31 June 30 Sept. 30 Dec. 31
--------- -------- -------- --------
Total interest income $ 7,588 $ 7,798 $ 7,881 $ 8,109
Net interest income 4,047 4,203 4,168 4,310
Provision for loan losses 234 161 158 154
Other income 651 731 840 866
Other expense 2,898 2,893 3,210 3,230
Net income 1,140 1,362 1,218 1,323
Net income per share 0.31 0.37 0.33 0.36
Net income per share, fully 0.31 0.37 0.33 0.36
diluted
QUARTERLY SHARE DATA
The following table sets forth, for the periods indicated, the quarterly high
and low bid price of stock as reported through the National Quotation Bureau and
actual cash dividends paid per share. The stock is traded on the NASDAQ Stock
Market under the symbol, CCNE. As of December 31, 1999, the approximate number
of shareholders of record of the Corporation's common stock was 1,800.
Price Range of Common Stock
1999 1998
High Low High Low
--------------- -------------------
First Quarter $35.00 $33.00 $23.13 $19.94
Second Quarter 33.75 29.00 29.50 23.13
Third Quarter 30.13 25.25 30.13 29.00
Fourth Quarter 26.75 23.00 34.25 30.00
Cash Dividends Paid
1999 1998
------ ------
First Quarter $0.20 $0.18
Second Quarter 0.20 0.18
Third Quarter 0.20 0.18
Fourth Quarter 0.20 0.18
----- ------
$0.80 $0.72
===== ======
TRUST AND ASSET MANAGEMENT DIVISION
FUNDS UNDER MANAGEMENT (MARKET VALUE)
($'s in thousands) 1999 1998
-------- ---------
Personal Trusts, Estates and Agency Accounts $180,664 $172,079
Corporate Accounts 10,801 16,455
-------- ---------
Total $191,465 $188,534
======== =========
20
CNB Financial Corporation and Subsidiaries
1999 Annual Report
Management's Discussion and Analysis
of Financial Condition and
Results of Operations
GENERAL
The following discussion and analysis of the consolidated financial statements
of CNB Financial Corporation (the "Corporation") is presented to provide insight
into management's assessment of financial results. The Corporation's subsidiary
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 Cambria, Clearfield, 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 financial condition and results of operations are not
intended to be indicative of future performance. The Corporation's subsidiary,
CNB Investment Corporation, is headquartered in Wilmington, DE. CNB Investment
Corporation maintains investments in debt and equity securities. Management's
discussion and analysis should be read in conjunction with the audited
consolidated financial statements and related notes.
Risk identification and management are essential elements for the successful
management of the Corporation. In the normal course of business, the Corporation
is subject to various types of risk, including interest rate, credit, and
liquidity risk. These risks are controlled through policies and procedures
established throughout the Corporation.
Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the direction and frequency of changes in
interest rates. Interest rate risk results from various repricing frequencies
and the maturity structure of the financial instruments owned by the
Corporation. The Corporation uses its asset/liability management policy to
control and manage interest rate risk.
Credit risk represents the possibility that a customer may not perform in
accordance to contractual terms. Credit risk results from loans with customers
and purchasing of securities. The Corporation's primary credit risk is in the
loan portfolio. The Corporation manages credit risk by following an established
credit policy and through a disciplined evaluation of the adequacy of the
allowance for loan losses. Also, the investment policy limits the amount of
credit risk that may be taken in the investment portfolio.
Liquidity risk represents the inability to generate or otherwise obtain funds at
reasonable rates to satisfy commitments to borrowers and obligations to
depositors. The Corporation has established guidelines within its asset
liability management policy to manage liquidity risk. These guidelines include
contingent funding alternatives.
MERGER AND ACQUISITIONS
On February 12, 1999 the Bank acquired a full-service banking office and the
corresponding liabilities ($36 million) and certain assets ($11 million) of the
office from an unaffiliated institution. The office is located in west central
Pennsylvania in the community of Punxsutawney. The office will continue to
operate as a branch of the Bank. This acquisition has been accounted for as a
purchase.
On September 24, 1999, the Bank acquired four full service offices in north
central PA from an unaffiliated institution. The offices are located in the
communities of Johnsonburg and Ridgway in Elk County and Bradford and Kane in
McKean County. The purchase included $21.7 million in loans, $116.2 million in
deposits and certain fixed assets associated with the offices. All locations
continue to operate as full service branches of the Bank. This purchase and the
previously discussed purchase of the Punxsutawney office are referred to
hereafter as "the Acquisitions".
