Exhibit 13
Table of Contents
- --------------------------------------------------------------------------------
Financial Charts............................................................ 1.
Letter to Shareholders...................................................... 2.
Financial Highlights of 1997................................................ 4.
Report of Independent Auditors.............................................. 5.
Consolidated Statements of Condition........................................ 6.
Consolidated Statements of Income........................................... 7.
Consolidated Statements of Cash Flows....................................... 8.
Consolidated Statements of Changes
in Shareholders' Equity.................................................... 9.
Notes to Consolidated Financial Statements.................................. 10.
Maturity Distribution of Balance Sheet...................................... 19.
Quarterly Summary of Earnings............................................... 19.
Selected Financial Data - Five Year Comparison.............................. 20.
Management Discussion and Analysis.......................................... 22.
Board of Directors.......................................................... 29.
Officers.................................................................... 30.
Services for Business & Consumer............................................ 31.
Shareholder Information
and Corporate Description.................................................. 32.
Financial Activity at a Glance [PHOTOGRAPHS OF
- ------------------------------------------ BRANCH OFFICES]
Asset Growth
(in thousands)
[GRAPH OF ASSET GROWTH]
Equity Growth
(in thousands)
[GRAPH OF EQUITY GROWTH]
Earnings Per Share
(adjusted for stock split)
[GRAPH OF EARNINGS PER SHARE]
Dividends Paid Per Share
(adjusted for stock split)
[GRAPH OF DIVIDENDS PAID PER SHARE]
[PHOTOGRAPHS OF CNB Financial Corporation and Subsidiary
BRANCH OFFICES] 1997 Annual Report
December 31, 1997
TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS:
1997 - A STRONG YEAR OF GROWTH AND PERFORMANCE
Our focus for increased shareholder benefit through asset growth and performance
standards continued throughout the year to bring equity and dividend rewards.
This past year we experienced what the banking industry in general is
experiencing, a tight squeeze on net interest margins and operating expenses.
Therefore, substantial income and cost containment re-engineering was required
to maximize income levels during 1997.
GROWTH This year's growth in income was the result of concerted efforts of
acquiring new markets and increasing market share in existing trade areas. The
expansion of our franchise service area into the DuBois area, Elk and McKean
county regions, and market concentrations developed throughout Clearfield and
Moshannon Valley, supported CNB's efforts as a banking leader throughout north
central Pennsylvania. Significant results were realized from our total asset
growth of $45.9 million or 14%, totaling over $372 million by year end. Growth
of net income reached a new high of $4.3 million. This formulizes to a return
on average assets of 1.23% and a return on average equity of 10.57%.
SHAREHOLDER FOCUS Four primary objectives constantly drive and motivate CNB's
efforts to its shareholders. They are the per share increases in book value,
market value, earnings and dividends. This year's closing book value per share
of $24.50 is a direct reflection of the total shareholders' equity of $42.2
million and represents an increase of 6.3% for the year. Market value per share
closed at $39.88, accumulating to a total market value of the institution to
$68.7 million for a 12.3% increase. Earnings per share closed at $2.50, a 4.1%
comparative increase over 1996 before applying any accounting changes.
Following the principal and accounting changes, that increase was reduced to
$.01 per share or .04%. Dividends per share were distributed at an all time
high of $1.36 per share, a $0.12 per share or 9.7% increase. The combined
increase in this dividend and the increase in market value provided an annual
yield of 16.1% per share.
CUSTOMER SERVICE We have made many changes recently that affect electronic
banking services such as automated telephone services, automatic account
transfers, electronic funds transfers, etc. This philosophy is consistent with
the technological services that are being introduced to customers throughout the
banking industry. As that philosophy changes in banks in the more metropolitan
areas, we feel it is still appropriate that our delivery system be conducted on
a more personal basis through branch banking networks. We monitored our
position throughout the year and will continue to consider the banking service
delivery process that is best for our customers.
CREDIT QUALITY The key to value of a rapidly expanding loan portfolio is high
quality loan production. Every effort has been made to assure that all credit
quality standards were improved as loans grew by $41.8 million or 18.7%. When
loan losses are controlled, the portfolio of loans provides the best earnings
source of all the bank's assets. Significant attention to the adequacy and the
contributions towards loan
2
[PHOTOGRAPHS OF
BRANCH OFFICES]
loss reserves have been dealt with to assure that the most appropriate levels of
reserves are maintained. This of course comes at the expense of annual net
earnings, however, it does provide to the safety and soundness of the bank while
protecting the shareholders' equity.
YEAR 2000 ISSUE The biggest threat looming to banks and customers is the
heralded year 2000 computer software glitch. Since the industry recognition of
this peril in late 1996, we have embarked on a full-fledged year 2000 effort.
Early in 1997, the board of directors commissioned an eight member internal task
force to assure timely assessment and remedial action to the effects upon this
institution and our vendors and customers. We were pleased to report that
management initiatives have created a high comfort level to this concern and
that related expenses to this resolve will not significantly impact earnings or
performance (page 27 offers additional insight into this situation). Federal
regulators have urgently converted this to a top priority for banks in 1998.
PEOPLE County National's employees have given another year of tremendous effort
to achieving the progress detailed further in this report. Their high quality
response to challenges during 1997 demonstrates each person's commitment towards
the company's strategic objectives. The contribution of each 164 full-time and
45 part-time staff member is recognized with this report and appreciated.
Employees can be expected to perform to the level of their training. Strong
emphasis on education through the American Institute of Banking and specific
graduate banking courses is provided and encouraged. Comprehensive internal
training is provided on a continuing basis, covering the primary and advanced
levels towards customer loyalty, service and sales and is supported by dedicated
trainers with strong technical assistance.
We at CNB look forward to the challenges 1998 will bring, as we work to
realize the maximum benefits for our shareholders and the opportunity to serve
our customers better. On behalf of the management, staff and the board of
directors, we thank you for the support you have shown through your ownership of
CNB Financial Corporation and for the privilege of serving your interests.
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
[Photograph of
Future DuBois Mall Office]
3
[PHOTOGRAPHS OF
BRANCH OFFICES]
Consolidated Financial Highlights
(in thousands of dollars, except per share data)
- --------------------------------------------------------
For the Year 1997 1996 % Change
--------- --------- ---------
Interest Income $ 26,205 $ 23,058 13.6%
Interest Expense 11,822 9,797 20.7
Net Interest Income 14,383 13,261 8.5
Net Income 4,302 4,282 0.5
Return on:
Average Assets 1.23% 1.40%
Average Equity 10.57% 11.73%
At Year End
Assets $372,867 $327,008 14.0%
Deposits 319,473 270,056 18.3
Loans 262,029 220,630 18.8
Shareholders' Equity 42,208 39,716 6.3
Trust Assets
Under Management
(at market value) 154,834 117,957 31.3
Per Share Data
Net Income $ 2.50 $ 2.49 0.4%
Dividends 1.36 1.24 9.7
Book Value 24.50 23.05 6.3
4
CNB Financial Corporation and Subsidiary
1997 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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, 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
January 28, 1998
Pittsburgh, Pennsylvania
5
CNB Financial Corporation and Subsidiary
1997 Annual Report
Consolidated Statements of Condition
(in thousands, except share data)
December 31
-------------------
1997 1996
-------- --------
Assets
Cash and due from banks........................................... $ 9,555 $ 10,806
Interest bearing deposits with other banks........................ 31 14
Federal funds sold................................................ 8,850 --
Investment securities available for sale.......................... 63,521 61,309
Investment securities held to maturity, fair value of $13,704 at
December 31, 1997 and $19,025 at December 31, 1996............. 13,511 18,695
Loans and leases.................................................. 268,585 226,407
Less: unearned discount........................................ 3,707 3,304
Less: allowance for loan and lease losses...................... 2,849 2,473
-------- --------
NET LOANS...................................................... 262,029 220,630
Premises and equipment, net....................................... 8,795 9,312
Accrued interest receivable....................................... 2,199 2,181
Other assets and intangible, net of amortization.................. 4,376 4,061
-------- --------
TOTAL ASSETS................................................... $372,867 $327,008
======== ========
Liabilities
Deposits:
Non-interest bearing deposits.................................. $ 32,893 $ 30,812
Interest bearing deposits...................................... 286,580 239,244
-------- --------
TOTAL DEPOSITS................................................. 319,473 270,056
Other borrowings.................................................. 8,071 14,656
Accrued interest and other liabilities............................ 3,115 2,580
-------- --------
TOTAL LIABILITIES.............................................. $330,659 $287,292
-------- --------
Shareholders' Equity
Common stock $4 par value
Authorized 2,500,000 shares
Issued 1,728,000 shares........................................... $ 6,912 $ 6,912
Retained earnings................................................. 34,246 32,289
Treasury stock, at cost (5,166 shares)............................ (100) (100)
Net unrealized gains on securities available for sale............. 1,150 615
-------- --------
TOTAL SHAREHOLDERS' EQUITY..................................... $ 42,208 $ 39,716
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY....................... $372,867 $327,008
======== ========
The accompanying notes are an integral part of these statements.
