Exhibit 13
[Graphic of
This newly designed universal sign system, protected by trademark registration,
is an updated modification of the Bank's familiar logo style and provides a more
consistent identity throughout its branch network.]
Table of Contents
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Table of Contents......................................................... i
Financial Charts.......................................................... 1.
Financial Highlights of 1996.............................................. 2.
Letter to Shareholders.................................................... 3.
Market Area and Service Locations......................................... 4.
Consolidated Statements of Condition...................................... 5.
Consolidated Statements of Income......................................... 6.
Consolidated Statements of Cash Flows..................................... 7.
Consolidated Statements of Changes
in Shareholders' Equity................................................. 8.
Notes to Consolidated Financial Statements................................ 9.
Report of Independent Auditors............................................ 17.
Maturity Distribution of Balance Sheet.................................... 18.
Quarterly Summary of Earnings............................................. 18.
Selected Financial Data - Five Year Comparison............................ 19.
Management Discussion and Analysis........................................ 21.
Services for Business & Consumer.......................................... 28.
Board of Directors........................................................ 29.
Officers.................................................................. 30.
Shareholder Information
and Corporate Description............................................... 31.
i
Financial Charts
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[Graphic of Asset Growth] [Graphic of Equity Growth]
[Graphic of Earnings Per Share] [Graphic of Dividends Paid Per Share]
1
Consolidated Financial Highlights
(in thousands of dollars, except per share data)
- -------------------------------------------------------------------------------
For the Year 1996 1995 % Change
---- ---- --------
Interest Income $ 23,058 $ 21,418 7.7%
Interest Expense 9,797 9,223 6.2
Net Interest Income 13,261 12,195 8.7
Net Income 4,282 3,817 12.2
Return on:
Average Assets 1.40% 1.36%
Average Equity 11.73% 10.58%
At Year End
Assets $327,008 $297,523 9.9%
Deposits 270,056 255,787 5.6
Loans 220,630 197,893 11.5
Shareholders' Equity 39,716 37,543 5.8
Trust Assets Under Management
(at market value) 117,957 94,149 25.3
Per Share Data
Net Income $ 2.49 $ 2.22 12.2%
Dividends 1.24 1.16 6.9
Book Value 23.05 21.79 5.8
2
CNB Financial Corporation and Subsidiary
1996 Annual Report
December 31, 1996
TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS:
The year 1996 was exciting at CNB Financial Corporation and County National
Bank as records were set in net earnings, growth accomplishments and common
stock performance. With these achievements all of our strategic issues, which
were established as goals and objectives for success, were addressed and many
fulfilled.
Net income for the year rose to $4.3 million. This represents an earnings
per share of common stock of $2.49 including $0.09 per share attributable to a
change in accounting principle. Operating earnings rose over 8% to $2.40 per
share for $4.1 million compared to earnings in 1995. These strong earnings,
provided a cash dividend of $1.24 per share for the year which included an
increase of $0.08 or 6.9%. The market value of our Common stock responded to
these events and correspondingly rose $6.50 to a new high of $35.50 per share
thereby yielding a 26.7% annual return for 1996.
Significant progress was made during 1996 towards our growth objectives.
Of these, total assets grew by $29.4 million or 9.9%, totaling over $327 million
by year end. Loans and leases increased by $23 million to $223.1 million. Loan
growth was primarily funded by deposit balances which rose $14.3 million during
the year, establishing a new deposit level of $270 million. Increased
shareholder equity of $2.2 million also provided additional loan funding.
Aggregate equity now stands at $39.7 million and continues to be the leverage
basis to support our natural and acquired growth ambitions.
A formal strategic direction developed by the Board of Directors and
Management continues to provide the focus to guide Management into and through
the Bank and Corporate growth mode. Many of our strategic plans include
objectives with customer service in mind, and include:
New Branch Offices --A new full service office in the community of Houtzdale
completed our branch network throughout the Moshannon Valley. The acquisition
of four branch offices is increasing CNB's market share in Clearfield and
Philipsburg and provided an entrance into the DuBois area. With these moves, we
fulfill an objective of becoming the dominant financial service provider in
Clearfield County.
Business Banking --For businesses of all sizes, we offer a wide variety of
products and services to assist with their daily accounting and money management
needs. From business checking with check imaging to corporate cash
concentration and disbursement, businesses now have the ability to reduce their
costs, improve cash flows, increase efficiencies and the service levels they
provide to their customers. Also, with our myriad of different business loans,
we pride ourselves in making quick decisions and establishing long-term
relationships that have proven to be mutually beneficial.
Investment Services --Our newly redesignated Trust and Asset Management Services
division is ready to address those clients with concerns over their financial
future. In addition to the traditional trust services, i.e. estates,
guardianships and trusts, we have developed alternative services to create a
solid financial future for our clients.
Consumer Banking --For the everyday retail banking products, there is a constant
research and development process at work. As new services are generated, they
are marketed for customer utilization and through time become "traditional
banking services". This year, six new deposit and loan services were added
along with four new communication service methods for consumers to relate with
their account or service needs including our Internet Home Page at
http://www.bankcnb.com.
Staff Training --To deliver new and traditional services in a professional
manner, extensive training procedures were developed. Veteran staff members
continually avail themselves to training opportunities that benefit their career
objectives and, at the same time, maintain product knowledge. New staff members
are naturally exposed to a wider variety of education prior to the challenge of
providing customer satisfaction. This universal training and education process
extends to all CNB's 158 full time and 43 part time employees.
Infrastructure --Among the basic framework of facilities, staff and
communication links, there are many external and internal support mechanisms
necessary to deliver customer service. In support are seventeen banking
locations, including one remote automatic teller branch. Expansion preparation
was made through a modernized headquarters facility which the public was invited
to inspect at an open house celebration in September. During 1996, full
utilization of the headquarters was implemented and quickly demonstrated the
benefits to growth and profits.
In facing a rapidly changing financial services world, we are prepared to
meet every new challenge. A serious investment has been made with your equity
in mind and we, the directors, the management and staff are committed to have
that investment pay off.
Sincerely, CNB Financial Corporation
/s/ James P. Moore
James P. Moore
President and Chief Executive Officer
County National Bank
/s/ William F. Falger
William F. Falger
President and Chief Executive Officer
3
Market Area and Service Locations
- --------------------------------------------------------------------------------
[Map of Market Area and Service Location Appears Here]
--------------------
County National Bank, the sole subsidiary of CNB Financial Corporation, is a
full-service, community financial institution, headquartered in Clearfield,
Pennsylvania. The Bank presently has 16 offices in the communities of
Clearfield, DuBois, Houtzdale, Karthaus, Madera, Osceola Mills, Philipsburg, St.
Marys and Bradford, McKean County, all located in Pennsylvania.
--------------------
4
CNB Financial Corporation and Subsidiary
1996 Annual Report
Consolidated Statements of Condition
(in thousands, except share data) December 31
-----------------------
Assets 1996 1995
--------- ---------
Cash and Due from Banks (Note 2)......................... $ 10,806 $ 9,110
Deposits with Other Banks................................ 14 19
Federal Funds Sold....................................... -- 3,200
Investment Securities Available for Sale (Note 3)........ 61,309 51,007
Investment Securities Held to Maturity, fair value
of $17,717 at December 31, 1996 and $25,540 at
December 31, 1995..................................... 17,387 24,921
Loans and Leases (Note 4)................................ 226,407 203,706
Less: Unearned Discount............................... 3,304 3,668
Less: Allowance for Loan Losses (Note 5).............. 2,473 2,145
--------- ---------
NET LOANS............................................. 220,630 197,893
Premises and Equipment, Net (Note 6)..................... 9,312 7,782
Accrued Interest Receivable.............................. 2,181 2,097
Other Assets and Intangible (Note 7)..................... 5,369 1,494
--------- ---------
TOTAL ASSETS.......................................... $327,008 $297,523
========= =========
Liabilities
Deposits: (Note 8)
Non-interest Bearing Deposits......................... $ 30,812 $ 25,705
Interest Bearing Deposits............................. 239,244 230,082
--------- ---------
TOTAL DEPOSITS........................................ 270,056 255,787
Other Borrowings (Note 9)................................ 14,656 2,846
Accrued Interest and Other Liabilities................... 2,580 1,347
--------- ---------
TOTAL LIABILITIES..................................... 287,292 259,980
--------- ---------
Shareholders' Equity
Common Stock $4 Par Value
Authorized 2,500,000 Shares
Issued 1,728,000 Shares.................................. 6,912 6,912
Retained Earnings........................................ 32,289 30,143
Treasury Stock, At Cost (5,166 Shares)................... (100) (100)
Net Unrealized Gains on Securities Available for Sale.... 615 588
--------- ---------
TOTAL SHAREHOLDERS' EQUITY............................ 39,716 37,543
--------- ---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.............. $327,008 $297,523
========= =========
The accompanying notes are an integral part of these statements.
5
CNB Financial Corporation and Subsidiary
1996 Annual Report
Consolidated Statements of Income
in thousands, except per share data) Year ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
Interest Income
Loans including Fees......................... $18,231 $16,849 $14,813
Deposits with Banks.......................... -- 1 91
Federal Funds Sold........................... 87 81 43
Investment Securities:
Taxable Securities which are
Available for Sale..................... 2,672 2,249 1,807
Tax-Exempt Securities which are
Available for Sale..................... 818 372 46
Taxable Securities being Held to
Maturity............................... 773 1,015 1,176
Tax-Exempt Securities being Held
to Maturity............................ 477 851 1,192
------- ------- -------
TOTAL INTEREST INCOME..................... 23,058 21,418 19,168
Interest Expense
Deposits..................................... 9,421 8,946 6,986
Borrowed Funds............................... 376 277 239
------- ------- -------
TOTAL INTEREST EXPENSE.................... 9,797 9,223 7,225
------- ------- -------
Net Interest Income....................... 13,261 12,195 11,943
Provision for Loan Losses................. 600 380 525
------- ------- -------
Net Interest Income After
Provision for Loan Losses.............. 12,661 11,815 11,418
Other Income
Trust & Asset Management Fees................ 511 529 456
Service Charges - Deposit Accounts........... 700 616 412
Other Service Charges and Fees............... 416 411 245
Security Gains (Losses)...................... (7) 146 --
Gain on Sale of Loans........................ 24 53 45
Other........................................ 231 188 352
------- ------- -------
TOTAL OTHER INCOME........................ 1,875 1,943 1,510
Other Expenses
Salaries..................................... 4,030 3,615 3,297
Employee Benefits............................ 972 1,210 1,155
Net Occupancy Expense of Premises............ 1,460 1,119 1,060
Other........................................ 2,498 2,824 2,570
------- ------- -------
TOTAL OTHER EXPENSES...................... 8,960 8,768 8,082
------- ------- -------
Income Before Income Taxes and
Cumulative Effect of Change
in Accounting Principle................... 5,576 4,990 4,846
Applicable Income Taxes...................... 1,450 1,173 1,137
------- ------- -------
Income Before Cumulative Effect of
Change in Accounting Principle............ 4,126 3,817 3,709
Cumulative Effect of Change in
Accounting Principle, after Taxes......... 156 -- --
------- ------- -------
Net Income................................... $ 4,282 $ 3,817 $ 3,709
======= ======= =======
EARNINGS PER SHARE, BASED ON WEIGHTED
AVERAGE SHARES OUTSTANDING
Income Before Cumulative Effect of
Accounting Change........................ $ 2.40 $ 2.22 $ 2.15
Cumulative Effect of Change in
Accounting Principle.................... 0.09 -- --
------- ------- -------
Net Income................................... $ 2.49 $ 2.22 $ 2.15
Cash Dividends Per Share..................... $ 1.24 $ 1.16 $ 1.08
The accompanying notes are an integral part of these statements.