On August 18, 1999, the Corporation acquired The First National Bank of Spangler
("Spangler") located in Spangler, PA. The merger, which was accounted for as a
pooling of interest, was affected by issuing 237,500 shares of CNB Financial
Corporation common stock in exchange for 100% of the outstanding shares of
Spangler. After consummation of the merger, Spangler was merged into County
National Bank. The merger included $23.0 million in loans, $29.0 million in
deposits, $4.6 million in capital and other assets and liabilities. All
historical financial information has been restated to reflect the merger.
21
CNB Financial Corporation and Subsidiaries
1999 Annual Report
FINANCIAL CONDITION
The following table presents ending balances ($'s in millions), growth
(reduction) and the percentage change during the past two years:
1999 Increase % 1998 Increase % 1997
Balance (Decrease) Change Balance (Decrease) Change Balance
--------------------------------------------------------------------------------------------------
Total assets $561.2 $ 92.3 19.7 $468.9 $65.1 16.1 $403.8
Total loans, net 358.9 51.1 16.6 307.8 24.7 8.7 283.1
Total investments 143.6 29.9 26.3 113.7 30.1 36.0 83.6
Total deposits 500.8 102.7 25.8 398.1 52.3 15.1 345.8
Total shareholders' 47.6 (1.7) (3.4) 49.3 2.7 5.8 46.6
equity
The above table is referenced for the discussion in this section of the report.
OVERVIEW OF BALANCE SHEET
The increase in assets during 1999 can be attributed to the Acquisitions,
previously mentioned, of $122.8 million in new deposits. These deposits
accounted for the increase in loans of $51,047,000 (or 16.6%), and investments
of $29,888,000 (26.3%). The 19.7% increase in assets shows the Corporation had a
very successful year of growth when compared to 16.1%, 12.7%, and 10.2% in 1998,
1997 and 1996 respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $21,214,000 at December 31, 1999 compared to
$26,093,000 on December 31, 1998. The decrease was the result of a reduction in
Federal Funds at year end. The investment in Federal Funds at year end 1998 was
high due to an infusion of cash prior to year end that was temporary in nature.
We believe 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 portion of the
investment and loan portfolios that matures within one year. These sources of
funds will enable the Corporation to meet cash obligations and off-balance sheet
commitments as they come due.
INVESTMENT SECURITIES
Investment securities increased 26% since December 31, 1998. The increase was
created by another good year of growth in deposits due to the Acquisitions as
well as internal growth. Also, the Corporation participated in Federal Home Loan
Bank (FHLB) financing to purchase certain investments that were favorable in the
market as compared to the funding rates provided by FHLB. Of the Corporation's
total investment portfolio of $143,563,000 as of December 31, 1999, $136,945,000
(or 95.4%) is classified as available for sale with the balance of $6,618,000
classified as held to maturity.
The Corporation experienced significant growth in US government agencies and
corporations, $15,849,000 during 1999 compared to 1998. The shift to bonds with
greater liquidity is a strategy to provide funding for future loan growth in an
economy that has made deposit growth increasingly more difficult.
We monitor the earnings performance and the effectiveness of the liquidity of
the investment 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 and analysis of the
investment securities portfolio, we maintain a sufficient level of liquidity to
satisfy depositor requirements and various credit needs of our customers.
LOANS
The Corporation's loan volume continues to grow and reflects the additional
credit opportunities in the markets served. Our 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
also commercial lending primarily to locally owned small businesses. The lending
market has grown as a result of the Acquisitions and our purchase of Spangler.
We expect moderate loan growth over the next several quarters in these and other
market areas of the Bank as customers seek alternatives to competing and
consolidating superregional banks.
Commercial activity has increased by $12 million or 18.6% in 1999 over 1998.
This growth has been spurred by a positive economic outlook within our current
markets and an expanded market area as previously mentioned. The auto leasing
portfolio continues to increase since the inception in 1996. Net lease
receivables have increased $6.6 million and $9.6 million in 1999 and 1998.
During 1998, the home equity products within the Bank were targeted for growth
and expanded $8.1 million or 63.6%, thus providing positive effects to the
consumer loan portfolio.