6
CNB Financial Corporation and Subsidiary
1997 Annual Report
Consolidated Statements of Income
(in thousands, except per share data)
Year ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Interest and Dividend Income
Loans including fees.............................................. $21,512 $18,231 $16,849
Deposits with banks............................................... 1 -- 1
Federal funds sold................................................ 209 87 81
Investment securities:
Taxable........................................................ 3,006 3,309 3,209
Tax-exempt..................................................... 1,301 1,295 1,223
Dividends...................................................... 176 136 55
------- ------- -------
TOTAL INTEREST AND DIVIDEND INCOME............................. 26,205 23,058 21,418
Interest Expense
Deposits.......................................................... 11,392 9,421 8,946
Borrowed funds.................................................... 430 376 277
------- ------- -------
TOTAL INTEREST EXPENSE......................................... 11,822 9,797 9,223
------- ------- -------
Net interest income............................................ 14,383 13,261 12,195
Provision for loan losses...................................... 900 600 380
------- ------- -------
Net interest income after provision for
loan losses................................................. 13,483 12,661 11,815
Other Income
Trust & asset management fees..................................... 612 511 529
Service charges - deposit accounts................................ 943 700 616
Other service charges and fees.................................... 443 416 411
Realized security gains (losses).................................. 529 (7) 146
Gain on sale of loans............................................. 26 24 53
Other............................................................. 133 231 188
------- ------- -------
TOTAL OTHER INCOME............................................. 2,686 1,875 1,943
Other Expenses
Salaries.......................................................... 4,624 4,030 3,615
Employee benefits................................................. 870 972 1,210
Net occupancy expense of premises................................. 1,642 1,460 1,119
Data processing................................................... 763 576 279
Amortization...................................................... 315 -- --
Other............................................................. 2,208 1,922 2,545
------- ------- -------
TOTAL OTHER EXPENSES........................................... 10,422 8,960 8,768
------- ------- -------
Income before income taxes and cumulative effect of
change in accounting principle................................. 5,747 5,576 4,990
Applicable income taxes........................................... 1,445 1,450 1,173
------- ------- -------
Income before cumulative effect of change in
accounting principle........................................... 4,302 4,126 3,817
Cumulative effect of change in accounting principle, after taxes.. -- 156 --
------- ------- -------
Net income........................................................ $ 4,302 $ 4,282 $ 3,817
======= ======= =======
EARNINGS PER SHARE, BASED ON WEIGHTED
AVERAGE SHARES OUTSTANDING
Income before cumulative effect of accounting change.............. $ 2.50 $ 2.40 $ 2.22
Cumulative effect of change in accounting principle............... -- 0.09 --
------- ------- -------
Net income........................................................ $ 2.50 $ 2.49 $ 2.22
Cash dividends per share.......................................... $ 1.36 $ 1.24 $ 1.16
The accompanying notes are an integral part of these statements.
7
CNB Financial Corporation and Subsidiary
1997 Annual Report
Consolidated Statements of Cash Flows
(in thousands)
Year ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Cash Flows from Operating Activities:
Net income................................................ $ 4,302 $ 4,282 $ 3,817
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses............................. 900 600 380
Depreciation and amortization......................... 1,066 664 505
Amortization and accretion............................ (652) (653) 42
Deferred taxes........................................ 762 169 37
Realized security (gains) losses...................... (529) 7 (146)
Gain on sale of loans................................. (26) (24) (53)
Proceeds from sales of loans.......................... 1,384 -- --
Changes in:
Interest receivable..................................... (18) (84) (169)
Other assets............................................ (479) (3,398) (200)
Interest payable........................................ 264 (38) 56
Other liabilities....................................... (271) 1,164 434
-------- -------- --------
Net cash provided by operating activities................. 6,703 2,675 4,703
Cash Flows from Investing Activities:
Proceeds from maturities of:
Securities held to maturity........................... 5,235 7,940 17,748
Securities available for sale......................... 13,095 7,742 17,702
Proceeds from sales of:
Securities available for sale......................... 5,925 4,877 358
Loans................................................. 1,791 1,910 4,738
Purchase of:
Securities held to maturity........................... (39) (1,404) (9,039)
Securities available for sale......................... (20,479) (22,390) (29,728)
Net principal disbursed on loans........................ (44,886) (24,825) (23,108)
Purchase of premises and equipment...................... (234) (2,094) (3,144)
Proceeds from the sale of foreclosed assets............. 18 122 56
-------- -------- --------
Net cash used in investing activities..................... (36,806) (28,122) (24,417)
Cash Flows from Financing Activities:
Net change in:
Checking, money market and savings accounts........... 378 9,064 19,495
Certificates of deposit............................... 49,039 5,205 5,651
Other borrowed funds.................................. (537) 2,127 (819)
Cash dividends paid..................................... (2,345) (2,136) (1,998)
Proceeds from Federal Home Loan Bank advances........... 5,000 10,625 --
Principal reduction in Federal Home Loan Bank advances.. (11,048) (942) (20)
-------- -------- --------
Net cash provided by financing activities................. 40,487 23,943 22,309
-------- -------- --------
Net increase (decrease) in cash and cash equivalents...... 7,616 (1,490) 2,595
Cash and cash equivalents at beginning of year............ 10,820 12,310 9,715
-------- -------- --------
Cash and cash equivalents at end of year.................. $ 18,436 $ 10,820 $ 12,310
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to
certificate accounts)............................... $ 11,558 $ 9,887 $ 9,279
Income taxes.......................................... 1,156 1,739 1,316
Noncash Investing Activities
Increase in net unrealized gains on securities
available for sale...................................... $ 535 $ 27 $ 1,209
Real estate acquired in settlement of loans............... $ 137 -- 142
The accompanying notes are an integral part of these statements.