6
CNB Financial Corporation and Subsidiary
1996 Annual Report
Consolidated Statements of Cash Flows
(in thousands) Year ended December 31,
--------------------------------
1996 1995 1994
--------- --------- ---------
Cash Flows from Operating Activities:
Net income......................................................... $ 4,282 $ 3,817 $ 3,709
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses...................................... 600 380 525
Depreciation................................................... 664 505 455
Amortization and accretion of net
deferred loan fees......................................... (754) (236) (115)
Amortization and accretion of premiums
and discounts on investments............................... 101 278 371
Deferred taxes................................................. 169 37 (29)
Security (gains) losses........................................ 7 (146) --
Gain on sale of loans.......................................... (24) (53) (45)
Other.......................................................... (14) -- (81)
Changes in:
Interest receivable.............................................. (84) (169) (92)
Other assets and intangibles..................................... (3,398) (200) (21)
Interest payable................................................. (38) 56 47
Other liabilities................................................ 1,164 434 (208)
--------- --------- ---------
Net cash provided by operating activities.......................... 2,675 4,703 4,516
Cash Flows from Investing Activities:
Proceeds from maturities of:
Securities held to maturity.................................... 7,940 17,748 11,424
Securities available for sale.................................. 7,742 17,702 14,195
Proceeds from sales of:
Securities available for sale.................................. 4,877 358 --
Loans.......................................................... 1,910 4,738 3,243
Purchase of:
Securities held to maturity.................................... (998) (9,025) (1,804)
Securities available for sale.................................. (22,390) (29,728) (14,965)
Net principal disbursed on loans................................. (24,825) (23,108) (17,208)
Redemption (Purchase) of Federal Home
Loan Bank stock.............................................. (406) (14) 20
Purchase of premises and equipment............................... (2,094) (3,144) (1,237)
Proceeds from the sale of foreclosed assets...................... 122 56 355
--------- --------- ---------
Net cash used in investing activities.............................. (28,122) (24,417) (5,977)
Cash Flows from Financing Activities:
Net change in:
Checking, money market and savings accounts.................... 9,064 19,495 1,825
Certificates of deposit........................................ 5,205 5,651 2,490
Other borrowed funds........................................... 2,127 (819) (771)
Cash dividends paid.............................................. (2,136) (1,998) (1,861)
Proceeds from Federal Home Loan Bank advances.................... 10,625 -- 540
Principal reduction in Federal Home Loan bank advances........... (942) (20) --
--------- --------- ---------
Net cash provided by financing activities.......................... 23,943 22,309 2,223
--------- --------- ---------
Net (decrease increase in cash and cash equivalents................ (1,504) 2,595 762
Cash and cash equivalents at beginning of year..................... 12,310 9,715 8,953
--------- --------- ---------
Cash and cash equivalents at end of year........................... $ 10,806 $ 12,310 $ 9,715
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to
certificate accounts)........................................ $ 9,887 $ 9,279 $ 6,979
Income taxes................................................... 1,739 1,316 1,320
Noncash Investing Activities
Increase in net unrealized gains on securities
available for sale................................................ $ 27 $ 1,209 $ 765
Real estate acquired in settlement of loans........................ -- 142 51
The accompanying notes are an integral part of these statements.
7
CNB Financial Corporation and Subsidiary
1996 Annual Report
Consolidated Statements of Changes
in Shareholders' Equity
(in thousands)
Net Unrealized
Gains (Losses) on
Additional Securities Total
Paid-In Retained Treasury Available Stockholders'
Common Stock Capital Earnings Stock for Sale Equity
-------------------------------------------------------------------------------------
Balance January 1, 1994.................... $ 6,912 -- $26,476 $(100) -- $33,288
Net Income for 1994.................... 3,709 3,709
Cash Dividend Declared................. (1,861) (1,861)
Net Unrealized Losses on Securities
Available for Sale................... (621) (621)
-------------------------------------------------------------------------------------
Balance December 31, 1994.................. 6,912 -- 28,324 (100) (621) 34,515
Net Income for 1995.................... 3,817 3,817
Cash Dividend.......................... (1,998) (1,998)
Net Unrealized Gains on Securities
Available for Sale................... 1,209 1,209
-------------------------------------------------------------------------------------
Balance December 31, 1995.................. 6,912 -- 30,143 (100) 588 37,543
Net Income for 1996.................... 4,282 4,282
Cash Dividend Declared................. (2,136) (2,136)
Net Unrealized Gains on Securities
Available for Sale................... 27 27
-------------------------------------------------------------------------------------
Balance December 31, 1996.................. $ 6,912 -- $32,289 $(100) $ 615 $39,716
=====================================================================================
The accompanying notes are an integral part of these statements.
-----------------------------------------------------------------------
8
CNB Financial Corporation and Subsidiary
1996 Annual Report
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization:
CNB Financial Corporation (the "Corporation"), is headquartered in
Clearfield, Pennsylvania, and provides a full range of banking and related
services through its wholly owned subsidiary, County National Bank (the "Bank").
The Bank 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 examinations by Federal regulators.
The Corporation's market area is in the northern 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 wholly owned bank subsidiary. These statements have been
prepared in accordance with generally accepted accounting principles. All
significant intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
Loans:
Interest income with respect to loans and leases is accrued on the principal
amount outstanding, except on certain installment loans on which interest income
is recognized over their terms using methods which approximate level yields. The
Bank discontinues the accrual of interest when the interest or principal is 90
days past due, unless the loan is in the process of collection and no loss of
interest and principal is anticipated. Loan fees and certain direct origination
costs are deferred and the net amount amortized as an adjustment to the related
loan interest income yield over the terms of the loans.
Allowance for Loan Losses:
The allowance for loan losses is established through provisions for loan
losses which are charged against income. Loans which are deemed to be
uncollectible are charged against the allowance account. Subsequent recoveries,
if any, are credited to the allowance account.
Management determines the adequacy of the reserves based on historical
patterns of charge-offs and recoveries, industry experience, and other
qualitative factors relevant to the collectability of the loan portfolio. While
management believes that the allowance is adequate to absorb estimated potential
loan losses, future adjustments may be necessary in circumstances that differ
substantially from the assumptions used in evaluating the adequacy of the
allowance for loan losses.
Investment Securities:
When purchased, management classifies debt securities as either held to
maturity, available for sale or trading securities. Debt securities are
classified as held to maturity when the Corporation has the positive intent and
ability to hold the securities to maturity. Held to maturity securities are
stated at amortized cost. Debt securities that the Corporation does not have the
positive intent or ability to hold to maturity, and all marketable equity
securities, are classified as available for sale or trading and carried at fair
value. Unrealized gains and losses, net of tax, on securities classified as
available for sale are carried as a separate component of shareholders' equity.
Unrealized gains and losses on securities classified as trading are included in
other income. Management has not classified any debt or equity securities as
trading.
The amortized cost of debt securities classified as held to maturity or
available for sale is adjusted for the amortization of premiums and the
accretion of discounts over the period through contractual maturity or, in the
case of mortgage-backed securities and collateralized mortgage obligations, over
the estimated life of the security. Such amortization is included in interest
income from investments. Realized gains and losses and declines in value judged
to be other than temporary are included in other income. The cost of securities
sold is based on the specific identification method.
Asset Transfers:
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities", was issued, effective for
transactions entered into after December 31, 1996. This Standard establishes
rules distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. Management does not expect this Standard to have a
material impact on the Corporation's financial position or results of
operations.
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.
9
CNB Financial Corporation and Subsidiary
1996 Annual Report
Notes to Consolidated Financial Statements (Continued)
Other Assets and Intangibles:
Other assets include real estate acquired through foreclosure or in
settlement of debt and is stated at the lower of the carrying amount of the
indebtedness or fair market value, net of selling costs.
The Corporation adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" effective January 1, 1996. This standard requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate the carrying value may not be
recoverable. The adoption of this Standard did not have a material impact on the
Corporation.
Trust Income:
In 1996, the Corporation changed its method of accounting for Trust income
from the cash basis to the accrual basis. The Corporation has recognized the
cumulative effect from this change in accounting principle in the amount of
$236,000, with applicable income taxes of $80,000, which resulted in an increase
in net earnings of $156,000 or $0.09 per share in 1996.
Treasury Stock:
The purchase of the Corporation's common stock is recorded at cost. At the
date of subsequent reissue, the treasury stock account is reduced by the cost of
such stock on a first-in-first-out basis.
Earnings per Share:
Earnings per share is calculated on the weighted average number of common
shares outstanding during the year.
Cash and Cash Equivalents:
For purposes of the consolidated statement of cash flows, the Corporation
defines cash and cash equivalents as cash and due from banks, and Federal funds
sold.
Reclassifications:
Certain prior year amounts have been reclassified for comparative purposes.
2. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of these reserve balances for the year ended
December 31, 1996, was approximately $1,531,000, which was maintained in vault
cash.
