CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except share data) DECEMBER 31
----------------------------
2002 2001
------------ ------------
ASSETS
Cash and due from banks ........................................................ $ 16,748 $ 17,350
Interest bearing deposits with other banks ..................................... 5,779 2,041
------------ ------------
CASH AND CASH EQUIVALENTS ................................................... 22,527 19,391
Securities available for sale .................................................. 185,025 152,757
Loans held for sale ............................................................ 3,924 5,334
Loans and leases ............................................................... 421,507 388,455
Less: unearned discount ..................................................... 1,143 2,282
Less: allowance for loan and lease losses ................................... 5,036 4,095
------------ ------------
NET LOANS ................................................................... 415,328 382,078
Federal Home Loan Bank and Federal Reserve Stock ............................... 3,388 1,932
Premises and equipment, net .................................................... 12,129 12,485
Accrued interest and other assets .............................................. 13,603 6,052
Mortgage servicing rights ...................................................... 512 368
Goodwill ....................................................................... 10,821 10,821
Other intangible assets ........................................................ 1,261 1,576
------------ ------------
TOTAL ASSETS ................................................................ $ 668,518 $ 592,794
============ ============
LIABILITIES
Deposits:
Non-interest bearing deposits ............................................... $ 56,010 $ 60,241
Interest bearing deposits ................................................... 489,127 446,399
------------ ------------
TOTAL DEPOSITS .............................................................. 545,137 506,640
Short-term borrowings .......................................................... 2,000 308
Federal Home Loan Bank advances ................................................ 40,000 22,250
Accrued interest and other liabilities ......................................... 9,348 7,992
Long-term debt ................................................................. -- 710
Trust preferred securities ..................................................... 10,000 --
------------ ------------
TOTAL LIABILITIES ........................................................... 606,485 537,900
------------ ------------
SHAREHOLDERS' EQUITY
Common stock $1.00 par value for 2002 and 2001
Authorized 10,000,000 shares for 2002 and 2001
Issued 3,693,500 shares for 2002 and 2001 ...................................... 3,694 3,694
Additional paid in capital ..................................................... 3,747 3,753
Retained earnings .............................................................. 52,065 47,731
Treasury stock, at cost (46,245 shares for 2002 and 53,568 shares for 2001) .... (974) (1,236)
Accumulated other comprehensive income ......................................... 3,501 952
------------ ------------
TOTAL SHAREHOLDERS' EQUITY .................................................. 62,033 54,894
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY .................................... $ 668,518 $ 592,794
============ ============
The accompanying notes are an integral part of these statements.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 5 2002 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) YEAR ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
Loans including fees .................................. $ 30,294 $ 31,323 $ 32,075
Deposits with banks ................................... 84 169 137
Federal funds sold .................................... 267 434 67
Securities:
Taxable ............................................ 6,507 6,788 5,990
Tax-exempt ......................................... 2,136 1,526 1,813
Dividends .......................................... 448 569 564
------------ ------------ ------------
TOTAL INTEREST AND DIVIDEND INCOME ................. 39,736 40,809 40,646
INTEREST EXPENSE
Deposits .............................................. 12,908 17,971 18,660
Federal Home Loan Bank advances and other debt ........ 2,016 1,176 1,174
Trust preferred securities ............................ 277 -- --
------------ ------------ ------------
TOTAL INTEREST EXPENSE ............................. 15,201 19,147 19,834
------------ ------------ ------------
Net interest income ................................ 24,535 21,662 20,812
Provision for loan losses .......................... 1,800 1,080 807
------------ ------------ ------------
Net interest income after provision for loan
losses............................................. 22,735 20,582 20,005
NON-INTEREST INCOME
Trust & asset management fees ......................... 910 1,015 924
Service charges - deposit accounts .................... 3,360 2,900 2,279
Other service charges and fees ........................ 476 525 604
Net security gains .................................... (7) 276 79
Net gain on sale of loans ............................. 247 45 53
Other ................................................. 1,052 837 542
------------ ------------ ------------
TOTAL NON-INTEREST INCOME .......................... 6,038 5,598 4,481
NON-INTEREST EXPENSES
Salaries .............................................. 6,670 6,151 6,185
Employee benefits ..................................... 2,060 2,027 2,263
Net occupancy expense of premises ..................... 2,397 2,439 2,392
Data processing ....................................... 1,492 1,261 1,207
Goodwill amortization ................................. -- 1,438 1,438
Intangible amortization ............................... 452 385 414
Director's fees ....................................... 675 346 156
Other ................................................. 3,561 3,327 3,194
------------ ------------ ------------
TOTAL NON-INTEREST EXPENSES ........................ 17,307 17,374 17,249
------------ ------------ ------------
Income before income taxes ............................ 11,466 8,806 7,237
Applicable income taxes ............................... 2,800 2,296 1,804
------------ ------------ ------------
Net income ............................................ $ 8,666 $ 6,510 $ 5,433
============ ============ ============
EARNINGS PER SHARE
Basic ................................................. $ 2.38 $ 1.78 $ 1.48
Diluted ............................................... $ 2.38 $ 1.78 $ 1.48
The accompanying notes are an integral part of these statements.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 6 2002 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................. $ 8,666 $ 6,510 $ 5,433
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses ............................... 1,800 1,080 807
Depreciation and amortization ........................... 1,577 3,006 2,951
Amortization, accretion and deferred loan fees .......... (148) (520) (477)
Deferred taxes .......................................... (1,640) (434) 269
Security (gains) losses ................................. 7 (276) (79)
Gain on sale of loans ................................... (247) (45) (53)
Net losses (gains) on dispositions of acquired property.. (12) (16) 4
Proceeds from sales of loans ............................ 34,086 27,728 9,461
Origination of loans for sale ........................... (32,428) (30,524) (9,521)
Changes in:
Interest receivable and other assets .................... (8,234) 438 (386)
Interest payable and other liabilities .................. 1,674 2,249 (1,280)
------------ ------------ ------------
Net cash from operating activities ......................... 5,101 9,196 7,129
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities, prepayments and calls of:
Securities held to maturity ........................... -- -- 310
Securities available for sale ......................... 45,543 49,698 23,541
Proceeds from sales of securities available for sale .... 1,258 19,081 7,483
Purchase of securities available for sale ............... (75,754) (83,513) (25,200)
Loan origination and payments, net ...................... (34,351) (20,160) (3,593)
(Purchase) of Federal Reserve Bank Stock and
Federal Home Loan Bank Stock ........................... (1,483) -- (150)
Net, purchase of premises and equipment ................. (769) (863) (1,050)
Proceeds from the sale of foreclosed assets ............. 438 572 264
------------ ------------ ------------
Net cash from investing activities ......................... (65,118) (35,185) 1,605
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Checking, money market and savings accounts ........... (12,028) 29,199 (7,084)
Certificates of deposit ............................... 50,525 (7,776) (8,450)
Treasury stock ........................................ 256 (533) 48
Cash dividends paid ..................................... (4,332) (3,410) (3,080)
Advances from other borrowings .......................... 20,000 10,710 10,000
Advances from trust preferred securities ................ 10,000 -- --
Repayments of other borrowings .......................... -- -- (5,000)
Net advances (repayments) from federal funds purchased .. (1,268) (783) 1,591
------------ ------------ ------------
Net cash from financing activities ......................... 63,153 27,407 (11,975)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ....... 3,136 1,418 (3,241)
Cash and cash equivalents at beginning of year ............. 19,391 17,973 21,214
------------ ------------ ------------
Cash and cash equivalents at end of period ................. $ 22,527 $ 19,391 $ 17,973
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .............................................. $ 15,505 $ 19,533 $ 19,773
Income taxes .......................................... 3,730 2,670 1,600
SUPPLEMENTAL NON CASH DISCLOSURES:
Transfers from securities held to maturity to
securities available for sale .......................... $ -- $ -- $ 3,431
Transfers to other real estate owned .................... $ 277 $ 166 $ 627
The accompanying notes are an integral part of these statements.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 7 2002 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except per share data)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME EQUITY
-----------------------------------------------------------------------------
Balance January 1, 2000 .......................... $ 3,694 $ 3,717 $ 42,278 $ (715) $ (1,331) $ 47,643
Comprehensive income:
Net income for 2000 ......................... 5,433 5,433
Other comprehensive income:
Cumulative effect of securities
transferred, net ........................... 7 7
Net change in unrealized losses
on available for sale securities,
net of taxes of $900 and adjustment
for after tax gains of $52 ................. 1,152 1,152
-------------
Total comprehensive income .................. 6,592
-------------
Treasury stock:
Reissue (2,329 shares) .................... 25 23 48
Cash dividends declared
($0.84 per share) ......................... (3,080) (3,080)
-----------------------------------------------------------------------------
Balance December 31, 2000 ........................ 3,694 3,742 44,631 (692) (172) 51,203
Comprehensive income:
Net income for 2001 ......................... 6,510 6,510
Other comprehensive income:
Net change in unrealized gains
on available for sale securities,
net of taxes of $577 and adjustment
for after tax gains of $182 ................ 1,124 1,124
-------------
Total comprehensive income .................. 7,634
-------------
Treasury stock:
Purchase (38,725 shares) .................. (770) (770)
Reissue (12,044 shares) ................... 11 226 237
Cash dividends declared
($0.93 per share) ......................... (3,410) (3,410)
-----------------------------------------------------------------------------
Balance December 31, 2001 ........................ 3,694 3,753 47,731 (1,236) 952 54,894
COMPREHENSIVE INCOME:
Net income for 2002 ......................... 8,666 8,666
OTHER COMPREHENSIVE INCOME:
Net change in unrealized gains
on available for sale securities,
net of taxes of $1,313 and adjustment
for after tax losses of ($5) ............... 2,549 2,549
-------------
Total comprehensive income .................. 11,215
-------------
TREASURY STOCK:
Purchase (16,156 shares) .................. (380) (380)
Reissue (23,479 shares) ................... (6) 642 636
Cash dividends declared
($1.18 per share) ......................... (4,332) (4,332)
-----------------------------------------------------------------------------
Balance December 31, 2002 ........................ $ 3,694 $ 3,747 $ 52,065 $ (974) $ 3,501 $ 62,033
=============================================================================
The accompanying notes are an integral part of these statements.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 8 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise indicated, amounts are in thousands, except per share data.