8
CNB Financial Corporation and Subsidiary
1997 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, 1995................... $6,912 -- $28,324 $(100) $ (621) $34,515
Net income for 1995................... 3,817 3,817
Cash dividend declared................ (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
Net income for 1997................... 4,302 4,302
Cash dividend declared................ (2,345) (2,345)
Net unrealized gains on securities
available for sale.................. 535 535
---------------------------------------------------------------------------------
Balance December 31, 1997................. $6,912 -- $34,246 $(100) $1,150 $42,208
=================================================================================
The accompanying notes are an integral part of these statements.
9
CNB Financial Corporation and Subsidiary
1997 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 north 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 will differ from those estimates and such differences may be
material.
Loans:
Interest income with respect to loans and leases is accrued on the principal
amount outstanding, except on certain installment loans on which interest income
is recognized over their terms using methods which approximate level yields. The
Bank discontinues the accrual of interest when, in the opinion of management,
there exists doubt as to the ability to collect such interest. Loan fees and
certain direct origination costs are deferred and the net amount amortized as an
adjustment to the related loan interest income yield over the terms of the
loans.
Allowance for Loan and Lease Losses:
The allowance for loan and lease losses is established through provisions for
loan losses which are charged against income. Loans which are deemed to be
uncollectible are charged against the allowance account. Subsequent recoveries,
if any, are credited to the allowance account.
Management determines the adequacy of the reserves based on historical
patterns of charge-offs and recoveries, industry experience, and other
qualitative factors relevant to the collectability of the loan portfolio. While
management believes that the allowance is adequate to absorb estimated potential
loan losses, future adjustments may be necessary 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.
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.
Other Assets:
Other assets include real estate acquired through foreclosure or in settlement
of debt and is stated at the lower of the carrying amount of the indebtedness or
fair market value, net of selling costs.
10
CNB Financial Corporation and Subsidiary
1997 Annual Report
Notes to Consolidated Financial Statements (Continued)
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.
Income Taxes:
The Corporation files a consolidated U. S. income tax return. Deferred taxes
are recognized for the expected future tax consequences of existing differences
between the financial reporting and tax reporting bases of assets and
liabilities using enacted tax laws and rates.
Mortgage Servicing Rights (MSR's):
Mortgage servicing assets are recognized as separate assets when servicing
rights are acquired through purchase or loan originations, when there is a
definitive plan to sell the underlying loan. Capitalized MSR's are reported in
other assets and are amortized into noninterest income in proportion to, and
over the period of, the estimated future net servicing income of the underlying
mortgage loans. Capitalized MSR's are evaluated for impairment based on the fair
value of those rights. In 1997, $1.93 million of 1-4 family mortgage loans were
originated for sale of which $1.39 million were sold to Freddie Mac. The MSR's
recognized were immaterial. At December 31, 1997, loans held for sale totaled
$541 thousand.
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:
In 1997, the FASB issued Statement No. 128, "Earnings Per Share" effective in
the fourth quarter of 1997. Statement No. 128 is designed to simplify the
computation of earnings per share and requires disclosure of "basic earnings per
share" and, if applicable, "diluted earnings per share." The Corporation has no
dilutive securities.
Basic earnings per share is calculated on the weighted average number of
common shares outstanding during the year. The number of shares used in the
earnings per share computations for all periods presented was 1,722,834.
Cash and Cash Equivalents:
For purposes of the consolidated statement of cash flows, the Corporation
defines cash and cash equivalents as cash and due from banks, and Federal funds
sold.
New Accounting Standards:
In 1997, the Financial Accounting Standards Board issued two new statements
which will impact the reporting and display of certain data for periods
beginning after December 15, 1997. Neither statement will impact the financial
position or results of operations of the Corporation.
Reporting Comprehensive Income
FAS No. 130, "Reporting Comprehensive Income" establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements.
Operating Segment Disclosure
FAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
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, 1997, was approximately $2,106,000, which was maintained in vault
cash.
11
CNB Financial Corporation and Subsidiary
1997 Annual Report
Notes to Consolidated Financial Statements (Continued)
3. INVESTMENT SECURITIES
Investment securities at December 31, 1997 and 1996 were as follows
(in thousands):
December 31, 1997 December 31, 1997
------------------------------------ ------------------------------------
Unrealized Unrealized
Amortized -------------- Market Amortized -------------- Market
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------ ------------------------------------
Securities available for sale:
U.S. Treasury..................... $15,482 $ 40 $ 4 $15,518 $13,496 $ 36 $ 24 $13,508
U.S. Government agencies
and corporations................ 19,088 100 37 19,151 26,192 118 203 26,107
Obligations of States and
Political Subdivisions.......... 18,788 718 -- 19,506 17,562 486 -- 18,048
Other Debt Securities............. 5,347 8 43 5,312 1,047 4 6 1,045
Marketable Equity Securities...... 3,074 961 1 4,034 2,080 538 17 2,601
------------------------------------ ------------------------------------
$61,779 $1,827 $85 $63,521 $60,377 $1,182 $250 $61,309
==================================== ====================================
Securities to be held to maturity:
U.S. Government agencies
and corporations............... -- -- -- -- $ 997 -- $ 1 $ 996
Obligations of States and
Political Subdivisions......... $ 6,398 $ 180 -- $ 6,578 7,319 $ 289 -- 7,608
Other Debt Securities............ 6,006 18 $ 5 6,019 9,071 66 24 9,113
Restricted Equity Securities..... 1,107 -- 1,107 1,308 -- -- 1,308
------------------------------------ ------------------------------------
$13,511 $ 198 $ 5 $13,704 $18,695 $ 355 $ 25 $19,025
==================================== ====================================
Other debt securities include corporate notes and bonds, collateralized
mortgage obligations and asset-backed securities.
On December 31, 1997 investment securities carried at $14,590,000 were pledged
to secure public deposits and for other purposes as provided by law.
The following is a schedule of the contractual maturity of investments
excluding equity securities, at December 31, 1997 (in thousands):
Available for Sale Held to Maturity
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
1 year or less....................... $11,990 $11,991 $ 6,251 $ 6,265
1 year-5 years....................... 29,731 30,060 5,372 5,535
5 years-10 years..................... 11,137 11,613 781 797
After 10 years....................... 500 511 -- --
---------------------------- -----------------------------
53,358 54,175 12,404 12,597
---------------------------- -----------------------------
Collateralized Mortgage Obligations..
and Other Asset-backed Securities.. 5,347 5,312 -- --
---------------------------- -----------------------------
Total Investment Securities...... $58,705 $59,487 $12,404 $12,597
============================ =============================
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
-------- ----------- ------------
1997 5,925 556 27
1996 4,877 23 30
1995 358 146 --
4. LOANS
Total Loans at December 31, 1997 and 1996 are summarized as follows
(in thousands):
1997 1996
-------- --------
Commercial, Financial and Agricultural.. $ 58,282 $ 45,037
Residential Mortgage.................... 113,369 100,402
Commercial Mortgage..................... 37,702 31,451
Installment............................. 41,001 43,448
Lease Receivables....................... 18,231 6,069
-------- --------
$268,585 $226,407
======== ========
12
CNB Financial Corporation and Subsidiary
1997 Annual Report
Notes to Consolidated Financial Statements (Continued)
At December 31, 1997 and 1996, net unamortized loan costs and fees of $357,346
and $126,358, respectively, have been included in the carrying value of loans.
The Bank`s outstanding loans and related unfunded commitments are primarily
concentrated within Central Pennsylvania. The Bank attempts to limit
concentrations within specific industries by utilizing dollar limitations to
single industries or customers, and by entering into participation agreements
with third parties. Collateral requirements are established based on
management`s assessment of the customer.
The recorded investment in loans that are considered impaired under SFAS No.