3. INVESTMENT SECURITIES
Investment securities at December 31, 1996 and 1995 were as follows (in
thousands):
December 31, 1996 December 31, 1996
-------------------------------------- --------------------------------------
Unrealized Unrealized
Amortized ----------------- Market Amortized ----------------- Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ----- ------ ------ --------- ----- ------ ------
Securities available for sale:
U.S. Treasury.............................. $13,496 $ 36 $ 24 $13,508 $11,500 $ 99 $ 5 $11,594
U.S. Government agencies
and corporations......................... 26,192 118 203 26,107 24,527 271 106 24,692
Obligations of States and
Political Subdivisions................... 17,562 486 -- 18,048 11,155 289 10 11,434
Other Debt Securities...................... 1,047 4 6 1,045 1,528 17 5 1,540
Marketable Equity Securities............... 2,080 538 17 2,601 1,405 342 -- 1,747
------- ------ ---- ------- ------- ------ ---- -------
$60,377 $1,182 $250 $61,309 $50,115 $1,018 $126 $51,007
======= ====== ==== ======= ======= ====== ==== =======
Securities to be held to maturity:
U.S. Government agencies
and corporations......................... $ 997 -- $ 1 $ 996 $ 1,989 $ 18 -- $ 2,007
Obligations of States and
Political Subdivisions................... 7,319 289 -- 7,608 11,251 439 5 11,685
Other Debt Securities...................... 9,071 66 24 9,113 11,681 183 16 11,848
------- ------ ---- ------- ------- ------ ---- -------
$17,387 $ 355 $ 25 $17,717 $24,921 $ 640 $ 21 $25,540
======= ====== ==== ======= ======= ====== ==== =======
Other debt securities include corporate notes and bonds, collateralized
mortgage obligations and asset-backed securities.
On December 31, 1996 investment securities carried at $13,230,000 were
pledged to secure public deposits and for other purposes as provided by law.
10
CNB Financial Corporation and Subsidiary
1996 Annual Report
Notes to Consolidated Financial Statements (Continued)
The following is a schedule of the contractual maturity of investments
excluding marketable equity securities, at December 31, 1996 (in thousands):
Available for Sale Held to Maturity
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
1 year or less.............................. $10,489 $10,520 $ 3,878 $ 3,905
1 year-5 years.............................. 27,643 27,545 10,528 10,795
5 years-10 years............................ 14,655 15,049 2,491 2,527
After 10 years.............................. 4,463 4,549 490 490
------------------------- ------------------------
57,250 57,663 17,387 17,717
------------------------- ------------------------
Collateralized Mortgage Obligations
and Other Asset-backed Securities......... 1,047 1,045 -- --
------------------------- ------------------------
Total Investment Securities............. $58,297 $58,708 $17,387 $17,717
========================= ========================
Collateralized mortgage obligations and other asset-backed securities are
not due at a single date; periodic payments are received based on the payment
patterns of the underlying collateral.
Information pertaining to security sales is as follows:
Proceeds Gross Gains Gross Losses
-------- ----------- ------------
1996 $4,877 $ 23 $30
1995 358 146 --
1994 -- -- --
4. LOANS
Total Loans at December 31, 1996 and 1995 are summarized as follows (in
thousands):
1996 1995
-------- --------
Commercial, Financial and Agricultural.......... $ 45,037 $ 49,643
Residential Mortgage............................ 100,402 78,111
Commercial Mortgage............................. 31,451 30,658
Installment..................................... 43,448 45,294
Lease Receivables............................... 6,069 --
-------- -------
$226,407 $203,706
======== =======
In the ordinary course of business, the Bank has transactions, including
loans, with it's officers, directors and their affiliated companies. These
transactions were on substantially the same terms as those prevailing at the
time for comparable transactions with unaffiliated parties and do not involve
more than the normal risks. The aggregate of such loans totaled $6,553,000 on
December 31, 1996 compared to $6,818,000 at December 31, 1995. During 1996,
$26,996,000 of new loans were made and repayments totaled $27,261,000.
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. No specific industry concentration exceeded 10 percent of
total loans outstanding. Collateral requirements are established based on
management's assessment of the customer.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures". These standards address the
accounting for certain loans when it is probable that all the amounts due under
the contractual terms of the loan will not be collected. Impairment is measured
based on either the present values of the expected future cash flows using the
initial effective interest rate on the loan, the observable market price of the
loan, or the value of the collateral if the loan is collateral dependent. If the
recorded investment in the loan exceeds the measure of fair value, a valuation
allowance is established as a component of the allowance for possible loan
losses. Impaired loans consist of non-homogeneous loans, which based on
management's evaluation of current information and events, it has determined
that it is probable that the Corporation will not be able to collect all amounts
due according to the contractual terms of the loan agreement. The Corporation
evaluates all commercial and commercial real estate loans which have been
classified for regulatory purposes, including nonaccrual and restructured loans,
in determining impaired loans. The adoption of this Standard did not have a
material impact on the Corporation.
The recorded investment in loans that are considered impaired under SFAS No.
114 was $884,000 and $957,000 at December 31, 1996 and 1995 respectively, net of
a $59,000 charge to the allowance which was recorded in 1995. No impairments
were recognized in 1996. Included in the 1996 amount is $654,000 of impaired
loans that as a result of a write-down do not have an allowance for loan losses.
The average recorded investments in impaired loans during the year ended
December 31, 1996 was approximately $800,693. For the year ended December 31,
1996, the Corporation recognized accrued interest income on those impaired loans
of $54,657. No income was recognized using the cash basis method of income
recognition. In 1995, interest recognized on the accrual method for impaired
loans was $19,108.
11
CNB Financial Corporation and Subsidiary
1996 Annual Report
Notes to Consolidated Financial Statements (Continued)
5. ALLOWANCE FOR LOAN LOSSES
Transactions in the Allowance for Loan Losses for the three years ended
December 31 were as follows (in thousands):
1996 1995 1994
------- ------- -------
Balance, Beginning of Year............ $2,145 $2,033 $1,750
Charge-offs........................... (360) (369) (382)
Recoveries............................ 88 101 140
------ ------ ------
Net Charge-offs................... (272) (268) (242)
Provision for Loan Losses............. 600 380 525
------ ------ ------
Balance, End of Year.................. $2,473 $2,145 $2,033
====== ====== ======
6. PREMISES AND EQUIPMENT
The following summarizes Premises and Equipment at December 31 (in
thousands):
1996 1995
------- ------
Land...................................................... $ 1,208 $1,011
Premises and Leasehold Improvements....................... 7,008 5,866
Furniture and Equipment................................... 4,947 4,260
------- ------
13,163 11,137
Less Accumulated Depreciation and Amortization............ 3,851 3,355
------- ------
Premises and Equipment, Net............................. $ 9,312 $7,782
======= ======
Depreciation on Premises and Equipment amounted to $664,000 in 1996,
$505,000 in 1995, and $455,000 in 1994.
7. INTANGIBLE
In December 1996, the Corporation purchased certain fixed assets and the
customer lists of four branches of a large, super-regional competitor. The
agreement provides the Corporation direct marketing opportunities to obtain the
customers of the selling institution. In conjunction with this transaction, the
Corporation paid the seller a premium of $3.152 million, which has been
identified as an intangible and is being amortized on a straight line basis over
a period of 7.5 years, beginning in January 1997.
8. DEPOSITS
Deposits at December 31, 1996 and 1995 consisted of the following (in
thousands):
1996 Time Deposits Maturing:
-------- -----------------------------------------------
Checking and Money Market Accounts.................... $112,996 Within One Year $ 69,286
Savings Accounts...................................... 36,183 Within Two Years 24,188
Certificates of Deposit and Time Accounts............. 120,877 Within Three Years 12,864
-------- Within Four Years 12,193
$270,056 Within Five Years and Greater 2,346
======== -----------------------------------------------
$120,877
Certificates of Deposit of $100,000 or more totaled $12,909,000 and
$12,676,000 at December 31, 1996 and 1995.
9. OTHER BORROWINGS
Other borrowings include $1.4 million and $0.4 million of demand notes
payable to the U.S. Treasury Department at December 31, 1996 and 1995,
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. In addition, other borrowings include
$12.1 million of advances from the Federal Home Loan Bank (FHLB) at December 31,
1996, compared to $2.4 million at year end 1995. On December 31, 1996, $10
million of these advances were due to mature within 30 days and bore interest at
a rate of 5.49%. The remaining FHLB advances mature within 15 years and bear
interest rates between 4.87% and 6.75%. The FHLB advances are secured by
qualifying assets of the Bank. At year end the Bank had remaining borrowing
capacity with the FHLB of $77.8 million.
10. INCOME TAXES
The Corporation uses the liability method to account for deferred income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities. These are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. The following is a
summary of the tax provision (in thousands):
1996 1995 1994
------- -------- ------
Current........................................................ $1,361 $1, 210 $1,129
Deferred....................................................... 169 (37) 8
------ ------- ------
Net provision for Income Taxes................................. $1,530 $ 1,173 $1,137
====== ======= ======
12
CNB Financial Corporation and Subsidiary
1996 Annual Report
Notes to Consolidated Financial Statements (Continued)
The components of the net deferred tax liability as of December 31, 1996 and
1995 are as follows (in thousands):
1996 1995
------- --------
Deferred tax assets
Allowance for loan losses........................................................................ $ 556 $ 444
Post-retirement benefits......................................................................... 9 15
Fiduciary Income Earned not Recorded............................................................. -- 80
------- --------
565 539
Deferred tax liabilities
Premises and equipment........................................................................... 383 270
Vehicle Leasing.................................................................................. 73 --
Unrealized gain on investment securities available for sale...................................... 317 304
Other............................................................................................ 8 --
------- --------
781 574
------- --------
Net deferred tax liability........................................................................... $ (216) $ (35)
======= ========
The reconciliation of income tax attributable to continuing operations at
the Federal statutory tax rates to income tax expense is as follows (in
thousands):
1996 1995 1994
------- ------- -------
Tax at statutory rate................. $1,977 $1,697 $1,648
Tax exempt income, net................ (508) (499) (475)
Other................................. 61 (25) (36)
------- ------- -------
Income tax provision.................. $1,530 $1,173 $1,137
======= ======= =======
11. EMPLOYEE BENEFIT PLANS
The Bank provides a defined contribution retirement plan that covers all
active officers and employees twenty-one years of age or older, employed by the
Bank for one year. Contributions to the plan, based on prior year compensation,
are 9 percent of total compensation plus 5.7 percent of the compensation in
excess of $62,700. The Corporation recognized expense of $304,000 in 1996,
$274,000 in 1995, and $268,000 in 1994.