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, CNB Investment
Corporation and County Reinsurance Company. 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.
USE OF ESTIMATES:
To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The allowance for loan losses,
mortgage servicing rights and fair values of financial instruments are
particularly subject to change.
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. While the Corporation's chief decision
makers monitor the revenue streams of the various Corporation's products and
services, operations are managed and financial performance is evaluated on a
Corporation-wide basis. Accordingly, the Corporation's business activities are
currently confined to one segment which is community banking.
SECURITIES:
When purchased, securities are classified as held to maturity, trading
or available for sale. 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 securities. Securities are written down to fair value when a decline
in fair value is not temporary. Gains and losses on securities sold is based on
the specific identification method.
LOANS:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
an allowance for loan losses. Loans held for sale are reported at the lower of
cost or market, on an aggregate basis.
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Interest
income on mortgage and commercial loans is discontinued at the time the loan is
90 days delinquent unless the credit is well-secured and in process of
collection. Consumer loans are typically charged off no later than 180 days past
due. In all cases, loans are placed on nonaccrual or charged-off at an earlier
date if collection of principal or interest is considered doubtful.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 9 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All interest accrued but not received for loans placed on nonaccrual is
reversed against interest income. Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
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 loans 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 allowance based on historical
patterns of charge-offs and recoveries, information about specific borrower
situations, industry experience, and other qualitative factors relevant to the
collectability of the loan portfolio. While management believes that the
allowance is adequate to absorb probable 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.
A loan is impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
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.
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.
FORECLOSED ASSETS:
Assets acquired through or instead of loan foreclosure are initially
recorded at fair value when acquired, establishing a new cost basis. If fair
value declines, a valuation allowance is recorded through expense. Costs after
acquisition are expensed.
BANK OWNED LIFE INSURANCE:
The Corporaton has purchased life insurance policies on certain
officers. Bank owned life insurance is recorded at its cash surrender value, or
the amount that can be realized.
GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill results from prior business acquisitions and represents the
excess of the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Upon adopting new accounting
guidance on January 1, 2002, the Corporation ceased amortizing goodwill.
Goodwill is assessed at least annually for impairment and any such impairment
will be recognized in the period identified. The effect on net income of ceasing
goodwill amortization in 2002 was $950.
Other intangible assets consist of acquired customer relationship
intangible assets arising from the purchase of customer lists. They are
initially measured at fair value and then are amortized on an accelerated method
over their estimated useful lives, which is 10 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. Income tax expense is the
total of the current year income tax due or refundable and the changes in
deferred tax assets and liabilities.
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
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 10 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in other assets and are amortized into non-interest 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. The MSR's recognized were $280 in 2002 and $203 in 2001.
TREASURY STOCK:
The purchase of the Corporation's common stock is recorded at cost.
Purchases of the stock are made both in the open market and through negotiated
private purchases based on market prices. 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 COMPENSATION:
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. For key employees, 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. For independent directors, the
vesting schedule is one-third of granted options per year beginning one year
after the grant date with 100% vested on the third 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 2002, 2001 and 2000 would have been adjusted to the pro forma amounts
indicated below:
2002 2001 2000
------------ ------------ ------------
Net income As reported $ 8,666 $ 6,510 $ 5,433
Pro forma compensation expense 22 39 19
------------ ------------ ------------
Pro forma $ 8,644 $ 6,471 $ 5,414
Earnings Per Share-Basic As reported $ 2.38 $ 1.78 $ 1.48
Pro forma $ 2.37 $ 1.77 $ 1.48
Earnings Per Share - Diluted As reported $ 2.38 $ 1.78 $ 1.48
Pro forma $ 2.37 $ 1.77 $ 1.48
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:
2002 2001 2000
-------- -------- --------
Dividend Yield 4.6% 4.9% 3.1%
Volatility 13.2% 25.9% 24.8%
Risk-free interest rates 1.2% 2.2% 6.3%
Expected option lives 6.0 years 6.0 years 5.7 years
A summary of the status of the common stock incentive plan, adjusted
retroactively for the effects of stock splits, is presented below:
REMAINING
WEIGHTED - AVERAGE CONTRACTUAL
SHARES EXERCISE PRICE LIFE
------ ------------------ ------------
Outstanding, at January 1, 2000 ............. 18,250 $ 28.25 7 years
Granted ..................................... 29,250 19.98 8 years
Exercised ................................... -- --
Forfeited ................................... -- --
------ ------------------
Outstanding, at December 31, 2000 ........... 47,500 23.12
Granted ..................................... 21,500 22.50 9 years
Exercised ................................... -- --
Forfeited ................................... -- --
------ ------------------
Outstanding, at December 31, 2001 ........... 69,000 22.93
Granted ..................................... 22,250 33.25 10 years
Exercised ................................... (250) 23.50
Forfeited ................................... -- --
------ ------------------
Outstanding, at December 31, 2002 ........... 91,000 $ 25.41
====== ==================
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 11 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2002 2001 2000
---------- ---------- ----------
Options exercisable .............................. 35,083 16,437 4,562
Fair value of options granted during the year .... $ 1.47 $ 3.22 $ 5.14
Number of authorized shares remaining ............ 159,000 181,000 202,500
Options outstanding at year-end 2002 were as follows:
OUTSTANDING EXERCISEABLE
-------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
PRICES NUMBER LIFE NUMBER PRICE
- --------------- ------ ---------------- ------ -------------
$18.50 - $33.25 91,000 8.5 years 35,083 $ 23.64
====== ================ ====== =============
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,
interest bearing deposits with other banks, and Federal funds sold.
RESTRICTIONS ON CASH:
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, 2002 and 2001, was $50, which was maintained in vault cash.
NEW ACCOUNTING STANDARDS:
New accounting standards on asset retirement obligations, restructuring
activities and exit costs, operating leases, and early extinguishment of debt
were issued in 2002. Management determined that when the new accounting
standards are adopted in 2003 they will not have a material impact on the
Corporation's financial condition or results of operations.
LOSS CONTINGENCIES:
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood of
loss is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there now are such matters that will have a material
effect on the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in a separate note.
Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified for comparative
purposes.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 12 2002 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 (in thousands, except per share data):
YEARS ENDED DECEMBER 31
------------------------------------
2002 2001 2000
---------- ---------- ----------
Net income applicable to common stock ............ $ 8,666 $ 6,510 $ 5,433
Weighted-average common shares outstanding ....... 3,638 3,661 3,665
---------- ---------- ----------
Basic earnings per share ......................... $ 2.38 $ 1.78 $ 1.48
========== ========== ==========
Net income applicable to common stock ............ $ 8,666 $ 6,510 $ 5,433
---------- ---------- ----------
Weighted-average common shares outstanding ....... 3,638 3,661 3,665
Dilutive effects of assumed
exercise of stock options ........................ 10 3 --
---------- ---------- ----------
Total weighted-average common
shares and equivalents .......................... 3,648 3,664 3,665
---------- ---------- ----------
Diluted earnings per share ....................... $ 2.38 $ 1.78 $ 1.48
========== ========== ==========
Stock options for 18 and 27 shares of common stock were not considered
in computing diluted earnings per common share for 2002 and 2001 because they
were antidilutive.
3. SECURITIES
Securities at December 31, 2002 and 2001 were as follows:
DECEMBER 31, 2002 December 31, 2001
--------------------------------------------- ---------------------------------------------
UNREALIZED Unrealized
AMORTIZED --------------------- FAIR Amortized --------------------- Fair
COST GAINS LOSSES VALUE Cost Gains Losses Value
--------- --------- --------- --------- --------- --------- --------- ---------
Securities available for sale:
U.S. Treasury .................... $ 10,169 $ 145 $ -- $ 10,314 $ 14,046 $ 263 $ (1) $ 14,308
U.S. Government agencies
and corporations ................ 26,109 431 (8) 26,532 24,073 503 (7) 24,569
Obligations of States and
Political Subdivisions .......... 47,322 2,520 (105) 49,737 25,450 478 (175) 25,753
Mortgage-backed securities ....... 44,622 950 (24) 45,548 39,073 238 (308) 39,003
Corporate notes and bonds ........ 42,819 2,000 (476) 44,343 40,563 967 (514) 41,016
Marketable equity securities ..... 8,680 280 (409) 8,551 8,115 97 (104) 8,108
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities available for sale $ 179,721 $ 6,326 $ (1,022) $ 185,025 $ 151,320 $ 2,546 $ (1,109) $ 152,757
========= ========= ========= ========= ========= ========= ========= =========
On December 31, 2002 securities carried at $31,945 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, 2002:
AVAILABLE FOR SALE
AMORTIZED COST FAIR VALUE
-------------- ----------
1 year or less ......................... $ 30,509 $ 30,852
1 year-5 years ......................... 38,186 39,615
5 years-10 years ....................... 18,051 19,779
After 10 years ......................... 39,673 40,680
-------------- ----------
126,419 130,926
-------------- ----------
Mortgage-backed securities ............. 44,622 45,548
-------------- ----------
Total securities .................... $ 171,041 $ 176,474
============== ==========
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.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 13 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information pertaining to security sales is as follows:
PROCEEDS GROSS GAINS GROSS LOSSES
-------- ----------- ------------
2002 $ 1,258 $ 13 $ 20
2001 19,089 371 95
2000 7,483 176 97
On July 1, 2000, the Corporation adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 allows the
Corporation a one time reclassification of securities held to maturity to
classification as available for sale or trading to allow hedging of securities.