22
CNB Financial Corporation and Subsidiaries
1999 Annual Report
LOAN CONCENTRATION
The Corporation monitors loan concentrations by individual
industries in order to track potential risk exposures resulting from industry
related downturns. At December 31, 1999, no concentration exists within our
commercial or real estate loan portfolio as related to concentration of 10% of
the total loans. Residential real estate lending along with automobile financing
continue to be the largest components of the loan portfolio.
LOAN QUALITY
The Corporation has established written lending policies and procedures that
require underwriting standards, loan documentation, and credit analysis
standards to be met prior to funding a loan. Subsequent to the funding of a
loan, ongoing review of credits is required. Credit reviews are performed
annually on a minimum of 60% of the commercial loan portfolio by an internal
loan review staff. See "Allowance for Loan and Lease Losses" for further
discussion of credit review procedures.
The following table sets forth information concerning loan delinquency and other
non-performing assets ($ in thousands):
at December 31, 1999 1998 1997
Nonperforming assets: $ 862 $ 190 $ 323
Non-accrual loans
Accrual loans greater than
89 days past due 886 1,479 601
Foreclosed assets held for
sale 394 365 153
-------- -------- --------
Total nonperforming assets $ 2,142 $ 2,034 $ 1,077
Total loans, net of
unearned income $362,764 $311,141 $286,113
Nonperforming loans as a
percent of loans, net 0.48% 0.54% 0.32%
Nonperforming assets as a
percent of loans, net 0.59% 0.65% 0.38%
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established by provisions for
possible losses in the loan and lease portfolio. These provisions are charged
against current income. Loans deemed not collectible are charged-off against the
allowance while any subsequent collections are recorded as recoveries and
increase the allowance.
The table below shows activity within the allowance account over the past three
years:
Allowance for Loan and Lease Losses
($'s in thousands)
Years Ended December 31,
1999 1998 1997
Balance at beginning of $ 3,314 $ 3,062 $ 2,683
Period
Charge-offs:
Commercial and financial 59 47 88
Commercial mortgages 30 30 --
Residential mortgages 54 16 28
Installment 380 459 529
Lease receivables 93 42 25
-------- -------- --------
616 594 670
Recoveries:
Commercial and financial 79 21 2
Commercial mortgages 1 -- --
Residential mortgages 4 2 --
Installment 103 115 116
Lease receivables 6 1 --
-------- -------- --------
193 139 118
Net charge-offs: (423) (455) (552)
Provision for possible
loan losses
999 707 931
======== ======== ========
Balance at end-of-period $ 3,890 $ 3,314 $ 3,062
======== ======== ========
Loans, net of unearned $362,764 $311,141 $286,113
Allowance to net loans 1.07% 1.07% 1.07%
Specific allocation 0.58% 0.53% 0.51%
Unallocated 0.49% 0.54% 0.57%
The adequacy of the allowance for loan and lease losses is subject to a formal
analysis by the loan review staff of the Bank. 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 "watch" loans that is given a specific reserve. The remaining loans
will be pooled, by category, into these segments:
Reviewed
. Commercial and financial
. Commercial mortgages
Homogeneous
. Residential real estate
. Installment
. Lease receivables
The reviewed loan pools are further segregated into three categories:
substandard, doubtful, and unclassified. Historical loss factors are calculated
for
23
CNB Financial Corporation and Subsidiaries
1999 Annual Report
each pool based on the previous eight quarters of experience. The homogeneous
pools are evaluated by analyzing the historical loss factors from the most
previous quarter end and the two most recent year ends. The historical loss
factors for both the reviewed and homogeneous pools are adjusted based on these
six qualitative factors:
. Levels of and trends in delinquencies and non-accruals
. Trends in volume and terms of loans
. Effects of any changes in lending policies and procedures
. Experience, ability and depth of management
. National and local economic trends and conditions
. Concentrations of credit
The methodology described above was created using the experience of our loan
review personnel, guidance from the regulatory agencies, and discussions with
our peers. The resulting factors are applied to the pool balances in order to
estimate the inherent risk of loss within each pool. The results of these
procedures are listed in the following chart:
Allocation of the Allowance for Loan and Lease Losses
Balance at end of period 1999 1998
Commercial and financial $ 626 $ 435
Commercial mortgages 216 179
Residential mortgages 504 342
Installment 592 453
Lease receivables 177 140
Unallocated 1,775 1,765
Total $3,890 $3,100
The results for the previous two years indicate higher allocations required for
specific pools. This result is based on two main factors. First, the growth of
our portfolio requires larger dollars to cover similar credit risks. Secondly,
economic factors both in our market area and nationwide have lead to trends of
increased charge-offs in recent years. The Bank did experience a slight decrease
in net charge-offs for 1999 when compared to 1998 and 1997. The unallocated
allowance is determined based on management's knowledge of the portfolio, recent
trends within the industry, historical trends reviewed monthly, and the local
economy. Also, management utilizes peer group data surveying a group of
similarly sized organizations which develop current information for comparative
purposes.