In addition to the above mentioned pension benefit plan, the Corporation
provides certain health care benefits for retired employees and their qualifying
dependents. The following table sets forth the plan's funded status (in
thousands):
December 31,
Accumulated post-retirement benefit obligation: 1996 1995
---------- ----------
Retirees..................................................... $ 53,742 $ 18,692
Fully eligible active plan participants...................... 39,921 23,164
Other active plan participants............................... 319,350 293,665
---------- ----------
Total accumulated post-retirement benefit obligation............. 413,013 335,521
Unrecognized net transition obligation........................... (124,873) (132,218)
Unrecognized net loss............................................ (96,621) (39,067)
---------- ----------
Accrued post-retirement obligation............................... $ 191,519 $ 164,236
========== ==========
1996 1995 1994
---------- ---------- --------
Net periodic post-retirement benefit cost:....................... $ 18,531 $ 14,119 $28,258
Service cost..................................................... 21,725 21,716 42,369
Interest cost.................................................... 7,566 7,345 21,727
---------- ---------- --------
Amortization of transition obligation over 21 years.............. $ 47,822 $ 43,180 $92,354
========== ========== ========
The weighted average discount rate used to calculate net periodic benefit
cost and the accrued post-retirement liability was 6.50% in 1996 and 7.75% in
1995. The health care cost trend rate used to measure the expected costs of
benefits for 1997 is 10.0%, 9.0%, in 1998 and 8.0% thereafter. A one percent
increase in the health care trend rates would result in an increase of $64,056
in the benefit obligation of December 31, 1996, and would increase the service
and interest costs by $9,573 in future periods The presentation above for the
years 1996 and 1995 reflects a policy which grants eligibility to these benefits
to employees 60 years of age with 30 years of service. The policy was changed in
1995 resulting in a reduction in costs from the 1994 level.
13
CNB Financial Corporation and Subsidiary
1996 Annual Report
Notes to Consolidated Financial Statements (Continued)
12. OPERATING LEASES
Rental expense, net of rental income, charged to occupancy expense was
$105,046 in 1996. In 1995 the amount of rental expense was $68,907 and in 1994
the rental expense was $41,894.
13. REGULATORY CAPITAL COMPLIANCE
The Corporation and Bank are subject to minimum capital requirements set by
Federal regulatory agencies, namely the Federal Reserve Bank and the Office of
the Comptroller of the Currency. Regulators require capital ratios of 6.0% Tier
1 capital to total risk based assets, 10% or more of total qualifying capital to
total risk weighted assets and total Tier 1 capital to total assets of 5% for an
institution to be considered well capitalized. The Corporation and Bank were
reported as well capitalized under the regulatory framework for prompt
corrective action as of the most recent notification of the regulators. There
are no conditions or events since that notification that management believes
would change the Corporation's status. The table below (in thousands except
percents) summarizes the Corporation and Bank's regulatory capital levels:
December 31
Risk Based Capital 1996 1996 1995 1995
----------------------------------------------------------------------
Regulatory Ratio to Minimum Regulatory Ratio to Minimum
Tier 1 Capital Risk Assets Required Capital Risk Assets Required
- ------ ----------------------------------------------------------------------
CNB Financial Corporation $35,800 16.37% 4.00% $36,752 17.84% 4.00%
County National Bank $33,683 15.55% 4.00% $35,015 17.25% 4.00%
Tier 1 + Tier 2 Captial
- -----------------------
CNB Financial Corporation $38,273 17.50% 8.00% $38,897 18.88% 8.00%
County National Bank $36,156 16.69% 8.00% $37,160 18.31% 8.00%
Leverage
- --------
CNB Financial Corporation $35,800 10.95% 4.00% $36,752 12.59% 4.00%
County National Bank $33,683 10.39% 4.00% $35,015 12.06% 4.00%
Failure to maintain the minimum capital level requirements can initiate
mandatory and possibly additional discretionary disciplinary actions by
regulators. In such an instance, if regulatory action was undertaken, the
results could have a direct effect on the Corporation's financial position.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of the Corporation's and the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Corporation's and the Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, to meet the financing needs of its
customers, the Bank enters into commitments involving financial instruments with
off-balance sheet risks. Commitments to extend credit are agreements to lend to
a customer at a future date, subject to the meeting of the contractual terms.
These commitments generally have fixed expiration dates (less than one year),
and require the payment of a fee. The Bank utilizes the same credit policies in
making these obligations as it does for on-balance-sheet instruments. The credit
risk involved in issuing these commitments is essentially the same as that
involved in extending loan facilities to customers. However, since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent actual future cash requirements
of the Bank. As of December 31, 1996, the Bank had $20.5 million of unfunded
commercial lines of credit; $9.7 million of unused credit card lines; $1.1
million of outstanding commitments to fund residential loans; $2.7 million in
standby letters of credit and $1.8 million of unfunded home equity lines of
credit.
15. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
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 preceeding 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, 1996,
$4.0 million of undistributed earnings of the Bank, included in consolidated
retained earnings, was available for distribution to the Corporation as
dividends, without prior regulatory approval.
The Bank is also subject to certain restrictions under the Federal Reserve
Act which include restrictions on extensions of credit to its affiliates. Of
note, the Bank is prohibited from lending monies to the Corporation unless the
loans are secured by specific collateral. These secured loans and other
regulated transactions made by the Bank are limited in amount to ten percent of
the Bank's captital stock and surplus.
14
CNB Financial Corporation and Subsidiary
1996 Annual Report
Notes to Consolidated Financial Statements (Continued)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" and Statement No. 119 "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments'
require the disclosure of estimated fair value of all assets, liability and off-
balance sheet instruments.
The fair value estimates of the Corporation's financial instruments are made
at a point in time, based on the then current market information and available
financial information about the financial instrument. Fair market values are
quoted on market prices for financial instruments where prices exist. In cases
where quoted market prices are not available, fair values are derived from
estimates using discounted cash flow techniques. Generally, market prices do not
exist for a substantial portion of the Corporation's financial instruments, and
accordingly fair value estimates are based on judgments with regard to future
cash flow expectations, perceived credit risk, interest rate risk, prepayment
risk, local and national economic conditions and other factors. The estimates
are therefore subjective and may not reflect the amount that could be realized
upon immediate sale of the instrument. Changes in certain assumptions could also
significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short-Term Assets:
The carrying amounts reported in the statement of condition for cash and
short-term assets approximates those assets' fair values primarily due to their
short-term nature. For purposes of this disclosure only, short-term assets
include due from banks, deposits with other banks, Federal funds sold, and
accrued interest receivable.
Investment Securities:
The fair value of investment securities are based on quoted market prices,
where available. For equity securities for which quoted market prices are not
available, fair value has been estimated to be the securities' carrying value.
Net Loans:
For demand and variable rate commercial, consumer loans, and residential
mortgages that reprice frequently, fair values are estimated by reducing
carrying amounts by estimated credit loss factors. For fixed rate commercial,
consumer and residential mortgage loans, including nonaccrual loans, fair values
are estimated using discounted cash flow analyses, with cash flows reduced by
estimated credit loss factors and discount rates equal to interest rates
currently being offered for similar loans.
Deposits:
The carrying amount for noninterest-bearing demand and interest-bearing
money-market and savings deposits approximates fair values. For certificates of
deposit fair value has been estimated using discounted cash flow analyses that
apply interest rates currently being offered on certificates with similar
maturities.
Advances from the Federal Home Loan Bank:
Fair value is determined by discounting the advances using current rates of
advances with comparable maturities.
Other Borrowings:
Other borrowings consist of short-term demand notes payable to the U.S.
Treasury Department under its program of investing treasury tax and loan account
balances with depository institutions. Because of their short-term nature
carrying value is considered to be fair value.
Accrued Interest Payable:
The carrying amounts reported in the statement of condition for accrued
interest payable approximates its fair value primarily due to its short-term
nature.
Standby Letters of Credit:
The fair value of letters of credit are estimated based upon the amount of
deferred fees and the creditworthiness of the counterparties.
December 31, 1996 December 31, 1995
--------------------------------------
(in thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------
ASSETS
Cash and short-term assets......................... $ 13,001 $ 13,001 $ 14,426 $ 14,426
Investment securities.............................. 78,696 79,026 75,928 76,547
Net Loans.......................................... 220,630 219,220 197,893 197,102
LIABILITIES
Deposits........................................... 270,056 269,687 255,787 256,464
Advances from the Federal Home Loan Bank........... 12,119 12,109 2,436 2,413
Other Borrowings................................... 2,537 2,537 410 410
Accrued Interest Payable........................... 771 771 809 809
15
CNB Financial Corporation and Subsidiary
1996 Annual Report
Notes to Consolidated Financial Statements (Continued)
17. PARENT COMPANY FINANCIAL INFORMATION
The Corporation's financial information (parent company only) is summarized
as follows (in thousands):
BALANCE SHEETS December 31,
-----------------
1996 1995
------- -------
ASSETS
Cash.................................................. $ 17 $ 366
Investment in Bank subsidiary......................... 37,255 35,580
Securities-available for sale......................... 2,601 1,747
Other assets.......................................... 20 --
------- -------
TOTAL ASSETS........................................ $39,893 $37,693
======= =======
LIABILITIES
Income taxes payable................................. $ -- $ 34
Deferred tax liability............................... 177 116
------- -------
TOTAL LIABILITIES................................... 177 150
TOTAL SHAREHOLDERS' EQUITY.......................... 39,716 37,543
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $39,893 $37,693
======= =======
STATEMENTS OF INCOME Year ended December 31,
-----------------------------------
1996 1995 1994
------- ------- -------
INCOME
Dividends from:
Bank subsidiary...................................... $ 2,494 $ 2,791 $ 2,350
Securities available for sale........................ 75 56 18
Other.................................................. 8 128 24
------- ------- -------
TOTAL INCOME............................ 2,577 2,975 2,392
------- ------- -------
EXPENSES
Other........................................... 76 63 90
------- ------- -------
TOTAL EXPENSES.......................... 76 63 90
------- ------- -------
INCOME BEFORE INCOME TAXES AND EQUITY
IN DISTRIBUTED NET INCOME OF SUBSIDIARY........... 2,501 2,912 2,302
Applicable income tax (obligation) benefit...... 15 (34) 17
Equity in undistributed net income of subsidiary.... 1,766 939 1,390
------- ------- -------
NET INCOME.............................. $ 4,282 $ 3,817 $ 3,709
======= ======= =======
STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------
Cash flows from operating activities: 1996 1995 1994
-------- -------- --------
Net income................................................ $ 4,282 $ 3,817 $ 3,709
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary........ (1,766) (939) (1,390)
Increase (Decrease) in other assets..................... (20) 17 (7)
Increase (Decrease) in other liabilities................ (34) 34 (1)
Gain on sale of available for sale securities........... (6) (125) --
-------- -------- --------
Net cash provided by operating activities............... 2,456 2,804 2,311
-------- -------- --------
Cash flows from investing activities:
Purchase of securities available for sale................. (737) (801) (505)
Proceeds from the sale of securities available for sale... 68 337 44
-------- -------- --------
Net cash used in investing activities................... (669) (464) (461)
Cash flows from financing activities:
Dividends paid............................................ (2,136) (1,998) (1,861)
-------- -------- --------
Net cash used in financing activities................... (2,136) (1,998) (1,861)
-------- -------- --------
Net increase (decrease) in cash........................... (349) 342 (11)
Cash beginning of year.................................... 366 24 35
-------- -------- --------
Cash end of year.......................................... $ 17 $ 366 $ 24
======== ======== ========
16
CNB Financial Corporation and Subsidiary
1996 Annual Report
---------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholders
CNB Financial Corporation
We have audited the accompanying consolidated statements of condition of CNB
Financial Corporation and subsidiary as of December 31, 1996 and 1995, 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, 1996.