The Corporation had no derivatives. The Corporation transferred securities with
a carrying value of $3,431 previously classified as held to maturity to
available for sale upon adoption. The unrealized gain on the securities
transferred totaled $10. On July 1, 2000, the Corporation's equity and
comprehensive income increased $7 (after tax effects) as a result of the
transfer.
4. LOANS
Total Loans at December 31, 2002 and 2001 are summarized as follows:
2002 2001
---------- ----------
Commercial, Financial and Agricultural ........... $ 130,121 $ 98,745
Residential Mortgage ............................. 143,569 154,115
Commercial Mortgage .............................. 97,928 73,904
Installment ...................................... 36,289 39,442
Lease Receivables ................................ 13,600 22,249
---------- ----------
$ 421,507 $ 388,455
========== ==========
Lease receivables at December 31, 2002 and 2001 are summarized as
follows:
2002 2001
---------- ----------
Lease payment receivable ......................... $ 5,212 $ 8,991
Estimated residual values ........................ 8,388 13,258
---------- ----------
Gross lease receivables .......................... 13,600 22,249
Less unearned income ............................. (1,143) (2,281)
---------- ----------
Net lease receivables ............................ $ 12,457 $ 19,968
========== ==========
At December 31, 2002 and 2001, net unamortized loan costs of $699 and
$721, 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.
Deposit accounts that have overdrawn their current balance, overdrafts,
are reclassified to loans. Overdrafts included in loans are $973 in 2002 and
$2,583 in 2001.
Nonperforming loans were as follows:
2002 2001
-------- --------
Loans past due over 90 days still on accrual ..... $ 1,106 $ 432
Nonaccrual loans ................................. $ 1,830 $ 1,174
Nonperforming loans include all (or almost all) impaired loans and
smaller balance homogeneous loans, such as residential mortgage and consumer
loans, that are collectively evaluated for impairment. No loans were determined
to be impaired at December 31, 2002 and 2001, nor were any loans during the
years then ended.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 14 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. 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:
2002 2001 2000
-------- -------- --------
Balance, Beginning of Year .................. $ 4,095 $ 3,879 $ 3,890
Charge-offs ................................. (1,064) (1,015) (967)
Recoveries .................................. 205 151 149
-------- -------- --------
Net Charge-offs .......................... (859) (864) (818)
Provision for Loan and Lease Losses ......... 1,800 1,080 807
-------- -------- --------
Balance, End of Year ........................ $ 5,036 $ 4,095 $ 3,879
======== ======== ========
6. SECONDARY MORTGAGE MARKET ACTIVITIES
Activity for capitalized mortgage servicing rights was as follows:
2002 2001
------- -------
Servicing rights:
Beginning of year ............................. $ 368 $ 256
Additions ..................................... 280 203
Amortized to expense .......................... (136) (91)
------- -------
End of year ................................... $ 512 $ 368
======= =======
No valuation allowance is deemed necessary as of December 31, 2002 and 2001.
7. PREMISES AND EQUIPMENT
The following summarizes Premises and Equipment at December 31:
2002 2001
-------- --------
Land ................................................. $ 1,650 $ 1,650
Premises and Leasehold Improvements .................. 11,365 11,080
Furniture and Equipment .............................. 8,455 7,955
-------- --------
21,470 20,685
Less Accumulated Depreciation and Amortization ....... (9,341) (8,200)
-------- --------
Premises and Equipment, Net ......................... $ 12,129 $ 12,485
======== ========
Depreciation on Premises and Equipment amounted to $1,125 in 2002,
$1,183 in 2001, $1,099 in 2000.
The Corporation is committed under four noncancellable operating leases
for facilities with initial or remaining terms in excess of one year. The
minimum annual rental commitments under these leases at December 31, 2002 are as
follows:
2003 $ 145
2004 113
2005 113
2006 113
2007 115
Thereafter 640
-------
$ 1,239
=======
Rental expense, net of rental income, charged to occupancy expense for
2002, 2001, and 2000 was $87, $111 and $141, respectively.
8. GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the year is as
follows:
Balance as of January 1, 2002 $ 10,821
Acquired during the period ........... --
---------
Balance as of December 31, 2002 ...... $ 10,821
=========
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 15 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Goodwill is no longer amortized starting in 2002. The effect of not
amortizing goodwill is summarized as follows:
2002 2001 2000
-------- -------- -------
Reported net income ................. $ 8,666 $ 6,510 $ 5,433
Add back: goodwill amortization,
net of taxes ....................... -- 950 950
-------- -------- -------
Adjusted net income ................. $ 8,666 $ 7,460 $ 6,383
======== ======== =======
Basic earnings per share:
Reported net income .............. $ 2.38 $ 1.78 $ 1.48
Goodwill amortization ............ -- 0.26 0.26
-------- -------- -------
Adjusted net income .............. $ 2.38 $ 2.04 $ 1.74
======== ======== =======
Diluted earnings per share:
Reported net income .............. $ 2.38 $ 1.78 $ 1.48
Goodwill amortization ............ -- 0.26 0.26
-------- -------- -------
Adjusted net income .............. $ 2.38 $ 2.04 $ 1.74
======== ======== =======
ACQUIRED INTANGIBLE ASSETS
Amortized intangible assets:
Other intangibles ................ $ 3,152
Accumulated amortization ......... (1,891)
--------
Net ........................... $ 1,261
========
Aggregate amortization expense:
2002 ............................. $ 315
Estimated amortization expense:
2003 ............................. $ 315
2004 ............................. 315
2005 ............................. 315
2006 ............................. 316
9. DEPOSITS
The following table reflects time certificates of deposit and IRA
accounts included in total deposits and their remaining maturities at December
31:
2002
---------
Time Deposits Maturing:
2003 ...................................... $ 60,887
2004 ...................................... 37,788
2005 ...................................... 80,654
2006 ...................................... 63,701
2007 ...................................... 41,482
Thereafter ................................ 934
---------
........................................... $ 285,446
=========
Certificates of Deposit of $100,000 or more totaled $62,983 and $34,030
at December 31, 2002 and 2001, respectively.
10. OTHER BORROWINGS
Other borrowings include $2,000 and $308 of demand notes payable to the
U.S. Treasury Department at December 31, 2002 and 2001, 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. The Corporation has available a $5 million line of credit with an
unaffiliated institution. Terms of the line are floating at 30 day LIBOR plus
180 basis points. The outstanding balance on the loan at year end 2002 was $0.
At year end 2002, the Bank had remaining borrowing capacity with the FHLB of
$146 million. Borrowings with the FHLB are secured by a blanket pledge of
selected securities in the amount of $79,081
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 16 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and certain mortgage loans with a value of $162,573. Also, other borrowings
include advances from the Federal Home Loan Bank (FHLB) at December 31, 2002,
and 2001 as follows:
DECEMBER 31,
Interest Rate Maturity 2002 2001
-------------------------------------------------
Variable
Overnight Daily $ -- $ 2,250
(a) 3/1/10 10,000 10,000
(b) 1/3/11 10,000 10,000
(c) 1/24/12 20,000 --
-------- ---------
Total borrowed funds $ 40,000 $ 22,250
======== =========
(a) FHLB has option to float the interest rate based on the 3 month
LIBOR +.16, the interest rate was 6.09% at December 31, 2002.
(b) Interest rate is fixed for one year at which time FHLB has
option to float the interest rate based on the 3 month LIBOR
+.20, the interest rate was 4.95% at December 31, 2002.
(c) Interest rate is fixed for two years at which time FHLB will
convert it to a floating interest rate based on the 3 month
LIBOR + .18 if the 3 month LIBOR is equal to or greater than
8.0%, the interest rate was 4.52% as of December 31, 2002.
Trust Preferred Securities - The Corporation issued $10,000 of floating
rate obligated mandatory redeemable securities through a special purpose entity
as part of a pooled offering. The rate is determined quarterly and floats based
on the 3 month LIBOR plus 3.45% and was 4.85% as of December 31, 2002. The
Corporation may redeem them, in whole or in part, at face value after June 26,
2007. They are presented in liabilities on the balance sheet and count as Tier 1
capital for regulatory capital purposes. Debt issue costs of $301 have been
capitalized and are being amortized through the first call date.