114 was $597,040 and $884,000 at December 31, 1997 and 1996, respectively. No
impairments were recognized in 1997. The recorded amount of impaired loans, net
of a write-down, does not require an allowance for loan losses. The average
recorded investments in impaired loans during the years ended December 31, 1997
and 1996 were approximately $627,038 and $800,693, respectively. For the years
ended December 31, 1997 and 1996, the Corporation recognized accrued interest
income on impaired loans of $49,428 and $54,657, respectively.
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
Transactions in the Allowance for Loan and Lease Losses for the three years
ended December 31 were as follows (in thousands):
1997 1996 1995
------ ------ ------
Balance, Beginning of Year........... $2,473 $2,145 $2,033
Charge-offs.......................... (640) (360) (369)
Recoveries........................... 116 88 101
------ ------ ------
Net Charge-offs.................. (524) (272) (268)
Provision for Loan and Lease Losses.. 900 600 380
------ ------ ------
Balance, End of Year................. $2,849 $2,473 $2,145
====== ====== ======
6. PREMISES AND EQUIPMENT
The following summarizes Premises and Equipment at December 31 (in thousands):
1997 1996
------- -------
Land............................................ $ 1,185 $ 1,208
Premises and Leasehold Improvements............. 7,007 7,008
Furniture and Equipment......................... 5,204 4,947
13,396 13,163
Less Accumulated Depreciation and Amortization.. 4,601 3,851
------- -------
Premises and Equipment, Net................... $ 8,795 $ 9,312
======= =======
Depreciation on Premises and Equipment amounted to $751,000 in 1997, $664,000
in 1996, and $505,000 in 1995.
Rental expense, net of rental income, charged to occupancy expense for 1997,
1996, and 1995 was $126,000, $105,000 and $69,000, respectively.
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 10 years, beginning in January 1997. Included in other assets is
$2,837,000 and $3,152,000 of goodwill for 1997 and 1996, respectively.
8. DEPOSITS
The following table reflects time certificates of deposit included in total
deposits and their remaining maturities at December 31, (in thousands):
Time Deposits Maturing: 1997 1996
-------- --------
Within One Year $101,62 $ 69,286
Within Two Years 39,534 24,188
Within Three Years 20,901 12,864
Within Four Years 3,573 12,193
Within Five Years and Greater 5,931 2,346
-------- --------
$171,565 $120,877
Certificates of Deposit of $100,000 or more totaled $20,839,000 and
$12,909,000 at December 31, 1997and 1996, respectively.
13
CNB Financial Corporation and Subsidiary
1997 Annual Report
Notes to Consolidated Financial Statements (Continued)
9. OTHER BORROWINGS
Other borrowings include $2.0 million and $1.4 million of demand notes payable
to the U.S. Treasury Department at December 31, 1997 and 1996, respectively.
These notes are issued under the U.S. Treasury Department`s program of investing
the treasury tax and loan account balances in interest bearing demand notes
insured by depository institutions. These notes bear interest at a rate of .25
percent less than the average Federal funds rate as computed by the Federal
Reserve Bank. At year end the Bank had remaining borrowing capacity with the
FHLB of $100 million. In addition, other borrowings include advances from the
Federal Home Loan Bank (FHLB) at December 31, 1997, and 1996 as follows (in
thousands):
December 31,
Interest Rate Maturity 1997 1996
------------------------------------------------------------
Fixed
5.49% 1/10/97 $ -- $10,000
4.60% 10/29/97 -- 1,000
6.75% 9/27/11 596 619
Variable
(a) 5/23/00 5,000 --
(b) 1/11/09 475 499
------ -------
Total borrowed funds $6,071 $12,118
====== =======
(a) Interest Rate floats quarterly based on the 3 month LIBOR which was 5.83%
at December 31, 1997.
(b) Interest Rate ranges from 5.28% to 6.46%.
Following are maturities of borrowed funds as of December 31, 1997
(in thousands):
1998 $2,052
1999 56
2000 5,060
2001 65
2002 69
Thereafter 769
------
Total Borrowed Funds $8,071
======
10. INCOME TAXES
The following is a summary of the tax provision (in thousands):
1997 1996 1995
------ ------ ------
Current......................... $ 683 $1,361 $1,210
Deferred........................ 762 169 (37)
------ ------ ------
Net provision for Income Taxes.. $1,445 $1,530 $1,173
====== ====== ======
The applicable portion of the current year provision related to the gain on
sales of available for sale securities is $180,000.
The components of the net deferred tax liability as of December 31, 1997 and
1996 are as follows (in thousands):
1997 1996
------ -----
Deferred tax assets
Allowance for loan losses.................................... $ 684 $ 556
Post-retirement benefits..................................... 29 9
Intangible................................................... 36 --
------ -----
749 565
Deferred tax liabilities
Premises and equipment....................................... 379 383
Vehicle leasing.............................................. 1,031 73
Unrealized gain on investment securities available for sale.. 592 317
Other........................................................ -- 8
------ -----
2,002 781
------ -----
Net deferred tax liability....................................... $1,253 $ 216
====== =====
14
CNB Financial Corporation and Subsidiary
1997 Annual Report
Notes to Consolidated Financial Statements (Continued)
The reconciliation of income tax attributable to continuing operations at the
Federal statutory tax rates to income tax expense is as follows (in thousands):
1997 % 1996 % 1995 %
------ ---- ------ ---- ------ -----
Tax at statutory rate... $1,954 34.0 $1,977 34.0 $1,697 34.0
Tax exempt income, net.. (516) (9.0) (508) (8.7) (499) (10.0)
Other................... 7 0.1 61 1.0 (25) (0.5)
------ ---- ------ ---- ------ -----
Income tax provision.... $1,445 25.1 $1,530 26.3 $1,173 23.5
====== ==== ====== ==== ====== =====
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 current 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
$350,000 in 1997, $304,000 in 1996, and $274,000 in 1995.
In addition, the Bank sponsors a contributory defined contribution Section
401(k) plan in which substantially all employees participate. The plan permits
employees to make pre-tax contributions which are matched by the Bank at 0.25%
for every 1% contributed up to one percent of the employee's compensation. The
Bank's contributions were $30,000, $26,000, and $24,000 in 1997, 1996, and 1995,
respectively.
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:
December 31,
1997 1996 1995
--------- --------- ---------
Accumulated post-retirement benefit obligation:
Retirees............................................... $ 52,508 $ 53,742 $ 18,692
Fully eligible active plan participants................ 40,053 39,921 23,164
Other active plan participants......................... 337,917 319,350 293,665
--------- --------- ---------
Total accumulated post-retirement benefit obligation...... 430,478 413,013 335,521
Unrecognized net transition obligation.................... (117,528) (124,873) (132,218)
Unrecognized net loss..................................... (75,639) (96,621) (39,067)
--------- --------- ---------
Accrued post-retirement obligation........................ $ 237,311 $ 191,519 $ 164,236
========= ========= =========
1997 1996 1995
--------- --------- ---------
Net periodic post-retirement benefit cost:
Service cost........................................... $ 21,737 $ 18,531 $ 14,119
Interest cost.......................................... 26,580 21,725 21,716
Amortization of transition obligation over 21 years.... 9,701 7,566 7,345
--------- --------- ---------
$ 58,018 $ 47,822 $ 43,180
========= ========= =========
The weighted average discount rate used to calculate net periodic benefit cost
and the accrued post-retirement liability was 6.50% in 1997. The health care
cost trend rate used to measure the expected costs of benefits for 1998 is 9.0%,
and 8.0% thereafter. A one percent increase in the health care trend rates would
result in an increase of $66,578 in the benefit obligation of December 31, 1997,
and would increase the service and interest costs by $10,260 in future periods
The presentation above for the years 1997, 1996 and 1995 reflects a policy which
grants eligibility to these benefits to employees 60 years of age with 30 years
of service.
12. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has transactions, including
loans, with its officers, directors and their affiliated companies. These
transactions were on substantially the same terms as those prevailing at the
time for comparable transactions with unaffiliated parties and do not involve
more than the normal risks. The aggregate of such loans totaled $6,732,000 on
December 31, 1997 compared to $6,553,000 at December 31, 1996. During 1997,
$34,080,000 of new loans were made and repayments totaled $33,901,000.
The Bank entered into an operating lease with a director of the Corporation
expiring 1999. The annual lease payments were determined based on prevailing
terms in the market area. All ongoing operating and general maintenance expenses
will be the responsibility of the director.
13. REGULATORY MATTERS
The Corporation and Bank are subject to minimum capital requirements set by
Federal regulatory agencies, namely the Federal Reserve Bank and the Office of
the Comptroller of the Currency. Regulators require capital ratios of 4.0% Tier
1 capital to total risk based assets, 8.0% or more of total qualifying capital
to total risk weighted assets and total Tier 1 capital to total assets of 4.0%
for an institution to be considered well capitalized. The Corporation and Bank
were reported as well capitalized under the regulatory framework for prompt
corrective action as of the most recent notification of the regulators. There
are no conditions or events since that notification that management believes
would change the
15
CNB Financial Corporation and Subsidiary
1997 Annual Report
Notes to Consolidated Financial Statements (Continued)
Corporation's status. The table below ($'s in thousands) summarizes the
Corporation and Bank's regulatory capital levels:
December 31
Risk Based Capital 1997 1996
----------------------------------- ----------------------------------
Regulatory Ratio to Minimum Regulatory Ratio to Minimum
Tier 1 Capital Risk Assets Required Capital Risk Assets Required
- ------ ----------------------------------- ----------------------------------
CNB Financial Corporation $38,221 15.05% 4.00% $35,800 16.37% 4.00%
County National Bank $35,210 14.09% 4.00% $33,683 15.55% 4.00%
Tier 1 + Tier 2 Capital
- -----------------------
CNB Financial Corporation $41,070 16.17% 8.00% $38,273 17.50% 8.00%
County National Bank $38,059 15.23% 8.00% $36,156 16.69% 8.00%
Leverage
- --------
CNB Financial Corporation $38,221 10.93% 4.00% $35,800 10.95% 4.00%
County National Bank $35,210 10.14% 4.00% $33,683 10.39% 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.
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, 1997, $3.0 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
capital stock and surplus.
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, 1997, the Bank had $25.4 million of unfunded
commercial lines of credit; $9.9 million of unused credit card lines; $1.9
million of outstanding commitments to fund residential loans; $3.7 million in
standby letters of credit and $2.4 million of unfunded home equity lines of
credit.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates of the Corporation's financial instruments are made
at a point in time, based on the then current market information and available
financial information about the financial instrument. Fair market values are
quoted on market prices for financial instruments where prices exist. In cases
where quoted market prices are not available, fair values are derived from
estimates using discounted cash flow techniques. Generally, market prices do not
exist for a substantial portion of the Corporation's financial instruments, and
accordingly fair value estimates are based on judgments with regard to future
cash flow expectations, perceived credit risk, interest rate risk, prepayment
risk, local and national economic conditions and other factors. The estimates
are therefore subjective and may not reflect the amount that could be realized
upon immediate sale of the instrument. Changes in certain assumptions could also
significantly affect the estimates.
16
CNB Financial Corporation and Subsidiary
1997 Annual Report
Notes to Consolidated Financial Statements (Continued)
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.
The tables in Note 3 provide greater detail for investment securities at
December 31, 1997 and 1996.
Net Loans:
For demand and variable rate commercial, consumer loans, and residential
mortgages that reprice frequently, fair values are estimated by reducing
carrying amounts by estimated credit loss factors. For fixed rate commercial,
consumer and residential mortgage loans, including nonaccrual loans, fair values
are estimated using discounted cash flow analyses, with cash flows reduced by
estimated credit loss factors and discount rates equal to interest rates
currently being offered for similar loans. Lease arrangements are not considered
financial instruments.
Deposits:
The carrying amount for noninterest-bearing demand and interest-bearing money-
market and savings deposits approximates fair values. For certificates of
deposit fair value has been estimated using discounted cash flow analyses that
apply interest rates currently being offered on certificates with similar
maturities.
Advances from the Federal Home Loan Bank:
Fair value is determined by discounting the advances using current rates of
advances with comparable maturities.
Other Borrowings:
Other borrowings consist of short-term demand notes payable to the U.S.
Treasury Department under its program of investing treasury tax and loan account
balances with depository institutions. Because of their short-term nature
carrying value is considered to be fair value.
Accrued Interest Payable:
The carrying amounts reported in the statement of condition for accrued
interest payable approximates its fair value primarily due to its short-term
nature.
Standby Letters of Credit:
The fair value of letters of credit are estimated based upon the amount of
deferred fees and the creditworthiness of the counterparties.
December 31, 1997 December 31, 1996
--------------------------------------
(in thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------
ASSETS
Cash and short-term assets................ $ 18,436 $ 18,436 $ 13,001 $ 13,001
Investment securities..................... 77,032 77,225 78,696 79,026
Net Loans................................. 247,281 250,462 220,630 219,220
LIABILITIES
Deposits.................................. 319,473 318,704 270,056 269,687
Advances from the Federal Home Loan Bank.. 6,071 5,624 12,119 12,109
Other Borrowings.......................... 2,000 2,000 2,537 2,537
16. SUBSEQUENT EVENTS
On January 27, 1998, the Board of Directors of the Corporation approved a
resolution for a 2 for 1 stock split. A separate resolution approved an increase
of authorized shares to 10,000,000. These resolutions are subject to shareholder
approval at the annual meeting.
The Bank has entered into an agreement to build a new facility in DuBois, PA.
The new branch will replace our existing office in the DuBois Mall. Approximate
costs associated with the building are $1,000,000. In addition, the Bank entered
into a long term lease agreement with the Mall for the parcel of land on which
the building is to be located. Annual lease payments for 1998 through 2002 are
$45,000.
Beginning January 1, 1998, the Corporation began a deferred directors'
compensation program. This program allows all outside directors the opportunity
to defer all or a portion of their directors' fees. Elections for deferrals are
made on an annual basis. The Corporation will fund the future liability by
contributions to a trust. The trust is subject to general creditors' claims. The
related income and expenses of the agreements will be recorded annually over the
remaining service period.