These financial statements are the responsibility of CNB Financial Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CNB Financial
Corporation and subsidiary at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, in 1996 CNB Financial
Corporation changed its method of accounting for trust and asset management
fees.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 21, 1997
17
CNB Financial Corporation and Subsidiary
1996 Annual Report
Maturity Distribution
Remaining maturity/earliest repricing as of December 31, 1996:
After Three After Six After One
Within Months But Months But Year But After
Three Within Six Within One Within Five
Months Months Year Five Years Years Total
------------------------------------------------------------------------------
Interest earning assets:
Investment Securities.................... $ 8,195 $ 3,880 $ 6,562 $ 38,129 $21,930 $ 78,696
Interest Bearing Deposits................ 14 14
Loans (Net).............................. 36,123 11,040 23,597 142,947 6,923 220,630
--------- --------- --------- --------- -------- ---------
Total................................ 44,332 14,920 30,159 181,076 28,853 299,340
Interest bearing liabilities:
Interest bearing demand deposits......... 51,697 -- -- 25,407 5,082 82,186
Savings.................................. -- -- -- 30,415 6,084 36,499
Time..................................... 36,403 14,793 17,772 51,227 364 120,559
Borrowed funds........................... 12,565 6 13 1,233 839 14,656
--------- --------- --------- --------- -------- ---------
Total................................ 100,665 14,799 17,785 108,282 12,369 253,900
--------- --------- --------- --------- -------- ---------
Gap...................................... $(56,333) $ 121 $ 12,374 $ 72,794 $16,484 $ 45,440
Cumulative Gap........................... $(56,333) $(56,212) $(43,838) $ 28,956 $45,440
Sensitivity Ratio........................ 0.44 1.01 1.70 1.67 2.33 1.18
Cumulative Sensitivity Ratio............. 0.44 0.51 0.67 1.12 1.18
---------------------------------------------------------------
Quarterly Summary of Earnings
The unaudited quarterly results of operations for the years ended December
1996 and 1995 are as follows (in thousands, except per share data):
Quarters Ended
1996 1995
March 31 (1) June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
------------------------------------------ ---------------------------------------
Total Interest Income.................. $5,721 $5,654 $5,731 $5,952 $5,037 $5,275 $5,473 $5,633
Net Interest Income.................... 3,252 3,291 3,332 3,386 3,051 3,046 3,037 3,061
Provision for Loan Losses.............. 125 125 125 225 125 125 65 65
Other Income........................... 463 510 479 423 412 518 421 592
Other Expense.......................... 2,196 2,193 2,191 2,380 2,140 2,249 2,099 2,280
Net Income Before Cumulative
Effect Adjustment.................... 1,024 1,062 1,107 933 864 922 1,017 1,014
Net Income............................. 1,180 1,062 1,107 933 864 922 1,017 1,014
Net Income Per Share................... 0.69 0.62 0.64 0.54 0.50 0.54 0.59 0.59
(1) Restated to reflect the change in accounting for trust fee income.
---------------------------------------------------------------
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
National Association of Securities Dealers Automatic Quotations (NASDAQ) through
the electronic bulletin board and pink sheets. As of December 31, 1996, the
approximate number of shareholders of record of the Corporation's common stock
was 1,425.
Price Range of Common Stock Cash Dividends Paid
1996 1995
High Low High Low 1996 1995
------------------------------ -------------
First Quarter................... $30.88 $29.50 $29.50 $28.25 First Quarter.............. $0.31 $0.29
Second Quarter.................. 31.50 30.75 29.00 27.50 Second Quarter............. 0.31 0.29
Third Quarter................... 34.25 31.50 28.25 27.00 Third Quarter.............. 0.31 0.29
Fourth Quarter.................. 35.50 34.25 29.00 27.00 Fourth Quarter............. 0.31 0.29
----- -----
$1.24 $1.16
===== =====
---------------------------------------------------------------
Trust and Asset Management Division
Funds under Management (Market Value)
Personal Trusts, Estates and Agency Accounts............. $105,862 $88,797
Corporate Accounts....................................... 12,095 5,352
-------- -------
Total.................................................... $117,957 $94,149
======== =======
18
CNB Financial Corporation and Subsidiary
1996 Annual Report
Selected Financial Data
Year Ended December 31
----------------------
(dollars in thousands, except per share data) 1996
----------------------
Interest Income
Loans Including Fees......................................................... $ 18,231
Deposits with Banks.......................................................... --
Federal Funds Sold........................................................... 87
Other Short-Term Investments................................................. --
Investment Securities:
U.S. Treasury Securities................................................. 854
Securities of U.S. Government Agencies and Corporations.................. 1,755
Obligations of States and Political Subdivisions......................... 1,294
Other Securities......................................................... 837
--------
Total Interest Income........................................................ $ 23,058
Interest Expense
Deposits..................................................................... $ 9,421
Other Borrowings............................................................. 376
--------
Total Interest Expense....................................................... $ 9,797
Net Interest Income............................................................. $ 13,261
Provision for Loan Losses....................................................... 600
--------
Net Interest Income After Provision
for Loan Losses.............................................................. $ 12,661
Other Income.................................................................... 1,875
Other Expenses.................................................................. 8,960
--------
Income Before Taxes and Cumulative Effect Adjustment............................ 5,576
Applicable Income Taxes......................................................... 1,450
--------
Income Before Cumulative Effect Adjustment...................................... 4,126
Cumulative Effect Adjustment.................................................... 156
--------
Net Income................................................................... $ 4,282
========
Per Share Data (1)
Income Before Cumulative Effect Adjustment................................... $ 2.40
Cumulative Effect Adjustment................................................. $ 0.09
Net Income................................................................... $ 2.49
Dividends Declared........................................................... $ 1.24
Book Value Per Share at Year End............................................. $ 23.05
At End of Period
Total Assets................................................................. $327,008
Investment Securities........................................................ 78,696
Loans, Net of Unearned Discount.............................................. 223,103
Allowance for Loan Losses.................................................... 2,473
Deposits..................................................................... 270,056
Shareholders' Equity......................................................... 39,716
Key Ratios
Return on Average Assets..................................................... 1.40%
Return on Average Equity..................................................... 11.73%
Loan to Deposit Ratio........................................................ 81.70%
Dividend Payout Ratio........................................................ 49.88%
Average Equity to Average Assets Ratio....................................... 12.59%
(1) Per share amounts have been restated to reflect a two-for-one split of
common stock in 1993.
19
CNB Financial Corporation and Subsidiary
1996 Annual Report
Five Year Comparison
- ------------------------------------------------------------------
1995 1994 1993 1992 (1)
- ------------------------------------------------------------------
$ 16,849 $ 14,813 $ 13,568 $ 13,935
1 91 243 848
81 43 89 224
-- -- 24 156
747 729 920 955
1,480 1,060 1,170 1,511
1,222 1,238 1,480 1,491
1,038 1,194 1,496 1,563
- ------------- ------------ ------------- -------------
$ 21,418 $ 19,168 $ 18,990 $ 20,683
$ 8,946 $ 6,986 $ 7,564 $ 9,690
277 239 32 35
- ------------- ------------ ------------- -------------
$ 9,223 $ 7,225 $ 7,596 $ 9,725
$ 12,195 $ 11,943 $ 11,394 $ 10,958
380 525 525 500
- ------------- ------------ ------------- -------------
$ 11,815 $ 11,418 $ 10,869 $ 10,458
1,943 1,510 1,257 1,040
8,768 8,082 7,730 6,949
- ------------- ------------ ------------- -------------
4,990 4,846 4,396 4,549
1,173 1,137 1,051 1,038
- ------------- ------------ ------------- -------------
3,817 3,709 3,345 3,511
-- -- 226 --
- ------------- ------------ ------------- -------------
$ 3,817 $ 3,709 $ 3,571 $ 3,511
============= ============ ============= =============
$ 2.22 $ 2.15 $ 1.93 $ 2.04
$ -- $ -- $ 0.13 $ --
$ 2.22 $ 2.15 $ 2.06 $ 2.04
$ 1.16 $ 1.08 $ 1.05 $ 1.00
$ 21.79 $ 20.03 $ 19.32 $ 18.30
$297,523 $269,698 $264,547 $270,525
75,928 71,314 78,927 92,493
200,038 181,789 167,956 150,024
2,145 2,033 1,750 1,502
255,787 230,641 226,326 235,887
37,543 34,515 33,288 31,525
1.36% 1.39% 1.35% 1.34%
10.58% 11.07% 11.06% 11.48%
77.36% 77.94% 73.44% 63.56%
52.36% 50.18% 51.00% 49.07%
12.86% 12.43% 12.21% 11.66%
20
CNB Financial Corporation and Subsidiary
1996 Annual Report
Management's Discussion and Analysis
of Financial Condition and
Results of Operations
General
The purpose of the following pages is to provide information on CNB Financial
Corporation (the Corporation) and County National Bank (the Bank) with regard to
changes in financial condition and expanded details on the results of operations
which may not be apparent from the consolidated financial statements and notes.
This discussion is intended to provide a clear report on the liquidity and
capital resources of the Corporation. Management's Discussion and Analysis
should be read in conjunction with the CNB Financial Corporation and Subsidiary
consolidated financial statements included herein.
Results of Operations
The Corporation earned $4.1 million in 1996 before the cumulative effect of
the change in accounting principle which was 8% higher than net income of $3.8
million in 1995. Compared to net income of $3.7 million the year ended December
31, 1994, this net income is 11.2% higher. The largest contributing factor to
the increased profits was a $1.1 million increase in the net interest income
earned on the Corporation's assets. Other income increased more than 4.7% over
1995 levels after adjusting for security gains taken on the Corporation's equity
holdings in 1995 and has increased by 24.6% from fee income recorded in 1994.
Operating expenses rose by $192 thousand to $8.96 million in 1996 compared to
1995. Operating expenses for 1994 were $8.1 million.
Despite the continually sound financial success, management measures the
Corporation's strengths by its achievements in remaining competitive and keeping
pace with the consumers' increasing demands.
As a financial services company, the Corporation is subject to intense
competitive pressures from not only local financial institutions but from out-
of-market competitors with remote banking technologies, mutual funds, insurance
companies, lending subsidiaries of non-financial corporations and a variety of
other service companies.
To these ends, the Corporation and Bank completed many strategic initiatives.
These including:
. The opening of a newly constructed branch in Houtzdale, Clearfield
County, on January 10, 1996.