Most significantly consumer charge-offs remain high as the national trend is
towards higher delinquencies and more personal bankruptcies. Also, the leasing
portfolio has matured after 3.5 years in the business. As a result, we are
experiencing an increase in charge-offs in the lease area. The allowance for
loan and lease losses is deemed to be adequate to absorb inherent losses in the
portfolio at December 31, 1999.
FUNDING SOURCES
The Corporation considers deposits, short-term borrowings, and term debt when
evaluating funding sources. Traditional deposits continue to be the most
significant source of funds. In addition, term borrowings from FHLB are used to
meet funding needs not met by deposit growth. Management plans to maintain
access to short-term and long-term FHLB borrowings as an additional funding
source.
The Corporation continued to experience a change in the mix of its deposit base
throughout much of 1999. The time deposit category has increased by $87,965,000
due in large part to the Acquisitions. This results in time deposits
representing 56.5% of total deposits compared to 49.0% as of year-end 1998. The
following table reflects the Corporation's deposit mix by category (in
thousands):
1999 1998 1997
-------- -------- --------
Checking, Non-Interest Bearing $ 54,891 $ 38,970 $ 35,062
Checking, Interest Bearing 121,614 127,809 84,344
Savings Accounts 41,091 36,113 37,384
Certificates of Deposit 283,155 195,190 188,970
-------- -------- --------
$500,751 $398,082 $345,760
======== ======== ========
SHAREHOLDERS' EQUITY
The Corporation's strong capital provided the strong base for our recent
profitable growth. Total shareholders' equity decreased 3.5% in 1999. The
decline was the result of a decrease of $2,859,000 in accumulated other
comprehensive income which represents a decrease in unrealized gains in
available-for-sale securities, net of taxes.
With 95.4% of the investment securities classified as available-for-sale, this
portion of the balance sheet is more sensitive to the change in market value of
investments. In 1999, interest rates had a significant increase resulting in
decreased valuations in the available-for-sale category of investments. The
status of the investment markets do not affect the Corporation's equity position
for regulatory capital standards as discussed below.
The Corporation has complied with the standards of capital adequacy mandated by
the banking industry. 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 either 0% (lowest risk assets), 20%, 50%, or 100% (highest
risk assets), is assigned to each asset on the balance sheet. The total risk-
based capital ratio of 10.04% as of December 31, 1999 is well above the minimum
standard of 8%. The Tier 1 capital ratio of 8.96% also is above the regulatory
minimum of 4%. The leverage ratio, 6.66%, was also above the minimum standard of
4%. The Corporation is deemed to be well capitalized under regulatory industry
standards as the noted ratios are above the regulatory
24
CNB Financial Corporation and Subsidiaries
1998 Annual Report
requirements of 10%, 6% and 5%, respectively. The ratios provide quantitative
data demonstrating the strength and future opportunities for use of the
Corporation's capital base. An evaluation of risk-based capital ratios and the
capital position of the Corporation is a part of its strategic decision making
process.
LIQUIDITY
Liquidity measures an organizations' ability to meet cash obligations as they
come due. The Consolidated Statements of Cash Flows presented on page 4 of the
accompanying financial statements provide analysis of the Corporation's cash and
cash equivalents and the sources and uses of liquidity. Additionally, the
portion of the loan portfolio that matures within one year and maturities within
one year in the investment portfolio are considered part of the liquid assets.
Liquidity is monitored by the ALCO which establishes and monitors ranges of
acceptable liquidity. Also, the Bank is a member of FHLB. This relationship
provides the Bank with a borrowing line of $130 million with only $5 million
outstanding at year end 1999. Management feels the Corporation's current
liquidity position is acceptable.