Following are maturities of borrowed funds as of December 31, 2002:
2003 $ 2,000
2004 --
2005 --
2006 --
2007 --
Thereafter 50,000
--------
Total Borrowed Funds $ 52,000
========
11. INCOME TAXES
The following is a summary of the tax provision:
2002 2001 2000
-------- -------- --------
Current .................................. $ 4,166 $ 3,138 $ 1,535
Deferred ................................. (1,366) (842) 269
-------- -------- --------
Net provision for Income Taxes ........... $ 2,800 $ 2,296 $ 1,804
======== ======== ========
The applicable portion of the current year provision related to the
gains on sales of available for sale securities is $(2), $94, and $27 in 2002,
2001 and 2000, respectively.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 17 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred tax liability as of December 31, 2002
and 2001 are as follows:
2002 2001
-------- --------
Deferred tax assets
Allowance for loan losses .......................... $ 1,712 $ 1,273
Post-retirement benefits ........................... 145 118
Intangible ......................................... 292 582
Deferred compensation .............................. 283 162
Merger costs ....................................... 52 60
Other .............................................. 80 60
-------- --------
2,564 2,255
Deferred tax liabilities
Premises and equipment ............................. 362 354
Vehicle leasing .................................... 2,667 3,771
Unrealized gain on securities available for sale ... 1,803 488
Other .............................................. 174 135
-------- --------
5,006 4,748
-------- --------
Net deferred tax liability ............................ $ 2,442 $ 2,493
======== ========
The reconciliation of income tax attributable to continuing operations
at the Federal statutory tax rates to income tax expense is as follows:
2002 % 2001 % 2000 %
---------- ------ ---------- ------ ---------- ------
Tax at statutory rate ... $ 3,898 34.0 $ 2,994 34.0 $ 2,461 34.0
Tax exempt income, net .. (959) (8.4) (715) (8.1) (773) (10.7)
Other ................... (139) (1.2) 17 0.2 116 1.6
---------- ------ ---------- ------ ---------- ------
Income tax provision .... $ 2,800 24.4 $ 2,296 26.1 $ 1,804 24.9
========== ====== ========== ====== ========== ======
12. 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 for 2002 and 2001, based on current
year compensation, are 6 percent of total compensation plus 5.7 percent of the
compensation in excess of $85. In 2000, contributions to the plan were 9 percent
of total compensation plus 5.7 percent of the compensation in excess of $76. The
Corporation recognized expense of $340 in 2002, $308 in 2001, and $402 in 2000.
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,
in 2002 and 2001, at 1% for every 1% contributed up to three percent then 0.5%
for every 1% contributed up to four percent in total of the employee's
compensation. Matching contributions in 2000 were 0.25% for every 1% contributed
up to 1% of the employee's compensation. The Bank's contributions were $169,
$187, and $28 in 2002, 2001, and 2000, respectively.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 18 2002 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 2002 2001 2000
-------- -------- --------
Benefit obligation at beginning of year ................ $ 538 $ 501 $ 434
Interest cost ...................................... 40 37 32
Service cost ........................................ 32 31 25
Actual claim expense ................................ (14) (22) (31)
Interest on claim expense ........................... -- -- 1
Actuarial (gain)/loss ............................... 41 (9) 40
-------- -------- --------
Benefit obligation at end of year ...................... $ 637 $ 538 $ 501
======== ======== ========
DECEMBER 31 2002 2001 2000
-------- -------- --------
Funded status of plan $ (637) $ (538) $ (501)
Unrecognized actuarial (gain)/loss 77 37 46
Unrecognized prior service cost -- -- --
Unrecognized transition obligation 81 88 95
-------- -------- --------
Accrued benefit cost $ (479) $ (413) $ (360)
======== ======== ========
DECEMBER 31 2002 2001 2000
-------- -------- --------
Net periodic post-retirement benefit cost:
Service cost $ 32 $ 31 $ 25
Interest cost 40 37 32
Amortization of transition obligation over 21 years 7 7 7
-------- -------- --------
$ 79 $ 75 $ 64
======== ======== ========
The weighted average discount rate used to calculate net periodic
benefit cost and the accrued post-retirement liability was 7.00% in 2002 and
7.50% in 2001. The health care cost trend rate used to measure the expected
costs of benefits for 2003 is 8.00%, and 7.00% thereafter. A one percent
increase in the health care trend rates would result in an increase of $88 in
the benefit obligation of December 31, 2002, and would increase the service and
interest costs by $14 in future periods. A similar one percent decrease in
health care trend rates would result in a decrease of $80 and $12 in the benefit
obligation and service and interest costs, respectively, at December 31, 2002.
The presentation above for the years 2002, 2001 and 2000 reflects a policy which
grants eligibility to these benefits to employees at least 60 years of age with
30 years of service.
13. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has transactions, including
loans, with its officers, directors and their affiliated companies. The
aggregate of such loans totaled $3,981 on December 31, 2002 compared to $7,888
at December 31, 2001. During 2002, $10,700 of new loans were made and repayments
totaled $10,430.
Deposits from principal officers, directors and their affiliates at
year-end 2002 and 2001 were $2,817 and $4,474.
14. CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
Banks and bank holding companies are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and, additionally for banks, prompt corrective action regulations
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgements
by regulators. Failure to meet capital requirements can initiate regulatory
action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. As of December 31, 2002
and 2001, the most recent regulatory notifications categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 19 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Actual and required capital amounts (in millions) and ratios are
presented below at year-end:
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------------ ------ ---------- -------
2002
Total Capital to risk
weighted assets
Consolidated $ 51,396 10.82% $ 38,000 8.0% $ 47,500 10.0%
Bank $ 54,589 11.67% $ 37,436 8.0% $ 46,795 10.0%
Tier 1 (Core) Capital to risk
weighted assets
Consolidated $ 46,360 9.76% $ 19,000 4.0% $ 28,500 6.0%
Bank $ 49,553 10.59% $ 18,720 4.0% $ 28,077 6.0%
Tier 1 (Core) Capital to
average assets
Consolidated $ 46,360 7.01% $ 26,454 4.0% $ 33,068 5.0%
Bank $ 49,553 7.70% $ 25,751 4.0% $ 32,189 5.0%
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------------ ------ ---------- -------
2001
Total Capital to risk
weighted assets
Consolidated $ 45,603 10.87% $ 33,549 8.0% $ 41,937 10.0%
Bank $ 42,972 10.33% $ 33,273 8.0% $ 41,591 10.0%
Tier 1 (Core) Capital to risk
weighted assets
Consolidated $ 41,508 9.90% $ 16,775 4.0% $ 25,162 6.0%
Bank $ 38,877 9.35% $ 16,636 4.0% $ 24,954 6.0%
Tier 1 (Core) Capital to
average assets
Consolidated $ 41,508 7.16% $ 23,204 4.0% $ 29,005 5.0%
Bank $ 38,877 6.75% $ 23,030 4.0% $ 28,789 5.0%
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, 2002,
$5.6 million of undistributed earnings of the Bank was available for
distribution to the Corporation as dividends, without prior regulatory approval.
15. OFF-BALANCE SHEET ACTIVITIES
Some financial instruments, such as loan commitments, credit lines,
letters of credit, and overdraft protection, are issued to meet customer
financing needs. These are agreements to provide credit or to support the credit
of others, as long as conditions established in the contract are met, and
usually have expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies are used to make such commitments as are used for loans, including
obtaining collateral at exercise of the commitment.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 20 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The contractual amount of financial instruments with off-balance-sheet
risk was as follows at year end.
2002 2001
---------------- -----------------
FIXED VARIABLE Fixed Variable
RATE RATE Rate Rate
----- -------- ------ --------
Commitments to make loans $ 9.3 $ 56.1 $ 10.8 $ 55.9
Unused lines of credit and
letters of credit -- 33.9 -- 28.7
Commitments to make loans are generally made for periods of 60 days or
less. The fixed rate loan commitments have interest rates ranging from 3.42% to
12.00% and maturities ranging from 3 months to 20 years.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amount is the estimated fair value for cash and cash
equivalents, Federal Home Loan Bank stock, accrued interest receivable and
payable, demand deposits, other borrowings, and variable rate loans, deposits or
borrowings that reprice frequently and fully. Security fair values are based on
market prices or dealer quotes, and if no such information is available, on the
rate and term of the security and information about the issuer. For fixed rate
loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair
values for impaired loans are estimated using discounted cash flow analysis or
underlying collateral values. Fair value of loans held for sale is based on
market quotes. Fair value of debt is based on current rates for similar
financing. The fair value of off-balance-sheet items is based on the current
fees or cost that would be charged to enter into or terminate such arrangements.
The fair value of off balance sheet items is not materially different from the
nominal value.
While these estimates of fair value are based on management's judgment
of the most appropriate factors as of the balance sheet date, there is no
assurance that the estimated fair values would have been realized if the assets
had been disposed of or the liabilities settled at that date, since market
values may differ depending on various circumstances. The estimated fair values
would also not apply to subsequent dates.
In addition, other assets and liabilities that are not financial
instruments, such as premises and equipment, are not included in the above
disclosures. Also, non-financial instruments typically not recognized on the
balance sheet may have value but are not included in the above disclosures.
These include, among other items, the estimated earnings power of core deposits,
the earnings potential of trust accounts, the trained workforce, customer
goodwill and similar items.