17
CNB Financial Corporation and Subsidiary
1997 Annual Report
Notes to Consolidated Financial Statements (Continued)
17. PARENT COMPANY ONLY FINANCIAL INFORMATION (in thousands)
BALANCE SHEETS
December 31,
--------------------------------
1997 1996
------- -------
ASSETS
Cash.................................................... $ 104 $ 17
Investment in Bank subsidiary........................... 38,562 37,255
Securities-available for sale........................... 4,034 2,601
Other assets............................................ -- 20
------- -------
TOTAL ASSETS.......................................... $42,700 $39,893
======= =======
LIABILITIES
Income taxes payable................................... $ 166 $ --
Deferred tax liability................................. 326 177
------- -------
TOTAL LIABILITIES..................................... 492 177
TOTAL SHAREHOLDERS' EQUITY............................ 42,208 39,716
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $42,700 $39,893
======= =======
STATEMENTS OF INCOME
Year ended December 31,
--------------------------------
1997 1996 1995
------- ------- -------
INCOME
Dividends from:
Bank subsidiary....................................... $ 2,852 $ 2,494 $ 2,791
Securities available for sale......................... 99 75 56
Other................................................... 542 8 128
------- ------- -------
TOTAL INCOME...................................... 3,493 2,577 2,975
------- ------- -------
EXPENSES............................................. (89) (76) (63)
INCOME BEFORE INCOME TAXES AND EQUITY
IN DISTRIBUTED NET INCOME OF SUBSIDIARY............. 3,404 2,501 2,912
Applicable income tax (obligation) benefit......... (166) 15 (34)
Equity in undistributed net income of subsidiary..... 1,064 1,766 939
------- ------- -------
NET INCOME........................................ $ 4,302 $ 4,282 $ 3,817
======= ======= =======
STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------
1997 1996 1995
------- ------- -------
Cash flows from operating activities:
Net income............................................... $ 4,302 $ 4,282 $ 3,817
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary........ (1,064) (1,766) (939)
Increase (Decrease) in other assets..................... 20 (20) 17
Increase (Decrease) in other liabilities................ 166 (34) 34
Gain on sale of available for sale securities........... (539) (6) (125)
------- ------- -------
Net cash provided by operating activities............... 2,885 2,456 2,804
------- ------- -------
Cash flows from investing activities:
Purchase of securities available for sale................ (2,065) (737) (801)
Proceeds from the sale of securities available for sale.. 1,612 68 337
------- ------- -------
Net cash used in investing activities................... (453) (669) (464)
Cash flows from financing activities:
Dividends paid........................................... (2,345) (2,136) (1,998)
------- ------- -------
Net cash used in financing activities................... (2,345) (2,136) (1,998)
------- ------- -------
Net increase (decrease) in cash.......................... 87 (349) 342
Cash beginning of year................................... 17 366 24
------- ------- -------
Cash end of year......................................... $ 104 $ 17 $ 366
======= ======= =======
18
CNB Financial Corporation and Subsidiary
1997 Annual Report
Statistical Information
MATURITY DISTRIBUTION
Remaining maturity/earliest repricing as of December 31, 1997 ($'s in
thousands):
After Three After One
Within Months But Year But After
Three Within One Within Five Five
Months Year Years Years Total
-------------------------------------------------------
Interest earning assets:
Federal funds sold............. $ 8,850 $ 8,850
Investment securities.......... 12,649 $ 11,092 $ 40,549 12,742 77,032
Interest bearing deposits...... 31 31
Loans (net).................... 43,043 33,761 137,707 47,518 262,029
-------- -------- -------- ------ --------
Total...................... 64,573 44,853 178,256 60,260 347,942
Interest bearing liabilities:
Interest bearing deposits...... 27,057 -- 50,141 5,141 82,339
Savings........................ -- -- 27,230 5,446 32,676
Time........................... 42,293 58,898 70,033 341 171,565
Borrowed funds................. 7,032 20 250 769 8,071
-------- -------- -------- ------ --------
Total...................... 76,382 58,918 147,654 11,697 294,651
-------- -------- -------- ------ --------
Gap............................ $(11,809) $(14,065) $ 30,602 $48,563 $ 53,291
Cumulative gap................. $(11,809) $(25,874) $ 4,728 $53,291
Sensitivity ratio.............. 0.85 0.76 1.21 5.15 1.18
Cumulative sensitivity ratio... 0.85 0.81 1.02 1.18
------------------------------------------------------------
QUARTERLY SUMMARY OF EARNINGS
The unaudited quarterly results of operations for the years ended December
1997 and 1996 are as follows (in thousands, except per share data):
Quarters Ended
1997 1996
March 31 June 30 Sept. 30 Dec. 31 March 31 (1) June 30 (1) Sept. 30 (1) Dec. 31
------------------------------------------- ------------------------------------------------
Total interest income.............. $6,095 $6,427 $6,754 $6,929 $5,721 $5,654 $5,731 $5,952
Net interest income................ 3,380 3,593 3,709 3,701 3,252 3,291 3,332 3,386
Provision for loan losses.......... 150 150 150 450 125 125 125 225
Other income....................... 585 489 566 1,046 463 510 479 423
Other expense...................... 2,642 2,580 2,572 2,628 2,196 2,193 2,191 2,380
Net income before cumulative
effect adjustment................ 869 1,039 1,118 1,276 1,024 1,062 1,107 933
Net income......................... 869 1,039 1,118 1,276 1,180 1,062 1,107 933
Net income per share............... 0.51 0.60 0.65 0.74 0.69 0.62 0.64 0.54
(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, 1997, the
approximate number of shareholders of record of the Corporation's common stock
was 1,432.
Price Range of Common Stock Cash Dividends Paid
1997 1996
High Low High Low 1997 1996
------------------------------- --------------
First Quarter...... $35.75 $35.50 $30.88 $29.50 First Quarter....... $0.34 $0.31
Second Quarter..... 35.75 35.50 31.50 30.75 Second Quarter...... 0.34 0.31
Third Quarter...... 37.50 35.75 34.25 31.50 Third Quarter....... 0.34 0.31
Fourth Quarter..... 39.88 37.50 35.50 34.25 Fourth Quarter...... 0.34 0.31
----- -----
$1.36 $1.24
===== =====
------------------------------------------------------------
Trust and Asset Management Division
Funds under Management (Market Value)
($'s in thousands) 1997 1996
-------- --------
Personal Trusts, Estates and Agency Accounts.. $138,674 $105,862
Corporate Accounts............................ 16,160 12,095
-------- --------
Total......................................... $154,834 $117,957
======== ========
19
CNB Financial Corporation and Subsidiary
1997 Annual Report
Selected Financial Data
Year Ended December 31
----------------------
1997
----------------------
(dollars in thousands, except per share data)
Interest income
Loans including fees.................................................... $ 21,512
Deposits with banks..................................................... 1
Federal funds sold...................................................... 209
Other short-term investments............................................ --
Investment securities:
U.S. treasury securities........................................... 886
Securities of U.S. government agencies and corporations............ 1,662
Obligations of states and political subdivisions................... 1,302
Other securities................................................... 633
--------
Total interest income................................................... $ 26,205
Interest expense
Deposits................................................................ $ 11,392
Other borrowings........................................................ 430
--------
Total interest expense.................................................. $ 11,822
Net interest income.......................................................... $ 14,383
Provision for loan losses.................................................... 900
--------
Net interest income after provision
for loan losses......................................................... $ 13,483
Other income................................................................. 2,686
Other expenses............................................................... 10,422
--------
Income before taxes and cumulative effect adjustment......................... 5,747
Applicable income taxes...................................................... 1,445
--------
Income before cumulative effect adjustment................................... 4,302
Cumulative effect adjustment................................................. --
--------
Net income.............................................................. $ 4,302
========
Per share data