YEAR ENDED DECEMBER 31, 1999
OVERVIEW OF THE INCOME STATEMENT
In 1999, net income was $4,604,000 a decrease of 8.7% compared to 1998 net
income of $5,043,000. The decline in earnings is primarily the result of merger
and acquisition related costs of $477,000, net of tax. Net income for 1999
exclusive of merger cost would be $5,081,000 or a 1% increase.
Net income prior to merger and acquisition costs and amortization of intangible
assets and goodwill for 1999 was $5.7 million compared to $5.3 million for 1998.
This measure is a reflection of the operating earnings of the Corporation
comparative for two years. The increase indicates an improvement in 1999 of 8%
over 1998. The major reason for the increase is the net interest income which
increased $2.1 million or 13% over 1998. While the net interest margin did
decline in 1999, the growth of earning assets of $66.2 million to $502,758,000
an increase of 15.2%.
INTEREST INCOME AND EXPENSE
Net interest income totaled $18,851,000 for 1999, an increase of 12.7% over
1998. Continued growth in loans has been the primary factor in this increase
which has been mitigated somewhat by lower yields on the new loans written due
to increased competition and the interest rate environment during much of 1999.
This was also aided by the large growth of investments during 1999. Total
interest income for 1999 increased by $4,035,000 or 12.9% while interest expense
increased by $1,912,000 or 13.1% when compared to 1998. The Corporation has
placed an emphasis on the sale of lower cost transactional deposit accounts.
This has kept the margin from experiencing an increase in our cost of funds. The
cost of funds declined 25 basis points from 4.35% to 4.10% in 1999.
The Corporation recorded a provision for loan and lease losses of $643,000 for
1999 compared to $707,000 for 1998. The decrease in provision is a result of a
better experience level of net charge-offs during 1999 coupled with the other
factors discussed previously in the loan section of this discussion. Also, the
Bank continued its efforts towards increased loan collection activities which
have created more timely procedures with delinquent loans.
NON-INTEREST INCOME
Non-interest income increased $429,000 or 13.9% in 1999 compared to 1998. The
service charges on deposit accounts is the main source of the increase. The
change for 1999 was an increase of $492,000 or 40.6%. The overall growth in
deposit customers accounts for some of the growth in this area. In addition, the
Corporation restructured fees for overdrafts and various other items within
transaction accounts.
The Corporation owns equity securities of various entities that are carried at
their current fair market value. During 1999, the gains (losses) realized from
these securities totalled ($25,000) compared to $349,000 in 1998. It is intended
that sales will be realized on this portfolio from time to time during the year
as each investment and the Corporation's liquidity position is analyzed.
NON-INTEREST EXPENSE
The costs associated with operating the Corporation rose by 28.0% to $15,661,000
during 1999 compared to 1998. These costs include but are not limited to
salaries, supplies, data processing expenses, insurance, occupancy, and
amortization expenses. The primary factors in this increase is amortization
expense up $743,000 or 226% over 1998 and merger costs of $627,000 included in
other expenses. Amortization expense increased due to the Acquisitions that were
previously discussed. These Acquisitions, accounted for using the purchase
method, increased our intangible assets by $14,382,000. These intangibles will
be written off over a 10 year period beginning with the date of each purchase.
The Bank signed an agreement to build a facility to replace the existing office
in Punxsutawney. The estimated total cost of this project is $325,000. The
project is expected to be completed in mid summer 2000 with little ongoing
effect to the annual operating expenses.
25
CNB Financial Corporation and Subsidiaries
1999 Annual Report
YEAR ENDED DECEMBER 31, 1998
OVERVIEW OF THE INCOME STATEMENT
In 1998, net income was $5,043,000, an increase of 7.4% over the 1997 net income
of $4,695,000. Overall net income for 1998 benefitted by a larger base of
earning assets over 1997. The increase in earning assets was $63,515,000, or
17%, over 1997 to $436,513,000. Details of this growth have been previously
discussed in the prior sections. Decreases in the net interest margin have
somewhat mitigated the benefit gained by the growth in earning assets. The
decrease in taxable equivalent net interest margin was 17 basis points or a 3.7%
decline overall. Each basis point meant approximately $41,000 dollars to the
Corporation for 1998. Also, the overall level of non-interest expenses increased
during 1998.