DECEMBER 31, 2002 December 31, 2001
----------------------- -----------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
---------- ---------- ---------- ----------
ASSETS
Cash and short-term assets $ 22,527 $ 22,527 $ 19,391 $ 19,391
Securities 184,964 184,964 152,757 152,757
Net loans 402,871 423,137 362,110 374,471
Federal Home Loan Bank and Federal Reserve stock 3,588 3,588 1,932 1,932
Accrued interest receivable 3,905 3,905 3,569 3,569
LIABILITIES
Deposits (545,137) (554,189) (506,640) (510,695)
Other borrowings (52,000) (52,843) (23,268) (23,268)
Accrued interest payable (1,650) (1,650) (1,679) (1,679)
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 21 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
DECEMBER 31,
2002 2001
-------- --------
ASSETS
Cash .............................................. $ 113 $ 72
Investment in bank subsidiary ..................... 65,281 52,268
Investment in non-bank subsidiaries ............... 5,769 3,236
Other assets ...................................... 1,159 896
-------- --------
TOTAL ASSETS .................................... $ 72,322 $ 56,472
======== ========
LIABILITIES
Income taxes payable .............................. $ (140) $ (21)
Deferred tax liability ............................ 9 (3)
Trust preferred securities ........................ 10,000 --
Other liabilities ................................. 420 1,602
-------- --------
TOTAL LIABILITIES ............................... 10,289 1,578
TOTAL SHAREHOLDERS' EQUITY ...................... 62,033 54,894
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...... $ 72,322 $ 56,472
======== ========
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
2002 2001 2000
-------- -------- --------
INCOME
Dividends from:
Bank subsidiary ......................................... $ 5,958 $ 3,555 $ 2,309
Non bank subsidiaries ................................... -- -- 770
Other ..................................................... 130 116 131
-------- -------- --------
TOTAL INCOME ......................................... 6,088 3,671 3,210
-------- -------- --------
EXPENSES .................................................. (543) (190) (187)
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY
IN DISTRIBUTED NET INCOME OF SUBSIDIARY ................. 5,545 3,481 3,023
Applicable income tax (obligation) benefit ............. 128 22 19
Equity in undistributed net income of bank subsidiary .. 2,841 2,751 3,006
(Distributions in excess of)/equity in undistributed
net income of non-bank subsidiaries ................... 152 256 (615)
-------- -------- --------
NET INCOME ........................................... $ 8,666 $ 6,510 $ 5,433
======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................. $ 8,666 $ 6,510 $ 5,433
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of bank subsidiary ..... (2,841) (2,751) (3,006)
Equity in undistributed net income of non-bank subsidiaries (152) (256) 615
(Increase) Decrease in other assets ....................... (263) 15 15
Increase (Decrease) in other liabilities .................. (1,284) 553 11
--------- --------- ---------
Net cash provided by operating activities ................. 4,126 4,071 3,068
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital transfer to subsidiaries ........................... (10,009) (144) --
-------- -------- --------
Net cash used in investing activities ..................... (10,009) (144) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ............................................. (4,332) (3,410) (3,080)
Net treasury stock activity ................................ 256 (533) 48
Advances from trust preferred securities ................... 10,000 -- --
-------- -------- --------
Net cash used in financing activities ..................... 5,924 (3,943) (3,032)
Net increase (decrease) in cash ............................ 41 (16) 36
Cash beginning of year ..................................... 72 88 52
-------- -------- --------
Cash end of year ........................................... $ 113 $ 72 $ 88
======== ======== ========
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 22 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as
follows:
2002 2001 2000
------- ------- -------
Unrealized holding gains and losses on
available for sale securities ................ $ 3,853 $ 1,979 $ 1,825
Cumulative effect of securities transferred ... -- -- 7
Less reclassification adjustments for gains and
losses later recognized in income ............ (7) 276 76
------- ------- -------
Net unrealized gains and losses ............... 3,860 1,703 1,756
Tax effect .................................... 1,311 579 597
------- ------- -------
Other comprehensive income (loss) ............. $ 2,549 $ 1,124 $ 1,159
======= ======= =======
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited quarterly results of operations for the years ended
December 2002 and 2001 are as follows (in thousands, except per share data):
QUARTERS ENDED
2002 2001
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------- -------- -------- -------- --------
Total interest income .................. $ 9,695 $ 9,967 $ 10,051 $ 10,023 $ 10,339 $ 10,304 $ 10,220 $ 9,946
Net interest income .................... 5,699 6,040 6,352 6,444 5,195 5,323 5,445 5,699
Provision for loan losses .............. 360 360 540 540 270 270 270 270
Non-interest income .................... 1,436 1,559 1,524 1,519 1,157 1,219 1,676 1,546
Non-interest expense ................... 4,277 4,300 4,364 4,366 4,270 4,302 4,489 4,313
Net income ............................. 1,858 2,165 2,288 2,355 1,382 1,503 1,735 1,890
Net income per share, basic ............ 0.51 0.60 0.63 0.65 0.38 0.41 0.47 0.52
Net income per share, diluted .......... 0.51 0.59 0.63 0.64 0.38 0.41 0.47 0.52
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 23 2002 ANNUAL REPORT
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
CNB Financial Corporation
Clearfield, PA
We have audited the accompanying consolidated statement of condition of CNB
Financial Corporation as of December 31, 2002 and 2001 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, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CNB Financial
Corporation as of December 31, 2002 and 2001, and the results of its operations
and cash flows for each of the three years in the period ended December 31, 2002
in conformity with accounting principles generally accepted in the United States
of America.
As disclosed in Note 1, during 2002 the Company adopted new accounting guidance
for goodwill and intangible assets.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Cleveland, Ohio
February 4, 2003
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 24 2002 ANNUAL REPORT
SELECTED FINANCIAL DATA
YEAR ENDED
DECEMBER 31
2002
-----------
(dollars in thousands, except per share data)
Interest Income
Loans including fees ......................................... $ 30,294
Deposits with banks .......................................... 84
Federal funds sold ........................................... 267
Investment securities:
U.S. treasury securities ................................. 528
Securities of U.S. government agencies and corporations .. 3,140
Obligations of states and political subdivisions ......... 2,136
Other securities ......................................... 3,287
---------
Total interest and dividend income ........................... 39,736
Interest expense
Deposits ..................................................... 12,908
Other borrowings ............................................. 2,293
---------
Total interest expense ....................................... 15,201
Net interest income ............................................. 24,535
Provision for loan losses ....................................... 1,800
---------
Net interest income after provision
for loan losses ................................................ 22,735
Non-interest income ............................................. 6,038
Non-interest expenses ........................................... 17,307
---------
Income before taxes ............................................. 11,466
Applicable income taxes ......................................... 2,800
---------
Net income ............................................... $ 8,666
=========
Per share data
Basic ........................................................ $ 2.38
Fully diluted ................................................ $ 2.38
Dividends declared ........................................... $ 1.18
Book value per share at year end ............................. $ 17.01
At end of period
Total assets ................................................. $ 668,518
Securities ................................................... 184,964
Loans, net of unearned discount .............................. 420,364
Allowance for loan losses .................................... 5,036
Deposits ..................................................... 545,137
Shareholders' equity ......................................... 62,033
Key ratios
Return on average assets ..................................... 1.35%
Return on average equity ..................................... 14.83%
Loan to deposit ratio ........................................ 76.19%
Dividend payout ratio ........................................ 49.58%
Average equity to average assets ratio ....................... 9.07%
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 25 2002 ANNUAL REPORT
FIVE YEAR COMPARISON
YEAR ENDED DECEMBER 31
2001 2000
-------------- --------------
(dollars in thousands, except per share data)
Interest Income
Loans including fees ......................................... $ 31,323 $ 32,075
Deposits with banks .......................................... 169 137
Federal funds sold ........................................... 434 67
Investment securities:
U.S. treasury securities ................................. 1,113 1,378
Securities of U.S. government agencies and corporations .. 2,862 2,706
Obligations of states and political subdivisions ......... 1,526 1,813
Other securities ......................................... 3,382 2,470
-------------- --------------
Total interest and dividend income ........................... 40,809 40,646
Interest expense
Deposits ..................................................... 17,971 18,660
Other borrowings ............................................. 1,176 1,174
-------------- --------------
Total interest expense ....................................... 19,147 19,834
Net interest income ............................................. 21,662 20,812
Provision for loan losses ....................................... 1,080 807
-------------- --------------
Net interest income after provision
for loan losses ................................................ 20,582 20,005
Non-interest income ............................................. 5,598 4,481
Non-interest expenses ........................................... 17,374 17,249
-------------- --------------
Income before taxes ............................................. 8,806 7,237
Applicable income taxes ......................................... 2,296 1,804
-------------- --------------
Net income ............................................... $ 6,510 $ 5,433
============== ==============
Per share data
Basic ........................................................ $ 1.78 $ 1.48
Fully diluted ................................................ $ 1.78 $ 1.48
Dividends declared ........................................... $ 0.93 $ 0.84
Book value per share at year end ............................. $ 15.08 $ 13.96
At end of period
Total assets ................................................. $ 592,794 $ 555,365
Securities ................................................... 152,757 136,250
Loans, net of unearned discount .............................. 386,173 366,156
Allowance for loan losses .................................... 4,095 3,879
Deposits ..................................................... 506,640 485,217
Shareholders' equity ......................................... 54,894 51,203
Key ratios
Return on average assets ..................................... 1.11% 0.97%
Return on average equity ..................................... 12.15% 10.80%
Loan to deposit ratio ........................................ 75.41% 74.66%
Dividend payout ratio ........................................ 52.38% 56.69%
Average equity to average assets ratio ....................... 9.17% 9.01%
YEAR ENDED DECEMBER 31
1999 1998
-------------- --------------
(dollars in thousands, except per share data)
Interest Income
Loans including fees ......................................... $ 27,990 $ 25,166
Deposits with banks .......................................... 60 12
Federal funds sold ........................................... 386 369
Investment securities:
U.S. treasury securities ................................. 989 1,134
Securities of U.S. government agencies and corporations .. 2,383 2,503
Obligations of states and political subdivisions ......... 1,888 1,414
Other securities ......................................... 1,557 694
-------------- --------------
Total interest and dividend income ........................... 35,253 31,292
Interest expense
Deposits ..................................................... 15,579 13,714
Other borrowings ............................................. 981 934
-------------- --------------
Total interest expense ....................................... 16,560 14,648
Net interest income ............................................. 18,693 16,644
Provision for loan losses ....................................... 643 707
-------------- --------------
Net interest income after provision
for loan losses ................................................ 18,050 15,937
Non-interest income ............................................. 3,675 3,172
Non-interest expenses ........................................... 15,661 12,231
-------------- --------------
Income before taxes ............................................. 6,064 6,878
Applicable income taxes ......................................... 1,460 1,835
-------------- --------------
Net income ............................................... $ 4,604 $ 5,043
============== ==============
Per share data
Basic ........................................................ $ 1.26 $ 1.37
Fully diluted ................................................ $ 1.25 $ 1.37
Dividends declared ........................................... $ 0.80 $ 0.72
Book value per share at year end ............................. $ 13.00 $ 13.41
At end of period
Total assets ................................................. $ 561,162 $ 468,917
Securities ................................................... 143,563 113,675
Loans, net of unearned discount .............................. 362,764 311,141
Allowance for loan losses .................................... 3,890 3,314
Deposits ..................................................... 500,751 398,082
Shareholders' equity ......................................... 47,643 49,372
Key ratios
Return on average assets ..................................... 0.91% 1.18%
Return on average equity ..................................... 9.50% 10.43%
Loan to deposit ratio ........................................ 71.67% 76.94%
Dividend payout ratio ........................................ 62.92% 51.32%
Average equity to average assets ratio ....................... 9.59% 11.31%
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 26 2002 ANNUAL REPORT
STATISTICAL INFORMATION
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, 2002, the
approximate number of shareholders of record of the Corporation's common stock
was 2,300.