Income before cumulative effect adjustment.............................. $ 2.50
Cumulative effect adjustment............................................ $ --
Net income.............................................................. $ 2.50
Dividends declared...................................................... $ 1.36
Book value per share at year end........................................ $ 24.50
At end of period
Total assets............................................................ $372,867
Investment securities................................................... 77,032
Loans, net of unearned discount......................................... 264,878
Allowance for loan losses............................................... 2,849
Deposits................................................................ 319,473
Shareholders' equity.................................................... 42,208
Key ratios
Return on average assets................................................ 1.23%
Return on average equity................................................ 10.57%
Loan to deposit ratio................................................... 82.02%
Dividend payout ratio................................................... 54.46%
Average equity to average assets ratio.................................. 11.64%
20
CNB Financial Corporation and Subsidiary
1997 Annual Report
Five Year Comparison
- ----------------------------------------------------------------------
1996 1995 1994 1993
- ----------------------------------------------------------------------
$ 18,231 $ 16,849 $ 14,813 $ 13,568
-- 1 91 243
87 81 43 89
-- -- -- 24
854 747 729 920
1,755 1,480 1,060 1,170
1,294 1,222 1,238 1,480
837 1,038 1,194 1,496
- ---------------- --------------- --------------- ---------------
$ 23,058 $ 21,418 $ 19,168 $ 18,990
$ 9,421 $ 8,946 $ 6,986 $ 7,564
376 277 239 32
- ---------------- --------------- --------------- ---------------
$ 9,797 $ 9,223 $ 7,225 $ 7,596
$ 13,261 $ 12,195 $ 11,943 $ 11,394
600 380 525 525
- ---------------- --------------- --------------- ---------------
$ 12,661 $ 11,815 $ 11,418 $ 10,869
1,875 1,943 1,510 1,257
8,960 8,768 8,082 7,730
- ---------------- --------------- --------------- ---------------
5,576 4,990 4,846 4,396
1,450 1,173 1,137 1,051
- ---------------- --------------- --------------- ---------------
4,126 3,817 3,709 3,345
156 -- -- 226
- ---------------- --------------- --------------- ---------------
$ 4,282 $ 3,817 $ 3,709 $ 3,571
================ =============== =============== ===============
$ 2.40 $ 2.22 $ 2.15 $ 1.93
$ 0.09 $ -- $ -- $ 0.13
$ 2.49 $ 2.22 $ 2.15 $ 2.06
$ 1.24 $ 1.16 $ 1.08 $ 1.05
$ 23.05 $ 21.79 $ 20.03 $ 19.32
$327,008 $297,523 $269,698 $264,547
78,696 75,928 71,314 78,927
223,103 200,038 181,789 167,956
2,473 2,145 2,033 1,750
270,056 255,787 230,641 226,326
39,716 37,543 34,515 33,288
1.40% 1.36% 1.39% 1.35%
11.73% 10.58% 11.07% 11.06%
81.70% 77.36% 77.94% 73.44%
49.88% 52.36% 50.18% 51.00%
12.59% 12.86% 12.43% 12.21%
21
CNB Financial Corporation and Subsidiary
1997 Annual Report
Management's Discussion and Analysis
of Financial Condition and
Results of Operations
GENERAL
The following discussion and analysis of the consolidated financial statements
of CNB Financial Corporation (the "Corporation") is presented to provide insight
into management's assessment of financial results. The corporation's only
subsidiary County National Bank (the "Bank") provides financial services to
individuals and businesses within the Bank's market area made up of the west
central Pennsylvania counties of Clearfield, Centre, Elk, and McKean. County
National Bank is a member of the Federal Reserve System and subject to
regulation, supervision and examination by the Office of the Comptroller of the
Currency ("OCC"). The financial condition and results of operations are not
intended to be indicative of future performance. Management's discussion and
analysis should be read in conjunction with the audited consolidated financial
statements and related notes.
On December 16, 1996 the Bank acquired three full-service banking offices and
one limited service banking office and the corresponding customer lists for
those offices from an unaffiliated institution (referred hereafter as
"Acquisition"). The offices are located in west central Pennsylvania in the
communities of Clearfield, Philipsburg, and DuBois. Two of the full-service
offices have been closed, one in Clearfield and the second in Philipsburg, and
service transferred to existing banking offices in those communities. The
remaining full-service office in DuBois and the limited service office in
Philipsburg continue to operate as branches of the bank.
FINANCIAL CONDITION
OVERVIEW OF BALANCE SHEET
Total assets increased from $327,008,000 at December 31, 1996 to $372,867,000 at
December 31, 1997, a growth rate of 14.0%. The increase in assets can be
attributed to the generation of $49,417,000 in new deposits of which $39 million
related to the branch locations and customers lists purchased in the
Acquisition. These new deposits were invested primarily in loans up $42,178,000
(or 18.6%) and to repay other borrowings in the amount of $6,585,000.
CASH AND CASH EQUIVALENTS
Cash and Cash equivalents totaled $18,436,000 at December 31, 1997 compared to
$10,820,000 on December 31, 1996. The increase was the result of continued
strong deposit growth in the fourth quarter of 1997 which was invested in
Federal Funds at year end.
We believe the liquidity needs of the Corporation are satisfied by the current
balance of cash and cash equivalents, readily available access to traditional
funding sources, and the portion of the investment and loan portfolios that
matures within one year. These sources of funds will enable the Corporation to
meet cash obligations and off-balance sheet commitments as they come due.
INVESTMENT SECURITIES
Investment securities declined $2,972,000 since December 31, 1996. Much of the
decline is currently in Federal Funds Sold awaiting settlement of investments
early in January, 1998. Of the Corporation's total investment portfolio of
$77,032,000 as of December 31, 1997, $63,521,000 (or 82.5%) is classified as
available for sale with the balance of $13,511,000 classified as held to
maturity.
We monitor the earnings performance and the effectiveness of the liquidity of
the investment portfolio on a regular basis through Asset/Liability Committee
("ALCO") meetings. The ALCO also reviews and manages interest rate risk for the
Corporation. Through active balance sheet management and analysis of the
investment securities portfolio, we maintain sufficient liquidity to satisfy
depositor requirements and various credit needs of our customers.
LOANS
The Corporation's loan volume continues to grow and reflects the additional
credit opportunities in the markets served. Our lending is focused in the west
central Pennsylvania market and consists principally of retail lending, which
includes single family residential mortgages and other consumer lending, and
also commercial lending primarily to locally owned small businesses. The
lending market has grown as a result of the Acquisition which included DuBois as
a new market area. This market has yielded $12.1 million in new loan
outstandings for all of 1997. We expect significant loan growth over the next
several quarters in this and other market areas of the Bank as customers seek
alternatives to competing superregional banks.
Residential mortgage activity has increased by $13.0 million in 1997 and $22.3
million in 1996 aided by the Bank's First Time Home Buyers mortgage product
which has been available for the past 24 months.
22
CNB Financial Corporation and Subsidiary
1997 Annual Report
In 1996, management elected to begin offering auto lease financing in order to
increase our market share in the auto business. This decision has led to higher
overall income levels and less charge-offs than conventional auto financing.
Lease receivables have increased $12.2 million and $6.1 million in 1997 and 1996
and has contributed to the decline of $2.4 million and $1.8 million in
conventional consumer loans in 1997 and 1996, respectively. We feel that this
trend will continue over the next several quarters.
LOAN CONCENTRATION
The Corporation monitors loan concentrations by individual industries in order
to track potential risk exposures resulting from industry related downturns. At
December 31, 1997, no concentration exists within our commercial or real estate
loan portfolio as related to concentration of 10% of the total loans.
Residential real estate lending along with automobile financing continues to be
the largest component of the loan portfolio.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established by provisions for
possible losses in the loan and lease portfolio. These provisions are charged
against current income. Loans deemed not collectible are charged-off against
the allowance while any subsequent collections are recorded as recoveries and
increase the allowance.