. The successful introduction of a vehicle leasing program in May. This
new financing tool has proven to be highly popular with consumer and business
customers ending the year with $6.1 million of gross receivables.
. The implementation of a 24-hour automated telephone system,
ServiceCall, was put into service in June, 1996 which provides valuable
information on demand to our customers at all hours of the day and night from a
computer generated "voice response" unit.
. The Bank introduced our Customer Service Center, a valuable delivery
system which is capable of responding quickly and efficiently to customer needs
through personalized service over the telephone.
. Imaged statements were introduced to the Bank's customers in August
which provide great benefits to the depositor while having measurable cost-
savings for the institution.
. The completion of our "branch partnering" transaction provided the
Bank four new branch locations, previously occupied by a competitor, and an
opportunity to market directly to the customers of that competitor, further
expanding our market dominance where we serve.
These activities were all within the framework of the organization's five year
strategic plan to create a solid network of financial services throughout its
targeted market and to provide for the highest level of customer satisfaction
while maintaining our community banking nature.
The earnings per share before the cumulative effect of the change in
accounting principle was $2.40 in 1996 compared to $2.22 in 1995 and $2.15 in
1994. Dividends were increased in 1996 to $1.24 per share, up 6.9% from 1995
when the dividend was $1.16 and up 14.8% over the $1.08 paid in 1994. Book value
per share at year-end was $23.05 including the net unrealized gain for
accounting for "available for sale" securities as required under generally
accepted accounting principles.
Balance Sheet Highlights
The total assets of the Corporation on December 31, 1996 were $327 million. At
year-end 1995 total assets were $297.5 million and on December 31, 1994 total
assets were $269.7 million. The 9.9% increase in total assets during 1996 was
comprised of a $22.7 million increase in loans outstanding, a $2.8 million
increase in the Corporation's investment portfolio and a $3.9 million increase
in other assets. In the two year period since December 31, 1994, the
Corporation's assets have increased $57.2 million or 21.2%.
21
CNB Financial Corporation and Subsidiary
1996 Annual Report
Loans
- -----
The largest portion of the Corporation's assets are loans. Loans, net of
unearned income, at year end were $223.1 million, compared with $200 million one
year ago. The Bank's loan portfolio continues to grow as more resources are
dedicated within our communities toward business development. Further, the
Corporation has benefited directly from new business obtained as the result of
competitors consolidating. Many borrowers have expressed the desire toward
keeping their borrowing relationships with local financial institutions. The
continuance of personalized service in all lending areas, has helped maintain
the Bank's position of the predominant lender in its local region.
Recognizing the growing demand for vehicle leasing, the Bank began its leasing
operations in May, 1996. On December 31, 1996 the Bank had $6.1 million of gross
vehicle lease receivables. The popularity of this financing method was
instrumental in increasing consumer loans.
As shown below, the portfolio composite changed somewhat during 1996.
Residential mortgages became a larger portion of the loan outstandings as the
"First Time Home Buyer" mortgage program, implemented last year, continued its
popularity and is an important source to the Bank's communities in making home
buying available to low and moderate income families.
The table below stratifies the loan portfolio by broad categories (in
thousands):
1996 1995
- --------------- ---- ----
Loan Categories (000's) (000's)
Commercial, Financial
& Agricultural............... $ 45,037 19.89% $ 49,643 24.37%
Commercial Mortgage............. 31,451 13.89% 30,658 15.05%
Residential Mortgage............ 100,402 44.35% 78,111 38.34%
Consumer Installment............ 43,448 19.19% 45,294 22.23%
-------- -------- -------- -------
Lease Receivables............... 6,069 2.68% -- --
$226,407 100.00% $203,706 100.00%
Management takes careful measures to ensure that loans are not concentrated in
any particular industry or category. This helps the Corporation diversify its
credit risks and reduce the impact of economic downturns in specific business
sectors.
Commercial loans consist of traditional forms of commercial credit including
term loans, lines of credit and tax advantaged loans to political subdivisions.
Also, loans to finance agricultural production are included in this category.
Commercial mortgage loans are made to businesses when real estate is used as the
underlying collateral. Residential mortgages include first mortgages on
residential properties, construction loans for the completion of residential
homes and open-ended revolving lines of credit secured by a lien on the
dwelling. Installment loans cover a variety of personal lending and included
direct and indirect automobile financing.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses is established by provisions for possible loan
losses which are charged as an expense against income. Loans deemed not
collectible are charged to the allowance while subsequent collections are
recorded as credits and increase the allowance.
As reported in many publications, both consumer delinquencies and bankruptcies
have risen during 1996. The Bank has seen evidences of this trend within the
consumer loan portfolio and recognizing this trend, increased its provision to
$600,000 in 1996 from $380,000 in 1995 and $525,000 in 1994.
The table below shows activity within the allowance account over the past
three years by loan type:
Allowance for Loan Losses
(in thousands)
------------------------------
Years Ended December 31,
------------------------------
1996 1995 1994
Balance at beginning of Period............ $ 2,145 $ 2,033 $ 1,750
Charge-offs:
Commercial and Financial............. 5 59 --
Commercial Mortgages................. -- 28 95
Residential Mortgages................ -- -- 33
Consumer Loans and
------------------------------
Credit Cards..................... 355 282 254
360 369 382
Recoveries:
Commercial and Financial............. 5 -- 19
Commercial Mortgages................. 1 -- --
Residential Mortgages................ -- -- --
Consumer Loans and
------------------------------
Credit Cards..................... 82 101 121
88 101 140
Net Charge-offs:.......... (272) (268) (242)
Provision for Possible
==============================
Loan Losses.......................... 600 380 525
==============================
Balance at End-of-Period.................. $ 2,473 $ 2,145 $ 2,033
Loans, net of unearned.................... $223,103 $200,038 $181,789
Allowance to Net Loans.................... 1.11% 1.07% 1.12%
Management regularly reviews the loan portfolio and trends in the allowance
for loan losses to ensure adequate protection of not only current potential
losses, but, for future periods when possible economic downturns may lead to
higher collection problems. Management considers local and national credit
trends
22
CNB Financial Corporation and Subsidiary
1996 Annual Report
in assessing the allowance for loan losses which it believes is adequate.
Further, strict adherence to established underwriting criteria is important in
maintaining a high quality loan portfolio.
Investments
- -----------
Investment securities are the next predominant earning asset after loans. At
year end, the investment portfolio totalled $78.7 million, or slightly more than
25% of the Corporation's earning assets. The Corporation's investments consist
of $13.5 million of U.S. Treasury obligations, $27.1 million of U.S. Government
Agency obligations, $25.4 million of Tax-Free State and Municipal Authority Debt
Securities and $9.1 million of corporate debt. Included in the corporate debt is
$1.5 million of collateralized mortgage obligations and asset backed securities.
These latter investments are all rated AAA by Moody's Rating Service. The parent
Corporation also holds $2.6 million of various bank and bank holding company
equities.
Upon purchasing a security, management considers various factors such as loan
and deposit growth, the Corporation's capital position and the interest rate
risk position and classifies the debt security as available for sale or held to
maturity. At year end the Corporation had $61.3 million in securities available
for sale and $17.4 million of securities it intends to hold until maturity.
The Corporation has established investment policies that address all aspects
of portfolio management including, but not limited to, the overall quality of
the portfolio, liquidity and maturity limits, investment concentrations and
regulatory guidelines. Compliance with these policies is reported regularly to
the Corporation's Asset-Liability Committee, a subcommittee of the Board of
Directors. The Corporation's objectives with respect to investment portfolio
management is to provide a high level of liquidity and to moderate any interest
rate risk which may be present between other earning assets and rate sensitive
liabilities.
Deposits
- --------
The Corporation's main source of funding is consumer deposits gathered through
the Bank's branch network. The Bank concentrates its deposit gathering
activities in the markets it serves and does not solicit monies from outside
those areas.
Total deposits at year end 1996 were $14.3 million higher than 1995 year end.
Compared to December 31, 1994, total deposits have grown $39.4 million or 17.1%.
The growth in deposits is in part, attributable to the five new locations which
the Bank made available to its markets in 1996. One branch was a new opening in
Houtzdale, Clearfield County. The four additional sites located in Clearfield,
Philipsburg (2) and DuBois, Pennsylvania resulted from a purchase transaction
where a large super-regional bank exited these communities and sold the Bank its
branch locations, fixed assets and customer lists and is facilitating the
migration of customers into the Bank's deposit base.
Deposit gathering, both locally and nationally, is subject to fierce
competition. Competition for customer deposits can come from insurance
companies, mutual funds and investment brokers and out-of-state banking
institutions through remote banking operations. Further, in a defensive measure,
some local institutions attempt to "buy" deposits through offering interest
rates considerably in excess of the Bank's and other competitors. Management has
approached this challenge with the philosophy of providing a complete menu of
products with local convenience. This approach is believed to provide deposit
customers with the personal service of community banking but with the technology
and product advancement of larger financial service companies. Management
considers its longer term approach to deposit gathering or customer retention
programs a success as the Bank is still the dominant depository institution in
its primary communities.
The Bank has experienced increases in all of its deposit products. The table
below outlines balances in the accounts at year end 1996, 1995 and 1994 (in
thousands):
----------------------------
1996 1995 1994
----------------------------
Checking, Non-Interest Bearing $ 30,812 $ 25,705 $ 28,279
Checking, Interest Bearing 82,184 78,821 50,782
Savings Accounts 36,183 35,307 41,559
----------------------------
Certificates of Deposit 120,877 115,954 110,021
$270,056 $255,787 $230,641
Purchased Funds
- ---------------
As a community bank, County National Bank strives to maintain the prudent
balance between the demand for funds for loans and withdrawal of consumer
deposits. During the course of operations, however, timing differences in cash
flows may cause the Bank to purchase federal funds from banks who have committed
to extend credit to the Bank. In 1996, demand for funds grew at a faster pace
than deposit growth. In anticipation of opening new branch locations, the Bank
utilized additional borrowings from the Federal Home Loan Bank of Pittsburgh. In
the latter months of 1996, the need for purchased funds from this and other
sources began to diminish. Management's intentions are to replace higher cost
borrowings with lower rate funds as deposits are generated.
23
CNB Financial Corporation and Subsidiary
1996 Annual Report
Shareholder's Equity
- --------------------
The Corporation's shareholders' equity position under generally accepted
accounting principles on December 31, 1996 was $39.7 million over total assets
of $327 million resulting in a period end equity to asset ratio of 12.15%. For
year end 1995 total capital stood at $37.5 million for an equity to asset ratio
of 12.62%. For December 31, 1994 the equity position was $34.52 million on a
total asset base of $269.7 million.
The Board of Directors and Management work together to deploy excess portions
of the capital into resources which they believe best for Corporation
shareholders.