PRICE RANGE OF COMMON STOCK
2002 2001
HIGH LOW High Low
---------------- ----------------
First Quarter ...... $ 26.00 $ 21.52 $ 18.50 $ 14.75
Second Quarter ..... 26.20 23.00 21.00 16.25
Third Quarter ...... 25.65 23.25 20.00 17.50
Fourth Quarter ..... 34.00 24.50 23.50 18.50
CASH DIVIDENDS PAID
2002 2001
------ ------
First Quarter ...... $ 0.25 $ 0.23
Second Quarter ..... 0.25 0.23
Third Quarter ...... 0.26 0.23
Fourth Quarter ..... 0.42 0.24
------ ------
$ 1.18 $ 0.93
TRUST AND ASSET MANAGEMENT DIVISION
FUNDS UNDER MANAGEMENT (MARKET VALUE)
($'s in thousands) 2002 2001
------------ ------------
Personal Trusts, Estates and Agency Accounts ..... $ 171,739 $ 194,884
Corporate Accounts ............................... 6,980 11,747
------------ ------------
Total ............................................ $ 178,719 $ 206,631
============ ============
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 27 2002 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 incorporated in
Delaware. CNB Investment Corporation maintains investments in debt and equity
securities. County Reinsurance Company, a subsidiary, is a Corporation of
Arizona. County Reinsurance Company provides credit life and disability for
customers of County National Bank. 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 and
systems to control, monitor 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 the purchase 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 securities 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.
FINANCIAL CONDITION
The following table presents ending balances ($'s in millions), growth
(reduction) and the percentage change during the past two years:
2002 INCREASE % 2001 INCREASE % 2000
BALANCE (DECREASE) CHANGE BALANCE (DECREASE) CHANGE BALANCE
------------------------------------------------------------------------
Total assets $ 668.5 $ 75.7 12.8 $ 592.8 $ 37.4 6.7 $ 555.4
Total loans, net 415.3 33.3 8.7 382.1 19.8 5.5 362.3
Total securities 185.0 32.2 21.1 152.8 16.5 12.1 136.3
Total deposits 545.1 38.5 7.6 506.6 21.4 4.4 485.2
Total shareholders' equity 62.0 7.1 13.0 54.9 3.7 7.2 51.2
The above table is referenced for the discussion in this section of the
report.
OVERVIEW OF BALANCE SHEET
The increase in assets during 2002 was primarily the result of continued
growth in customer deposits. In addition, a loan production office was created
to service commercial customers in Blair, Centre, Cambria and surrounding
counties. The specific effects to each area are described in the following
sections.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $22,527,000 at December 31, 2002
compared to $19,391,000 on December 31, 2001. The cash and equivalents has
various fluctuations based on timing during the month. The year end balance is
slightly higher than normal but is not considered unreasonable.
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 securities 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.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 28 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SECURITIES
Securities increased 21.1% since December 31, 2001. A large part of the
increase resulted from purchasing $20 million of state and municipal bonds in
the first quarter of 2002, using borrowings at a favorable net interest margin
from the Federal Home Loan Bank of Pittsburgh. The borrowing has a fixed rate of
interest for two years and then may convert to floating at 3 month LIBOR +0.18
if the 3 month LIBOR rate is equal to or greater than 8.0%. The 3 month LIBOR at
December 31, 2002 was 1.38%. The notes had maturities ranging from 2016 to 2020
years with call dates from 2006 to 2013 years. Also, adding to the increase was
a change in the fair market valuation of the bond portfolio. In a declining
interest rate environment, bond prices generally increase. This increase gave
the Corporation an increase in unrealized gains of $3,867,000. The Corporation
generally buys into the market over time and does not attempt to "time" its
transactions. In doing this the highs and lows of the market are averaged into
the portfolio and attempts to minimize the overall effect of different rate
environments.
The portfolio mix stayed fairly consistent to the prior year with the
exception of the state and municipal obligations. The $20 million leverage in
medium to long term maturity bonds in early 2002 was the majority of the
increase. The Corporation can utilize the tax free income to assist in reducing
its overall tax costs since the tax benefits from the Bank's vehicle leasing
operation are virtually gone for 2002 and later years.
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 was strong during 2002. 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. We expect loan demand to remain steady over the next several
quarters in these and other market areas of the Bank.
Contributing to the growth in loans was an increase of $31.4 million in
commercial loans and $24.0 million in commercial mortgages. These loans are not
concentrated in one area nor were they in a single industry. The previously
mentioned loan production office has accounted for $15.5 million of the
increase. We anticipate that a similar growth for this office will occur during
2003. The remaining increase was from within our market area as we continue to
strengthen our niche in the small business arena. The increases helped to offset
the continued unwinding of our leased auto portfolio. In June 2002, the Bank
decided to discontinue leasing as the auto manufacturers began to offer
incentives to purchase new cars at 0% financing, causing us to be uncompetitive.
Our lease portfolio has declined $8.6 million or 38.9% since December 31, 2001.
LOAN CONCENTRATION
The Corporation monitors loan concentrations by individual industries in
order to track potential risk exposures resulting from industry related
downturns. At December 31, 2002, no concentration exists within our commercial
or real estate loan portfolio as related to a concentration of 10% of the total
loans. Residential real estate lending continues to be the largest component of
the loan portfolio.
LOAN QUALITY
The Corporation has established written lending policies and procedures
that require underwriting standards, loan documentation, and credit analysis
standards to be met prior to funding a loan. Subsequent to the funding of a
loan, ongoing review of credits is required. Credit reviews are performed
annually on a minimum of 60% of the commercial loan portfolio by an outsourced
loan review partner. See "Allowance for Loan and Lease Losses" for further
discussion of credit review procedures.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 29 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table sets forth information concerning loan delinquency
and other non-performing assets ($ in thousands):
AT DECEMBER 31, 2002 2001 2000
--------- --------- ---------
Nonperforming assets:
Non-accrual loans $ 1,830 $ 1,174 $ 652
Accrual loans greater than
89 days past due 1,106 432 1,136
Foreclosed assets held for sale 212 361 783
--------- --------- ---------
Total nonperforming assets $ 3,148 $ 1,967 $ 2,571
========= ========= =========
Total loans, net of unearned income $ 420,364 $ 386,173 $ 366,156
Nonperforming loans as a percent of loans, net 0.75% 0.51% 0.70%
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established by provisions for
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,
2002 2001 2000
--------- --------- ---------
Balance at beginning of Period $ 4,095 $ 3,879 $ 3,890
Charge-offs:
Commercial and financial 152 38 144
Commercial mortgages 82 162 3
Residential mortgages 127 87 12
Installment 468 494 413
Lease receivables 235 234 395
--------- --------- ---------
1,064 1,015 967
Recoveries:
Commercial and financial 1 1 17
Commercial mortgages 52 4 3
Residential mortgages -- 8 --
Installment 87 83 95
Lease receivables 65 55 34
--------- --------- ---------
205 151 149
--------- --------- ---------
Net charge-offs: (859) (864) (818)
Provision for loan losses 1,800 1,080 807
--------- --------- ---------
Balance at end-of-period $ 5,036 $ 4,095 $ 3,879
========= ========= =========
Loans, net of unearned $ 420,364 $ 386,173 $ 366,156
Allowance to net loans 1.20% 1.06% 1.06%
The adequacy of the allowance for loan and lease losses is subject to a
formal analysis by the credit administrator 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 criticized loans that is given a specific reserve. The
remaining loans are pooled, by category, into these segments:
Reviewed
. Commercial and financial
. Commercial mortgages
Homogeneous
. Residential real estate
. Installment
. Lease receivables
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 30 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The reviewed loan pools are further segregated into three categories:
substandard, doubtful and unclassified. Historical loss factors are calculated
for 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
credit administrator, guidance from the regulatory agencies, expertise of our
loan review partner, 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 2002 2001
--------- ---------
Commercial and industrial $ 2,311 $ 1,547
Commercial mortgages 1,053 676
Residential mortgages 802 812
Installment 638 753
Lease receivables 232 307
--------- ---------
Total $ 5,036 $ 4,095
========= =========
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 commercial loan and commercial mortgage portfolios require
larger dollars to cover the associated credit risks. Secondly, economic factors
both in our market area and nationwide have lead to trends of increased
charge-offs in recent years.
With the growth of our commercial portfolios along with the unfavorable
economic conditions, the Bank began to increase the allocation to loan loss
reserve. This increase occurred during the third quarter and continued in the
fourth quarter. The increase resulted in a $540,000 provision in the 3rd and 4th
quarters as compared to $360,000 in each of the first two quarters of 2002.