INTEREST INCOME AND EXPENSE
Net interest income totaled $16,728,000 for 1998, an increase of 7.5% over 1997.
Continued growth in loans has been the primary factor in this increase which has
been mitigated somewhat by higher interest costs. This was also aided by the
large growth of investments during 1998. A $10 million block of investments was
purchased with funds acquired from FHLB. This transaction had the effect of
increasing both interest income and expense with the end result being an overall
increase in net interest income. Total interest income for 1998 increased by
$2,925,000 or 10.3% while interest expense increased by $1,759,000 or 13.6% when
compared to 1997. The Corporation has placed an emphasis on the sale of lower
cost transactional deposit accounts. This has kept the margin from experiencing
a larger decline. The success of the sales effort is discussed within the
"Funding Sources" section.
The Corporation recorded a provision for loan and lease losses of $707,000 for
1998 compared to $931,000 for 1997. The decrease in provision is a result of a
better experience level of net charge-offs during 1998 coupled with the other
factors discussed previously in the loan section of this discussion. Also, the
Bank implemented increased loan collection activities which have created more
timely procedures with delinquent loans.
NON-INTEREST INCOME
Non-interest income increased $339,000 or 12.3% in 1998 compared to 1997. Two
major areas contributed to this increase. First, the Trust & Asset Management
division of the Bank had fee increases of $146,000 or 23.9% over 1997. This
results from very good growth within the Trust area. Assets under management
increased from $154,834,000 in 1997 to $188,534,000 in 1998 for a 21.8% increase
in the market value of assets.
Second, the service charges on deposit accounts continues to increase. The
change for 1998 was an increase of $233,000 or 23.8% which is comparable with
the $243,000 increase that occurred during 1997. The overall growth in deposit
customers accounts for the majority of the growth in this area.
The Corporation owns equity securities of various entities that are carried at
their current fair market value. During 1998, the gains realized from these
securities totalled $349,000 compared to $539,000 in 1997. It is intended that
sales will be realized on this portfolio from time to time during the year as
each investment and the Corporation's liquidity position is analyzed.
NON-INTEREST EXPENSE
The costs associated with operating the Corporation rose by 10.8% to $12,231,000
during 1998 compared to 1997. These costs include but are not limited to
salaries, supplies, data processing expenses, insurance, occupancy, and
amortization expenses. The primary factors in this increase are salaries up
$371,000 or 7.8% over 1997 and employee benefits up $647,000 or 69.6%. Salaries
increased during 1998 based on annual cost of living adjustments for all
personnel as well as some key hirings in order to handle our significant
expansion especially in the commercial arena. Employee benefits have risen
dramatically over 1997 generally due to unfavorable occurrences in our
healthcare plan under our self-funded arrangement. During 1997, we had a
favorable experience as costs declined 10.5% compared to 1996. Due to the nature
of this plan, fluctuations can occur as the Corporation pays on an experience
basis with a stop loss coverage in place to minimize overall exposure. Occupancy
costs, data processing, and other expenses were controlled favorably by the
Corporation with a combined increase of only $162,000 or 3.2%.
The Corporation signed a purchase and assumption agreement on October 13, 1998
to assume the liabilities and purchase certain assets of the Punxsutawney, PA
office of First Western Bank, N.A. The branch size is approximately $36 million
in total deposits with approximately $11 million in consumer and small business
loans. This purchase will create an intangible asset that will be amortized over
its useful life. The amortization will significantly increase non-interest costs
in future periods when compared with 1998. The amortization of the premium will
begin in February 1999 upon consummation of the transaction. The costs will be
offset by increased service charges as well as net interest income.
RETURN ON EQUITY
The return on average shareholder's equity ("ROE") for 1999 was 9.5% compared to
10.43% and 10.44% for 1998 and 1997 respectively. The decrease compared to 1998
can be attributed primarily to the Corporation's
26
CNB Financial Corporation and Subsidiaries
1999 Annual Report
efforts to utilize its excess capital position. The Corporation through the
acquisitions and the merger with Spangler, had one time merger related costs of
$477,000, net of tax. The ROE exclusive of these one time charges and the
amortization expense for recorded intangible assets was 11.81% compared to
10.93% in 1998. Management anticipates increases in the ROE during 2000 as
earnings are expected to continue improving.