Income Statement Highlights
Net Interest Income
- -------------------
The Corporation's primary source of earnings comes from the difference between
interest earned on loans and investments (including deposits with other banks
and federal funds sold) and the interest expense paid on deposits and borrowed
funds.
The table below compares volume and yields for the past two years for various
categories.
1996 1995
-------------------------------------------
Avg Yld Avg Yld
($000's) ($000's)
Investment Securities
(Taxable) $ 57,472 6.14% $ 56,149 5.97%
Investment Securities
(Non-Taxable) 24,740 5.23% 21,495 5.69%
Commercial Loans 46,986 8.26% 44,621 8.56%
Mortgage Loans 101,909 9.26% 89,215 9.03%
Installment Loans 56,334 8.72% 54,293 9.16%
-------------------------------------------
Average Earning Assets $287,441 8.02% $265,773 8.06%
Non Interest Bearing
Demand $ 27,852 -- $ 27,554 --
Interest Bearing Checking 76,496 3.13% 56,284 1.98%
Savings 36,266 1.66% 38,716 2.72%
Time Deposits 117,339 5.47% 116,239 5.83%
FHLB Advances & T.T.&L 7,186 5.23% 5,229 5.32%
-------------------------------------------
Average Liabilities $265,139 3.70% $244,022 3.78%
The Corporation made $1,066,000 more net interest income in 1996 compared to
1995. This increase is largely attributable to higher average earning assets
during the current year. The yield on earning assets declined slightly primarily
as a result of lower yields received on non-taxable securities, commercial loans
and installment loans. Offsetting this reduced earnings yield was a
corresponding drop in the cost of liabilities primarily resulting from a lower
cost of time deposits as maturing deposits with higher rates were replaced by
lower rates in 1996. While the rate on interest bearing checking accounts rose
dramatically, this is a result of a higher volume of Prime Money Fund balances
present for the full year of 1996 compared to a partial year in 1995.
As mentioned in the discussion on deposits, obtaining core funds has become
increasingly difficult. To an extent the Bank's cost of deposits is influenced
by local and out-of-market competitors offering above market rates for monies.
The amount of net interest income is dependent not only on the mix of assets
and liabilities, but is also heavily influenced by the ability to have assets
and liabilities concurrently reprice in response to changes in market rates. As
described later in the discussion on interest rate sensitivity, management pays
particular attention to the net amount of assets and liabilities (mainly
referred to as the "interest rate gap") which reprice in periodic time frames.
The Corporation strives to be in a neutral position with regard to repricing and
does not take substantial risks to maximize the net interest margin spread.
Non Interest Income
- -------------------
In the normal course of business, the Bank derives income for services it
provides and charges penalties when customers are not in compliance with product
agreements. This general category also includes fiduciary fees earned by the
Bank's Trust and Asset Management division, service charges on deposit accounts
and late charges assessed when a customer exceeds the prescribed limits of the
payment due date.
Total revenue for these activities for 1996 was $1.9 million compared to $1.9
million in 1995 and $1.5 million in 1994. Excluding gains on securities, 1996
non interest income was 4.7% more than in 1995 and 21.7% higher than recorded in
1994. The fees recognized from trust and asset management activities decreased
slightly in 1996 to $511 thousand from $529 thousand in 1995. During 1996, the
Bank adopted the accrual method of accounting in recognizing trust fee income.
Prior to 1996, the Bank recognized such income on a cash basis. The cumulative
after tax effect of adopting this change in 1996 resulted in an increase in net
income of $156 thousand or $0.09 per share for the Corporation.
Service charges on deposit accounts rose $84 thousand in 1996 over 1995 and
are $288 thousand higher than those charges recorded in 1994. As the Bank did
not increase their fees in 1996, this increase is attributable to a larger
deposit base and more fees generated from existing customers. Increases were
24
CNB Financial Corporation and Subsidiary
1996 Annual Report
recorded in the categories of other bank fee charges and miscellaneous income.
These categories include safe deposit rents, money transfer charges and check
commissions.
The Corporation had a net loss on the sale of securities in 1996 of $7
thousand. In 1995 the Corporation recognized a $146 thousand net gain on the
sale of debt and equity securities.
In 1994 the Bank began a program of selling its Pennsylvania Higher Education
loans. Management had been searching for an avenue to place the servicing and
funding on these government guaranteed loans elsewhere, as increasingly complex
procedures were expected to affect the portfolio's profitability. On an ongoing
basis, the Bank is an active lender for student loans, however, these
disbursements are in turn sold to the Student Loan Marketing Association (SLMA)
for servicing and collection. In 1994 the Bank recognized $43 thousand of gains
on this activity which grew to $53 thousand during the 1995 fiscal year. In 1996
the Bank recognized $24 thousand of gains under these activities.
Non Interest Expense
- --------------------
The costs associated with operating the Corporation rose by 2.2% over 1995 and
are 10.9% over 1994 year end results. These costs include salaries paid to
personnel, supplies, data processing expenses, insurance and occupancy expenses.
As mentioned in this report, the Bank opened one new branch in 1996 and acquired
four additional banking locations in the latter part of the year. Personnel
expenses for new branches were incurred prior to the opening for training and
other necessary preparations. Merit and cost of living increases also
contributed to the increase in salaries. Benefit costs, in large part, are
driven by increases in salaries, as many benefits such as retirement
contributions, and payroll taxes are computed as a function of salaries.
With the many new activities and services implemented during 1996, salary
expense rose 11.5% over last year. Compared to 1994, salary expense is 22.2%
higher. Benefit expenses were lessened by a temporary reduction in health care
expense and were 19.6% lower than benefits expensed during 1995. The Corporation
expensed $47.8 thousand under benefits as required under SFAS No. 106. The 1996
expense for post-retirement benefit costs is somewhat higher than for 1995 due
to a higher number of employees, but both 1996 and 1995 expense levels are
significantly lower than 1994 as the eligibility policy was changed in 1995.
The Corporation has made a major investment in expanding its markets and
services in the past three years. Along with the three new branches opened since
1994, the Bank also purchased four additional banking sites. The longer term
objectives have not only increased the personnel costs mentioned above but also
the facilities costs associated with expanded locations. Occupancy expense rose
30% to $1.5 million in 1996 compared to 1995. Compared to the occupancy expense
for 1994, expenses have increased 37.7% over the $1.1 million reported that
year.
Other operating expenses were lower in 1996 as compared to those incurred in
1995 and 1994. The FDIC lowered deposit premiums as the Bank Insurance Fund
(BIF) was determined to be funded to the required level as established under the
Financial Institutions Reform, Recovery and Enforcement Act of 1989.
Accordingly, in 1996 the Bank was required to pay the minimum insurance level of
only $2 thousand compared to $267 thousand and $513 thousand in 1995 and 1994,
respectively.
Included in other operating expenses are fees paid to the Corporation's data
processing provider, M&I Data Services, Inc. The Corporation has six and one-
half years remaining under an eight year contract with this service provider.
Other routine expenses have increased slightly from year to year, offset
slightly by increases in deferred loan origination costs.
Federal Income Taxes
- --------------------
For the year ended December 31, 1996, the Corporation provided $1.531 million
for Federal income tax. This is $411 thousand more than provided for in 1995.
The Corporation's higher earnings created a higher tax obligation. However, the
Corporation's effective tax rate rose from 23.5% in 1995 and 1994 to 26.3% in
1996. This increase occurred as a substantial portion of tax preferrenced
interest income has matured or been retired early. A reconcilement of taxes
accrued compared to the Corporation's statutory rate is provided in Footnote No.
10 on page 13.
Net Income
- ----------
Net income for the year ended December 31, 1996 was $4.1 million or 8% higher
than the 1995 results as measured prior to the cumulative effect in the change
in accounting principle. When compared to the net income reported for 1994, net
income is up 11.2%. On a per share basis, earnings for 1996 were $2.40 compared
with $2.22 for 1995 and $2.15 the fiscal year ending
25
CNB Financial Corporation and Subsidiary
1996 Annual Report
December 31, 1994.
Return on average assets for 1996 was 1.35% prior to the cumulative effect of
the change in accounting principle compared with 1.36% for 1995. Return on
average assets for 1994 was 1.39%. Return on average equity for the year was
11.73% compared with 10.58% for 1995. The return on average equity for 1994 was
11.07%. The return on equity calculation is influenced by changes in capital by
the amounts required for accounting for the unrealized gains and losses on
investments available for sale.
Capital Resources
The Corporation's capital position, increasing to $39.7 million at December
31, 1996, provides an above average capital position as compared to other bank
holding companies of similar size. Capital adequacy for a financial institution
is its ability to support asset growth and to sufficiently protect itself and
depositors against risk. The Corporation has relied on retained earnings to
increase equity, while providing a desirable return on invested capital to its
shareholders.
However, in the event that additional capital was necessary for various
activities of the Corporation, there are 772 thousand shares of authorized, not
issued, common stock which could be used to raise capital. Depending on the type
of equity required, the Corporation could issue a variety of capital instruments
that would qualify as primary (Tier 1) capital or other obligations which could
count as supplemental (Tier 2) capital.
The Federal Reserve Board standards classify capital into two tiers, referred
to as Tier 1 and Tier 2. Tier 1 capital consists of common shareholders' equity,
noncumulative and cumulative perpetual preferred stock. Tier 2 capital consists
of allowance for loan losses, perpetual preferred stock (not used in Tier 1),
hybrid capital instruments, term subordinate debt and intermediate-term
preferred stock. All banks are required to meet a minimum ratio of 8% of
qualifying total capital to risk-adjusted total assets and at least a 4% Tier 1
capital ratio. Capital that qualifies as Tier 2 capital is limited to 100% of
Tier 1 capital. In addition to the above risk based capital requirements, the
Federal Reserve also requires a minimum leverage capital ratio of 4% of Tier 1
capital to total assets adjusted for goodwill and intangible assets. The
disclosure in footnote No. 13 of the notes to the financial statements provides
an analysis of the Corporation and Bank's current capital levels.
Liquidity
As a financial intermediary, the Bank must manage its liquidity in order to
ensure its abilities to meet the cash flow requirements of deposit customers who
may potentially want to withdraw their funds and to assure borrowers that
sufficient funds are available to meet their credit needs. The Bank's major
source of new funds has come from the growing number of depositors. As interest
rates have fallen the banking industry has seen deposit growth rates drop to
minimal levels. In this regard, management continually explores new products
which may attract customers searching for customized financial vehicles. The
Prime Money Fund is an example of how quickly managment can develop a product
for customers' needs.