Management has continued this provision into the first quarter of 2003 and
continues to closely monitor the loss potential within the portfolio. Management
feels that the allowance provides the Corporation with adequate coverage for the
credit risk associated with the increase in its commercial portfolios.
The Bank's experience in net charge-offs for 2002 when compared to 2001
and 2000 was relatively unchanged. Management utilizes peer group data surveying
a group of similarly sized organizations to develop current information for
comparative purposes. The allowance for loan and lease losses is deemed to be
adequate to absorb probable incurred losses in the portfolio at December 31,
2002.
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 short-term 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 experienced an increase of 7.6% in deposits during 2002.
Per the table below, growth was in the certificate of deposit accounts. With
lower interest rates and a weak economy, customers are searching for insured
deposits paying a reasonable rate of interest. We had two promotional CDs during
2002 which were very successful. First, a product over four years guaranteeing
automatic rate increases every twelve months. Second, a CD allowing no penalty
withdrawals and add-ons to principal during the period of the CD. Both products
have been very successful and have allowed our customers flexibility in their
investments at a competitive price for the Bank.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 31 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table reflects the Corporation's deposits by category (in
thousands):
2002 2001 2000
--------- --------- ---------
Checking, Non-Interest Bearing $ 56,010 $ 60,241 $ 52,757
Checking, Interest Bearing 128,309 132,177 116,730
Savings Accounts 75,372 79,301 72,940
Certificates of Deposit 285,446 234,921 242,790
--------- --------- ---------
$ 545,137 $ 506,640 $ 485,217
========= ========= =========
SHAREHOLDERS' EQUITY
The Corporation's capital provided the strong base for our profitable
growth. Total shareholders' equity increased 13.0% in 2002. The increase was the
result of an increase of $2,549,000 in accumulated other comprehensive income
which represents an increase in unrealized gain in available-for-sale
securities, net of taxes. The remainder of the growth is a result of retained
earnings and a reduction in the treasury stock held.
With 100% of the securities classified as available-for-sale, this
portion of the balance sheet is more sensitive to the change in market value of
securities. In 2002, interest rates declined resulting in increased valuations
in the available-for-sale category of securities. 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 10.82% as of December 31, 2002 is well above
the minimum standard of 8%. The Tier 1 capital ratio of 9.76% also is above the
regulatory minimum of 4%. The leverage ratio, 7.01%, 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
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 7 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 $186 million with only $40 million
outstanding at year end 2002. Management feels the Corporation's current
liquidity position is acceptable.
YEAR ENDED DECEMBER 31, 2002
OVERVIEW OF THE INCOME STATEMENT
In 2002, net income was $8,666,000 an increase of 33.1% compared to 2001
net income of $6,510,000. The increase in earnings is the result of enhanced net
interest income from the utilization of increased earning assets and an
increased net interest margin as well as a recent accounting rule change
regarding the expensing of goodwill from branch purchases. The net interest
income increased $2.9 million or 13% over 2001. The Corporation's net interest
margin increased in 2002 which, coupled with a higher level of average earning
assets, resulted in increased net interest income.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 32 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTEREST INCOME AND EXPENSE
Net interest income totaled $24,535,000 for 2002, an increase of 13.3%
over 2001. Continued growth in average earning assets has been the primary
factor in this increase along with an increased net interest margin. Total
interest income for 2002 decreased by $1,073,000 or (2.6)% while interest
expense decreased by $3,946,000 or (20.6)% when compared to 2001. The
Corporation's tax equivalent net interest margin in 2002 was 4.29%, up 11 basis
points from 4.18% in 2001. The main cause of the increased net interest margin
is the reduction in cost of funds. Cost of funds in 2002 declined to 2.91% from
4.10% in 2001 or a 29% reduction. This reduction was aided by an overall decline
in interest rates as well as management's efforts in deposit pricing over the
past three years.
The Corporation recorded a provision for loan and lease losses of
$1,800,000 for 2002 compared to $1,080,000 for 2001. The increase in provision
is a result of a change in the volume of the commercial loan portfolios as
discussed in the Allocation of the Allowance for Loan and Lease Losses section.
NON-INTEREST INCOME
Non-interest income increased $440,000 or 7.9% in 2002 compared to 2001.
The service charges on deposit accounts is the main source of the increase. The
change for 2002 was an increase of $460,000 or 15.9%. This area continues to
show increases resulting from an increased number of accounts and an overdraft
payment program which allows customers to manage their financing in a more
efficient manner. In addition, the Corporation's net gain on sale of loans
increased $202,000 or 449% over 2001. This increase was caused by an above
average wave of refinances caused by the lower interest rates in 2002.
The Corporation owns equity securities of various entities that are
carried at their current fair market value. During 2002, the losses realized
from these securities totalled $(7,000) compared to a $276,000 gain in 2001. 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 declined by 0.4% to
$17,307,000 during 2002 compared to 2001. These costs include but are not
limited to salaries, benefits, supplies, data processing expenses, insurance,
occupancy, and amortization expenses. The primary factor in the decrease is the
discontinuance of amortization expense associated with goodwill. This previously
discussed accounting rule change saved the Corporation $1,438,000 in
amortization expense in 2002. Under this rule, the goodwill is tested for
impairment. The testing was performed as of implementation of the accounting
rules, showing that there was no impairment of the goodwill and thus no write
down occurred during 2002.
The reduction of amortization expense was offset by increases in
salaries, data processing and other expenses. Salaries increased $519,000 or
8.4% due to the opening of the loan production office, increased staff in the
credit administration area and the normal increases caused by individual
increases in salaries. Data processing increased due to the implementation of a
new customer platform system that automates customer account opening and loan
documentation. This system allows the Bank to serve customers more efficiently
and automates the opening of accounts on the accounting system.
The Bank signed an agreement to build a facility in Bradford, PA. This
location will replace the Washington Street location in Bradford. The estimated
total cost of this project is $700,000. The project is expected to be completed
in late summer 2003 with minimal effect on annual operating expenses.
YEAR ENDED DECEMBER 31, 2001
OVERVIEW OF THE INCOME STATEMENT
In 2001, net income was $6,510,000 an increase of 19.8% compared to 2000
net income of $5,433,000. The increase is a combination of increased net
interest income and non-interest income with virtually no change in non-interest
expense.
Net income prior to merger and acquisition costs and amortization of
intangible assets and goodwill for 2001 was $7.6 million compared to $6.7
million for 2000. The increase indicates an improvement in 2001 of 14.6% over
2000. The major reason for the increase is the net interest income which
increased $850,000 or 4.1% over 2000. Also the net interest margin was unchanged
in 2001 on growth of average earning assets of $21.1 million to $537,523,000, an
increase of 4.1%.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 33 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTEREST INCOME AND EXPENSE
Net interest income totaled $21,662,000 for 2001, an increase of 4.1%
over 2000. Continued growth in loans along with reduced funding costs has been
the primary factor in this increase. This was also aided by the large growth of
investments during 2001. Total interest income for 2001 increased by $163,000 or
0.4% while interest expense decreased by $687,000 or 3.5% when compared to 2000.
The Corporation has placed an emphasis on increasing lower cost transactional
deposit accounts. The cost of funds declined 30 basis points from 4.40% in 2000
to 4.10% in 2001.
The Corporation recorded a provision for loan and lease losses of
$1,080,000 for 2001 compared to $807,000 for 2000. The increase in provision is
a result of a higher level of net charge-offs during 2001.
NON-INTEREST INCOME
Non-interest income increased $1,117,000 or 24.9% in 2001 compared to
2000. The service charges on deposit accounts is the main source of the
increase. The change in service charge income for 2001 was an increase of
$621,000 or 27.2% over 2000. The overall growth in deposit customers accounts
for the growth in this area. Also, trust income is up $91,000 or 9.8% over 2000
mainly due to growth in trust assets of $12,159,000 or 6.3%.
The Corporation owns equity securities of various entities that are
carried at their current fair market value. During 2001, the gains realized from
the sale of securities totalled $276,000 compared to $79,000 in 2000. 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 0.7% to
$17,374,000 during 2001 compared to 2000. These costs include but are not
limited to salaries, benefits, supplies, data processing expenses, insurance,
occupancy, and amortization expenses. The Corporation focused on non-interest
expenses throughout much of 2000 and 2001 to maximize efficiencies through
growth and automation. The minimal increase is due to process efficiencies that
were implemented in the fourth quarter of 2000.
RETURN ON EQUITY
The return on average shareholder's equity ("ROE") for 2002 was 14.83%
compared to 12.15% and 10.80% for 2001 and 2000 respectively. The increase in
2002 can be attributed primarily to the Corporation's efforts to become more
efficient and profitable as the growth in earning assets continue.
RETURN ON ASSETS
The Corporation's return on average assets ("ROA") was 1.35% in 2002 up
from 1.11% in 2001 and 0.97% recorded in 2000. Increased ROA can be attributed
to growing net interest income as well as the elimination of amortization
expense associated with goodwill.
FEDERAL INCOME TAX EXPENSE
Federal income taxes increased to $2,800,000 in 2002 compared to
$2,296,000 in 2001. This increase year to date can be attributed to the
Corporation's higher taxable income during the period. The effective tax rates
were 24.4%, 26.1% and 24.9% for 2002, 2001 and 2000, respectively.
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.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 34 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 2002 was 11.85% of total earning assets
compared to policy guidelines of plus or minus 15.0%. The ratio was -19.28% at
December 31, 2001.
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.