RETURN ON ASSETS
The Corporation's return on average assets ("ROA") was 0.91% in 1999 down from
1.18% and 1.23% recorded in 1998 and 1997, respectively.
Decreased ROA can be attributed to a narrowing net interest margin and increased
operating costs as discussed in 1999 non-interest expense section as well as the
previously mentioned merger related expenses. The overall decline in the net
interest margin was 18 basis points comparing 1999 with 1998. This factor is
well documented by the Corporation and is a constant concern of management.
Every attempt is being made to minimize the decline in the net interest margin
in the future. This, however, is a concern to the Banking industry as a whole
due in large part to competitive pressures with both banks and non-banks.
FEDERAL INCOME TAX EXPENSE
Federal income taxes decreased to $1,460,000 in 1999 compared to $1,835,000 in
1998. This decrease year to date can be attributed to the Corporation's lower
taxable income during the period. The effective tax rates were 24.1%, 26.7% and
26.0% for 1999, 1998 and 1997, respectively. We anticipate the effective tax
rate to maintain these levels as our tax exempt income remains stable.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates, and
equity prices. As a financial institution, the Corporation is primarily
sensitive to the interest rate risk component. Changes in interest rates will
affect the levels of income and expense recorded on a large portion of the
Bank's assets and liabilities. Additionally, such fluctuations in interest rates
will impact the market value of all interest sensitive assets. The
Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate
sensitivity position and establishing policies to control exposure to interest
rate fluctuations. The primary goal established by this policy is to increase
total income within acceptable risk limits.
The Corporation monitors interest rate risk through the use of two models:
earnings simulation and static gap. Each model standing alone has limitations,
however taken together they represent a reasonable view of the Corporation's
interest rate risk position.
STATIC GAP: Gap analysis is intended to provide an approximation of projected
repricing of assets and liabilities at a point in time on the basis of stated
maturities, prepayments, and scheduled interest rate adjustments within selected
time intervals. A gap is defined as the difference between the principal amount
of assets and liabilities which reprice within those time intervals. The
cumulative one year gap at December 31, 1999 was -0.30% of total earning assets
compared to policy guidelines of plus or minus 10.0%. The ratio improved
slightly from -6.25% at December 31, 1998.
Fixed rate securities, loans and CDs are included in the gap repricing based on
time remaining until maturity. Mortgage prepayments are included in the time
frame in which they are expected to be received using a prepayment factor of 100
PSA. Non maturity deposits are assigned time frames using a decay factor
determined by historical analysis within the Corporation.
Certain shortcomings are inherent in the method of analysis presented in Static
Gap. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may not react correspondingly to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate with changes in market interest rates,
while interest rates on other types of assets may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features, like annual and lifetime rate caps, which restrict changes in interest
rates both on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate from those assumed in the table. Finally, the ability of
certain borrowers to make scheduled payments on their adjustable-rate loans may
decrease in the event of an interest rate increase.
EARNINGS SIMULATION: This model forecasts the projected change in net income
resulting from an increase or decrease in the level of interest rates. The model
assumes a one time shock of plus or minus 200 basis points or 2%. The earnings
simulation model at December 31, 1999 projects an increase of 10.60% of stable
net income if rates decline 200 basis points and a decrease of 15.40% if rates
were to rise by 200 basis points.
The model makes various assumptions about cash flows and reinvestments of these
cash flows in the different rate environments. Generally, repayments, maturities
and calls are assumed to be reinvested in like instruments and no significant
change in the balance sheet mix is assumed. Actual results could
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CNB Financial Corporation and Subsidiaries
1998 Annual Report
differ significantly from these estimates which would produce significant
differences in the calculated projected change in income. The limits stated
above do not necessarily represent measures that would be taken by management in
order to stabilize income results. The instruments on the balance sheet do react
at different speeds to various changes in interest rates as discussed under
Static Gap. In addition, there are strategies available to management that
minimize the decline in income caused by a rapid rise in interest rates.