Aside from the capital markets open to the Corporation, the Bank has
substantial avenues it can use to augment its liquidity needs. First, the Bank
is a member of the Federal Home Loan Bank and had an average of $77.8 million of
additional borrowing capacity with that organization. Secondly, the bank has
committed lines from other banks to purchase up to $15 million in Federal funds
on a short term basis. And lastly, the Corporation has $61.3 million of
investments classified as available for sale, which could be sold to provide
additional funding if necessary. The investment portfolio has a short weighted
average maturity and in 1997 $14.4 million of securities will mature. These
monies could be used to meet liquidity needs or reinvested in high quality,
short term investments.
Interest Rate Sensitivity
The monies provided by deposit gathering and other borrowings are used by the
Bank in its lending activities. In general, the ability to simultaneously
reprice the deposits and loans does not occur. This difference is called
interest rate risk and can represent substantial uncertainty as to the stability
of earnings if interest rates rise or fall by relatively modest amounts. The
process of asset/liability management is the continuous monitoring of the amount
of monies available for repricing in periodic time frames. The primary function
of asset/liability management is to assure stabilized earnings regardless of
interest rate swings. Management's guiding principle in managing interest rate
risk is to attempt to keep the amount of
26
CNB Financial Corporation and Subsidiary
1996 Annual Report
liabilities and assets maturing or repricing in a particular time frame as close
to equal as possible. Therefore, any changes in market interest rates should
affect the renewing of the obligations to much the same extent, and net interest
income should not experience significant adverse effects.
Management uses several methods to manage its interest rate risk one of which
is the interest rate sensitive assets to interest-rate sensitive liabilities
report sometimes called the "gap report". Also, the Corporation uses a computer
simulation model which attempts to duplicate all the repricing/maturity
characteristics of the assets and liabilities and provide an ongoing estimate of
net interest income under various interest rate environments. This second method
has special uses in that it is helpful in judging not only short term risk, but
the risk in longer time-frames also.
27
CNB Financial Corporation and Subsidiary
1996 Annual Report
Services for Business & Consumer
- --------------------------------------------------------------------------------
County National Bank is a nationally chartered full-service commercial bank
which provides all conventional banking services. In addition to those
services, County National Bank provides the following innovative products and
services which differientates the Bank as the premier financial services
provider in its market area.
Business Banking
[] Automated Clearing House Originations (ACH) & EFT Transactions
[] Accounts Receivable Financing through "Business Manager(TM)"
[] Cash Concentration Accounts through ACH
[] Payroll Direct Deposit Services
[] Customized Statement Cycles for Business and Organizations
Investment Services
[] Investment Management
[] Custody Accounts
[] Corporate Money Management Services
[] Trusts
[] Land Management
[] Employee Benefit Administrative and Investment Services
[] 401 (k) Administration
[] Self-Directed IRA's
Consumer Banking
[] Maximum Value Plan (MVP Account) to reward customer loyalty
[] Rainbow Account Checking for Customers 50 years of age & better
[] Check C D for Customers with Active Lifestyles
[] E-Z Access Certificates of Deposit (no penalty for early withdrawal after
the first seven (7) days following initial date of purchase)
[] Prime Money Fund (money market accessibility, a premium rate and FDIC
insurance)
[] Check Imaging with the Check Organizer and Combined Statements (new
revolutionary way to organize checks & simplify recordkeeping)
[] Automobile Leasing
[] First Time Home Buyer Program
[] Expedited Loan Approvals
[] Customer Service Center (personalized service over the telephone)
1-800-492-3221
[] Service Call (24 hour automated customer information line) 1-800-407-6554
[] CNB Home Page (http://www.bankcnb.com)
28
CNB Financial Corporation and Subsidiary
1996 Annual Report
Board of Directors
CNB Financial Corporation
L. E. Soult, Jr.
Chairman of the Board
Vice President and Treasurer, Soult Wholesale Co. (Building
Materials Wholesaler)
Robert E. Brown
Vice President, E. M. Brown, Inc. (Coal Producer)
William F. Falger
Executive Vice President - CNB Financial Corporation
President and Chief Executive Officer - County National Bank
Richard D. Gathagan
President & Owner of Pharmaceutical & Medical Companies
(Health Care)
James J. Leitzinger
President, Leitzinger Realty (Real Estate Investments)
Dennis L. Merrey
President, Clearfield Powdered Metals, Inc. (Manufacturer)
James P. Moore
President and Chief Executive Officer - CNB Financial
Corporation
Chairman of the Board - County National Bank
William R. Owens
Retired, Formerly Vice President, Secretary and Treasurer, CNB
Financial Corporation and President & Chief Executive Officer,
County National Bank
Robert C. Penoyer
President, Penoyer Contracting Co., Inc. (Contractor)
Carl J. Peterson
Assistant Secretary - CNB Financial Corporation
Senior Vice President & Trust Officer - County National Bank
Jeffrey S. Powell
President, J.J. Powell, Inc. (Petroleum Distributor)
Edward B. Reighard
Retired
Peter F. Smith
Attorney at Law
Robert G. Spencer
President, Hepburnia Coal Sales Corp. (Coal Producer)
Joseph L. Waroquier, Sr.
President, Waroquier Coal Company (Coal Producer)
DIRECTOR EMERITUS - W. K. Ulerich
County National Bank
James P. Moore
Chairman of the Board
Robert E. Brown
Vice President, E. M. Brown, Inc. (Coal Producer)
William F. Falger
President and Chief Executive Officer
Richard D. Gathagan
President & Owner of Pharmaceutical & Medical Companies
(Health Care)
James J. Leitzinger
President, Leitzinger Realty (Real Estate Investments)
Dennis L. Merrey
President, Clearfield Powdered Metals, Inc. (Manufacturer)
William R. Owens
Retired, Formerly Vice President, Secretary and Treasurer, CNB
Financial Corporation and President & Chief Executive Officer,
County National Bank
Robert C. Penoyer
President, Penoyer Contracting Co., Inc. (Contractor)
Jeffrey S. Powell
President, J.J. Powell, Inc. (Petroleum Distributor)
Edward B. Reighard
Retired
Peter F. Smith
Attorney at Law
L. E. Soult, Jr.
Vice President and Treasurer, Soult Wholesale Co. (Building
Materials Wholesaler)
Robert G. Spencer
President, Hepburnia Coal Sales Corp. (Coal Producer)
Joseph L. Waroquier, Sr.
President, Waroquier Coal Company (Coal Producer)
DIRECTOR EMERITUS - W. K. Ulerich
29
CNB Financial Corporation and Subsidiary
1996 Annual Report
Corporate Officers
James P. Moore
President and Chief Executive Officer
William F. Falger
Executive Vice President
William A. Franson
Secretary
Carl J. Peterson
Assistant Secretary
Bank Executive Officers
James P. Moore
Chairman
William F. Falger
President & Chief Executive Officer
William A. Franson
Executive Vice President & Cashier, Chief
Operating Officer
Carl J. Peterson
Senior Vice President & Senior Trust
Officer
Mark D. Breakey
Senior Vice President & Senior Loan
Officer
Trust & Asset Management Services
Donald E. Shawley
Vice President & Trust Officer
Eunice M. Peters
Assistant Trust Officer
Lending Operations
Robin L. Hay
Vice President, Community Banking
Joseph H. Yaros
Vice President, Community Banking,
Bradford
William J. Mills
Assistant Vice President, Community
Banking, St. Marys
Ronald E. Billotte
Assistant Vice President, Community
Banking, Clearfield
David W. Ogden
Assistant Vice President, Loan Review
Duane P. Shifter
Assistant Vice President, Community
Banking, Clearfield
Merrill A. Dunlap
Assistant Cashier, Community Banking,
Clearfield
Larry A. Putt
Assistant Cashier, Community Banking,
Clearfield
Richard L. Bannon
Credit Administration Officer
Paul A. McDermott
Collection Officer
Keith M. Folmar
Lending Officer, Community Banking,
Philipsburg
Jo Potter
Lending Officer, Community Banking,
Philipsburg
Ruth Anne Ryan
Lending Officer, Dealer Center
Finance & Accounting
Rachel E. Larson
Assistant Vice President, Accounting
Operations
Edward H. Proud
Assistant Vice President, Electronic
Technology
C. Glenn Myers
Controller & Assistant Financial Officer
Dennis J. Sloppy
Assistant Cashier, Electronic Technology
Branch Office Administration
Jacqueline A. Hynd
Assistant Vice President, Branch
Administrator
Rodger L. Read
Assistant Vice President, Madera Office
Jeffrey A. Herr
Assistant Vice President, Presqueisle
Street Office, Philipsburg
Susan J. Shimmel
Assistant Cashier, Old Town Road Office,
Clearfield
Deborah M. Young
Assistant Cashier, Washington Street
Office, St. Marys
Nancy J. Fink
Assistant Cashier, Bonds & Securities
S. Jean Sankey
Community Office Manager, Lending
Officer, Osceola Mills Office
Kathy J. McKinney
Community Office Manager, Houtzdale
Office
Gregory R. Williams
Community Office Manager, Industrial
Park Road Office, Clearfield
Gregory J. Urbassik
Community Office Manager, DuBois
Mall Office, DuBois
Auditing
Brenda L. Terry
Auditor
Compliance
Donna J. Casteel
Compliance Officer
Human Resources
Mary Ann Conaway
Assistant Vice President
Marketing
Helen G. Kolar
Vice President, Marketing Director
30
CNB Financial Corporation and Subsidiary
1996 Annual Report
Shareholder Information
Annual Meeting
The Annual Meeting of the Shareholders of
CNB Financial Corporation will be held Tuesday,
April 15, 1997 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 and 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 18.
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.
1825 Oregon Pike
P. O. Box 4548
Lancaster, PA 17604-4548
(800) 456-9234
Monroe Securities, Inc.
47 State Street
Rochester, NY 14614
(800) 766-5560
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
E. E. Powell & Co. Inc.
1100 Gulf Tower
Pittsburgh, PA 15219
(800) 289-7865
Ryan, Beck & Co.
3 Parkway
Philadelphia, PA 19102
(800) 766-5560
Sandler O'Neill & Partners
2 World Trade Center
104th Floor
New York, NY 10048
(800) 635-6860
Corporate Description
CNB Financial Corporation is a bank holding company established April 26, 1984.
Its assets consist principally of all the outstanding stock of County National
Bank, Clearfield, Pennsylvania. County National Bank is a full-service financial
institution with the main office located at 1 S. Second Street, Clearfield,
Pennsylvania; and 15 full-service branch offices in the communities of
Clearfield, DuBois, Karthaus, Madera, Osceola Mills, Philipsburg, St. Marys,
and Bradford, McKean County, Pennsylvania. The Bank competes actively with
several other commercial banks, savings banks, local credit unions and small
loan and consumer loan companies having offices within its market areas.
[Logo of FDIC Appears here]
31