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 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
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 reflecting rate sensitive assets to rate sensitive
liabilities at December 31, 2002 and 2001:
2002 2001
--------- --------
Static 1-Yr. Cumulative Gap 11.85% (19.28%)
--------- --------
Earnings Simulation
-200 bps vs. Stable Rate (2.24%) 10.62%
+200 bps vs. Stable Rate (6.08%) (16.05%)
The interest rate sensitivity position at December 31, 2002 was asset
sensitive in the short-term. 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.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 35 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FUTURE OUTLOOK
Management's focus for 2003 is to continue to increase our retail
business. This will enable us to better control our cost of funds and create
higher returns for our shareholders through increased profitability. Our
strategy began in the first quarter of 2001 by aggressively seeking new checking
customers. We will continue a similar direct marketing approach throughout 2003,
focusing on both deposits and loans. The Corporation will begin offering
alternative investments in the form of annuities in 2003. These investments will
be sold throughout the Bank's branch network utilizing bank personnel who have
obtained the necessary licensing and product training. Other strategies will be
implemented throughout the year to encourage consumer loan growth. Management
continues to be encouraged by the growth in markets served by the Bank. 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 2003.
Loan growth was strong during 2002. A concerted effort to manage our
pricing based on credit risk has resulted in increased loan yields compared to
the overall decline in market interest rates. Management believes that the rate
of loan growth will be moderate to low in 2003 and expects the loan to deposit
ratio to remain constant throughout 2003.
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, 2002,
the efficiency ratio was 51.9% compared to 54.6% for 2001 and 57.2% for 2000.
The efficiency ratio was positively impacted by increased service
charges on deposit accounts resulting from more customers. Management will
continue its emphasis on this area during 2003 with a goal of improved
efficiency along with improved non-interest income.
The interest rate environment will continue to play an important role in
the future earnings of the Corporation. The net interest margin in 2002 improved
compared to 2001 even with the dramatic drop in interest rates. Also, overall
net interest income continues to increase due to growth in interest earning
assets. Management will closely monitor the net interest margin in 2003 as much
of the earnings of the Corporation continue to be derived from interest income.
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 2003.
"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.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 36 2002 ANNUAL REPORT
BOARD OF DIRECTORS
CNB FINANCIAL CORPORATION AND COUNTY NATIONAL BANK
William R. Owens
Chairman of the Board
Retired, Formerly Vice President, Secretary and Treasurer, CNB Financial
Corporation and President & Chief Executive Officer, County National
Bank
Robert E. Brown
Vice President, E. M. Brown, Inc. (Coal Producer, Auto Dealer and
Concrete Supplier)
William F. Falger
President and Chief Executive Officer, CNB Financial Corporation;
President and Chief Executive Officer, County National Bank
William A. Franson
Secretary, CNB Financial Corporation;
Executive Vice President & Cashier, Chief Operating Officer, County
National Bank
James J. Leitzinger
Retired, Formerly President, Leitzinger Realty (Real Estate Investments)
Dennis L. Merrey
Retired, Formerly President, Clearfield Powdered Metals, Inc.
(Manufacturer)
James P. Moore
Retired, Formerly President & Chief Executive Officer, CNB Financial
Corporation and Chairman of the Board, County National Bank
Robert C. Penoyer
Retired, Formerly President, Penoyer Contracting Co., Inc. (Contractor)
Jeffrey S. Powell
President, J.J. Powell, Inc. (Petroleum Distributor)
James B. Ryan
Retired, Formerly Vice President of Sales, Marketing, Windfall Products,
Inc. (Manufacturer)
Peter F. Smith
Attorney at Law
Joseph L. Waroquier, Sr.
Retired, Formerly President, Waroquier Coal Company (Coal Producer)
DIRECTORS EMERITUS
L. E. Soult, Jr.
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 37 2002 ANNUAL REPORT
OFFICERS
CORPORATE OFFICERS
William F. Falger
President & Chief Executive Officer
William A. Franson
Secretary
Joseph B. Bower, Jr.
Treasurer
EXECUTIVE OFFICERS
William F. Falger
President & Chief Executive Officer
William A. Franson
Executive Vice President & Cashier, Chief
Operating Officer
Joseph B. Bower, Jr.
Executive Vice President & Chief Financial Officer
Mark D. Breakey
Senior Vice President & Senior Loan Officer
Donald E. Shawley
Senior Vice President & Senior Trust Officer
TRUST & ASSET MANAGEMENT SERVICES
Donald E. Shawley
Senior Vice President & Senior Trust Officer
Calvin R. Thomas, Jr.
Vice President, Trust Officer
Andrew J. Woolridge
Investment Officer
Jane M. Gnan
Assistant Trust Officer
Glenn R. Pentz
Trust Officer
Vickie L. Pingie
Assistant Trust Officer
LENDING DIVISION
Robert S. Berezansky
Vice President, Corporate Lending
Robin L. Hay
Vice President, Community Banking
William J. Mills
Vice President, Community Banking, St. Marys
Richard L. Sloppy
Vice President, Community Banking
Joseph H. Yaros
Vice President, Community Banking, Bradford
Duane P. Shifter
Vice President, Downtown Office, Clearfield
Christopher L. Stott
Vice President, Mortgage Lending
David W. Ogden
Assistant Vice President, Credit Administration
Rodger L. Read
Assistant Vice President, Dealer Center
Eric P. Schmader
Community Banking, Ridgway
Richard L. Bannon
Credit Administration Officer
Christopher N. Norris
Collection Officer
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 38 2002 ANNUAL REPORT
OFFICERS
BRANCH DIVISION
Michael C. Sutika
Vice President, Branch Administration
Jeffrey A. Herr
Vice President,
Presqueisle Street Office, Philipsburg
Mary A. Baker
Assistant Vice President,
Northern Cambria Office
Deborah M. Young
Assistant Vice President,
Washington Street and BiLo Offices,
St. Marys
Denise J. Greene
Community Office Manager,
DuBois Office
Paul A. McDermott
Banking Officer, Community Banking, Clearfield
Kathy J. McKinney
Community Office Manager,
Houtzdale and Madera Offices
Francine M. Papa
Community Office Manager,
Ridgway Office
Jo Ellen Potter
Community Office Manager,
Osceola Mills Office
Larry A. Putt
Community Office Manager,
Industrial Park Road, Clearfield
Douglas M. Shaffer
Community Office Manager, Punxsutawney Office
Susan J. Shimmel
Community Office Manager,
Old Town Road Office, Clearfield
Steven C. Tunall
Community Office Manager, Kane Office
Gregory R. Williams
Banking Officer, Community Banking, Clearfield
ADMINISTRATIVE SERVICES
Mary Ann Conaway
Vice President, Human Resources
Helen G. Kolar
Vice President, Marketing & Sales
Rachel E. Larson
Vice President, Operations
Edward H. Proud
Vice President, Information Systems
Ruth Anne Ryan-Catalano
Assistant Vice President, Insurance & Annuities
Thomas J. Ammerman, Jr.
Bank Security Officer
Donna J. Collins
Compliance Officer
Susan B. Kurtz
Customer Service Officer
Duane B. Luzier
Network Administration Officer
Dennis J. Sloppy
Information Systems Officer
Richard L. Greslick, Jr.
Banking Officer & Controller
Brenda L. Terry
Banking Officer
Tammy C. Wagner
Banking Officer
Susan M. Warrick
Operations Officer
CNB FINANCIAL CORPORATION AND SUBSIDIARIES 39 2002 ANNUAL REPORT
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of the Shareholders of CNB Financial Corporation
will be held Tuesday, April 15, 2003 at 2:00 p.m. at the Corporation's
Headquarters in Clearfield, PA.
CORPORATE ADDRESS
CNB Financial Corporation
1 S. Second Street
P.O. Box 42
Clearfield, PA 16830
(814) 765-9621
STOCK TRANSFER AGENT & REGISTRAR
County National Bank
1 S. Second Street
P.O. Box 42
Clearfield, PA 16830
(814) 765-9621
FORM 10-K
Shareholders may obtain a copy of the Annual Report to the Securities
and Exchange Commission on Form 10-K by writing to:
CNB Financial Corporation
1 S. Second Street
P.O. Box 42
Clearfield, PA 16830
ATTN: Shareholder Relations
QUARTERLY SHARE DATA
For information regarding the Corporation's quarterly share data,
please refer to page 23 in the 2002 Annual Report Financial Section.
MARKET MAKERS
The following firms have chosen to make a market in the stock of the
Corporation. Inquiries concerning their services should be directed to:
Ferris Baker Watts, Inc.
6 Bird Cage Walk
Hollidaysburg, PA 16648
(800)343-5149
Hopper Soliday & Co., Inc.
1703 Oregon Pike
P.O. Box 4548
Lancaster, PA 17604-4548
(800) 456-9234
F. J. Morrissey & Co.
1700 Market Street, Suite 1420
Philadelphia, PA 19103
(800) 842-8928
Parker Hunter, Inc.
484 Jeffers Street
P.O. Box 1105
DuBois, PA 15801
(800) 238-0067
Ryan, Beck & Co.
401 City Avenue Suite 902
Bala Cynwyd, PA 19004-1122
(800) 223-8969
CORPORATE PROFILE
County National Bank, a subsidiary of CNB Financial Corporation, is a
leader in providing integrated financial solutions, which creates value
for both consumers and businesses. These solutions consist of a family
of products and services developed to support the evolving needs of our
customers from traditional to innovative. For over 137 years, we have
prided ourselves in building long-term customer relationships by being
reliable and competitively priced.
Being a regional independent community bank in North Central
Pennsylvania, we have approximately 240 employees who make our customer
service more responsive, reliable and empathetic. In addition, we offer
a variety of delivery channels, which includes 20 full-service offices,
telephone banking (1-888-641-6554), Internet banking (www.bankcnb.com)
and a centralized customer service center (1-800-492-3221).
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