The following table below summarizes the information from the interest rate risk
measures at December 31, 1999 and 1998:
1999 1998
---- ----
Static 1-Yr. Cumulative Gap (0.30%) (6.25%)
Earnings Simulation
- - 200 bps vs. Stable Rate 10.60% 14.62%
+200 bps vs. Stable Rate (15.40%) (14.29%)
The interest rate sensitivity position at December 31, 1999, was slightly
liability sensitive in the short-term and asset sensitive for periods longer
than one year. Management measures the potential impact of significant changes
in interest rates on both earnings and equity. By the use of computer generated
models, the potential impact of these changes has been determined to be
acceptable with modest affects on net income and equity given an interest rate
shock of an increase or decrease in rates of 2.0%. We continue to monitor the
interest rate sensitivity through the ALCO and use the data to make strategic
decisions.
YEAR 2000
During 1999, management completed the process of preparing for the Year 2000
date change. This process involved identifying and remediating date recognition
problems in computer systems, software and other operating equipment, working
with third parties to address their Year 2000 issues, and developing contingency
plans to address potential risks in the event of Year 2000 failures. To date,
the Corporation has successfully managed the transition.
Although considered unlikely, unanticipated problems in the Corporation's core
business processes, including problems associated with non-compliant third
parties and disruptions to the economy in general, could still occur despite
efforts to date to remediate affected systems and develop contingency plans.
Management will continue to monitor all business processes, including
interaction with the Corporation's customers, vendors and other third parties,
throughout 2000 to address any issues and ensure all processes continue to
function properly. Through 1999, the cost of the Year 2000 project totalled
$100,000 and included $68,000 in capitalized costs incurred to replace non-
compliant hardware and software. No further expense is expected during the Year
2000.
FUTURE OUTLOOK
Management's focus for 2000 is to streamline the operations of the Corporation.
This will enable us to reduce our non-interest expenses and create higher
returns through increased profitability. Management continues to be encouraged
by the growth in the Elk and McKean county markets served by the Bank. In 1999,
renovations will be done at one facility to improve customer service and traffic
flow. The addition of the Punxsutawney Office to our branch network has proved
beneficial as we have been able to enhance our service area. In 2000, we will be
relocating to a new facility. In addition, we have expanded our market to
Johnsonburg, Kane and Northern Cambria through merger and acquisition. With the
addition of these customers and market area, CNB Financial Corporation continues
to enhance the services and accessibility for all of our customers. These
additional locations provide us a catalyst for growth in 2000. In addition to
deposits, the traditional funding source for the Corporation, we will continue
to manage potential earning enhancement opportunities using other borrowings
with the Federal Home Loan Bank of Pittsburgh. There are certain interest rate
environments that allow for pricing opportunities from such borrowings. These
opportunities will be evaluated and used when possible to enhance earnings
throughout 2000.
Loan growth continued to be good, exceeding management's expectations for 1999.
While loan demand is good, competitive pressure from other financing sources has
not resulted in increased loan yields. Management believes that the rate of loan
growth will be moderate in 2000. Much of this growth is expected to occur in the
commercial loan portfolio. Management expects the loan to deposit ratio to raise
slightly throughout 2000.
Enhancing non-interest income and controlling 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 taxable net interest income and non-interest income (net of
provision for ALLL and non-recurring income). For the year December 31, 1999,
the efficiency ratio was 58.4% compared to 60.5% for 1998 and 58.7% for 1997.
28
CNB Financial Corporation and Subsidiaries
1999 Annual Report
The efficiency ratio was positively impacted by increased non-interest income
resulting from more customers as well as increases in some of our fees.
Management is placing emphasis on this area during 2000 with a goal of improved
efficiency to approach prior levels.
The interest rate environment will continue to play an important role in the
future earnings of the Corporation. The net interest margin has been declining
as higher cost deposits continue to be obtained. However, overall net interest
income continues to increase due to growth in interest earning assets.
Management will closely monitor the net interest margin in 2000 as much of the
earnings of the Corporation are derived from interest earnings.
Management concentrates on return on average equity and earnings per share
evaluations, plus other methods, to measure and direct the performance of the
Corporation. While past results are not an indication of future earnings, we
feel the Corporation is positioned to enhance performance of normal operations
through 2000.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements above which are not historical fact are forward looking
statements that involve risks and uncertainties, including, but not limited to,
the interest rate environment, the effect of federal and state banking and tax
regulations, the effect of economic conditions, the impact of competitive
products and pricing, and other risks detailed in the Corporation's Securities
and Exchange Commission filings.