The table below shows activity within the allowance account over the past three
years:
Allowance for Loan and Lease Losses
($'s in thousands)
Years Ended December 31,
------------------------------
1997 1996 1995
------------------------------
Balance at beginning of Period $ 2,473 $ 2,145 $ 2,033
Charge-offs:
Commercial and financial 88 5 59
Commercial mortgages -- -- 28
Residential mortgages 14 -- --
Installment 513 355 282
Lease receivables 25 -- --
-------- -------- --------
640 360 369
Recoveries:
Commercial and financial 2 5 --
Commercial mortgages -- 1 --
Residential mortgages -- -- --
Installment 114 82 101
Lease receivables -- -- --
-------- -------- --------
116 88 101
Net charge-offs: (524) (272) (268)
Provision for possible
loan losses 900 600 380
======== ======== ========
Balance at end-of-period $ 2,849 $ 2,473 $ 2,145
======== ======== ========
Loans, net of unearned $264,878 $223,103 $200,038
Allowance to net loans 1.11% 1.07% 1.12%
The adequacy of the allowance for loan and lease losses is subject to a formal
analysis by the loan review staff of the Bank. As part of the formal analysis,
delinquencies and losses are monitored. Our current trend of higher installment
charge-offs is consistent with the national trend of higher delinquencies and
charge-offs in the consumer sector within the financial services industry.
Delinquencies and losses are the result of increased consumer credit problems
often resulting in bankruptcies. While charge-offs were higher, non-performing
assets, which include loans 90 or more days past due, non-accrual loans and
other real estate owned declined to $1,058,000 or 0.27% of total assets on
December 31, 1997 compared to $1,264,000 or 0.39% on December 31, 1996.
Increased loan collection activities have resulted in decreased levels of loan
delinquency for the current year.
The allowance for loan and lease losses is deemed to be adequate to absorb
inherent losses in the portfolio at December 31, 1997.
FUNDING SOURCES
The Corporation considers deposits, short-term borrowings, and term debt when
evaluating funding sources. Traditional deposits continue to be the most
significant source of funds. In addition, term borrowings from the Federal Home
Loan Bank (FHLB) are used to meet funding needs not met by deposit growth.
During 1997, the Company repaid $11 million FHLB borrowings and borrowed $5
million resulting in a $6 million net decline in FHLB borrowings since December
31, 1996. Management plans to maintain access to short-term and long-term FHLB
borrowings as an additional funding source.
The Corporation continues to experience a change in the mix of its deposit base.
The time deposit category has increased by $50,688,000 which represents growth
greater than our total deposit growth for 1997. This results in time deposits
representing 53.7% of total deposits compared to 44.8% as of year-end 1996. We
expect this shift in deposit mix to continue, however, at a lesser rate as
deposit growth from the Acquisition winds down. The following table reflects
the Corporations deposit mix by category (in thousands):
1997 1996 1995
-------- -------- --------
Checking, Non-Interest Bearing $ 32,893 $ 30,812 $ 25,705
Checking, Interest Bearing 82,339 82,184 78,821
Savings Accounts 32,676 36,183 35,307
Certificates of Deposit 171,565 120,877 115,954
-------- -------- --------
$319,473 $270,056 $255,787
SHAREHOLDERS' EQUITY
The Corporation's capital continues to provide a strong base for profitable
growth. Total shareholders' equity increased 6.3% in 1997. Growth was the
result
23
CNB Financial Corporation and Subsidiary
1997 Annual Report
of an increase in retained earnings of $1,957,000 and an increase of $535,000 in
the net unrealized holding gain on available-for-sale securities.
With 82.5% of the investment securities classified as available-for-sale, this
portion of the balance sheet is more sensitive to the changing market value of
investments. In 1997, interest rates declined somewhat while the market value
of equities have risen resulting in increased valuations in the available-for-
sale category of investments. The status of the investment markets do not
affect the Corporation's equity position for regulatory capital standards
discussed below.
The Corporation has also complied with the standards of capital adequacy
mandated by the banking industry. Bank regulators have established "risk-based"
capital requirements designed to measure capital adequacy. Risk-based capital
ratios reflect the relative risks of various assets banks hold in their
portfolios. A weight category of either 0% (lowest risk assets), 20%, 50%, or
100% (highest risk assets), is assigned to each asset on the balance sheet. The
total risk-based capital ratio of 16.17% as of December 31, 1997 is well above
the minimum standard of 8%. The Tier 1 capital ratio of 15.05% also is above
the regulatory minimum of 4%. The leverage ratio, 10.93%, was also above the
minimum standard of 4%. The Corporation is deemed to be well capitalized under
regulatory industry standards. The ratios provide quantitative data
demonstrating the strength and future opportunities for use of the Corporation's
capital base. An evaluation of risk-based capital ratios and the capital
position of the Corporation is a part of its strategic decision making process.
LIQUIDITY
Liquidity measures an organizations' ability to meet cash obligations as they
come due. The Consolidated Statements of Cash Flows presented on page 8 of the
accompanying financial statements provide analysis of the Corporation's cash and
cash equivalents. Additionally, the portion of the loan portfolio that matures
within one year and maturities within one year in the investment portfolio are
considered part of the liquid assets. Liquidity is monitored by the ALCO which
establishes and monitors ranges of acceptable liquidity. Also, the Bank is a
member of FHLB. This relationship provides the Bank with a borrowing line of
$106 million with only $6 million currently outstanding. Management feels the
Corporation's current liquidity position is acceptable.
YEAR ENDED DECEMBER 31, 1997
OVERVIEW OF THE INCOME STATEMENT
In 1997, net income was $4,302,000, an increase of 4.3% over the 1996 net income
of $4,126,000 before the cumulative effect of accounting change. Net income has
been negatively affected, when compared to 1996, by a lower net interest margin
and higher operating expenses largely related to the Acquisition. This impact
was anticipated by management and is the consequence of the nature of the
Acquisition which resulted in the Bank taking over the four acquired branches to
include the employees and over time acquiring the customers and their respective
deposits. Therefore, we experienced an immediate increase in operating expenses
without a comparable increase in operating revenues. In addition, the premium
paid for the customer lists began amortizing which added an operating expense
previously not incurred. The closing of two acquired offices has somewhat
reduced the Acquisition effect, however, the additional employees were
transferred to accommodate for heavier traffic flows at existing offices.
INTEREST INCOME AND EXPENSE
Net interest income totaled $14,383,000 for 1997, an increase of 8.5% over 1996.
Continued growth in loans has been the primary factor in this increase which has
been mitigated somewhat by higher interest costs for deposits resulting from a
shift in deposit mix to higher cost time deposits. Total interest income for
1997 increased by $3,147,000 or 13.6% while interest expense increased by
$2,025,000 or 20.7% when compared to 1996.
The Corporation recorded a provision for loan and lease losses of $900,000 for
all of 1997 compared to $600,000 for 1996. The increased provision is due to
continued loan growth and an increased level of charge-offs.
NON-INTEREST INCOME
Non-interest income increased $811,000 or 43.3% in 1997 compared to 1996.
Realized gains in the equity portfolio of $539,000 accounted for the majority of
the increase for 1997. Increased deposit account service charges have provided
some growth in non-interest income. For 1997, account service charge income
totaled $943,000, an increase of $243,000 (or 34.7%) over 1996. These increases
in fee income were the result of the growth in the number of customers and
related deposit accounts acquired from the Acquisition. Revenues have also been
enhanced by a higher overdraft activity of existing customers.
For 1997, other operating income was $133,000, compared to $231,000 in 1996.
This decline is primarily the result of the termination of the sale of mutual
funds and annuities through a vendor and the transfer of the mutual funds
activity into the Trust and Asset Management Division. Future revenue from this
activity will be included in trust and asset management fees, which increased
$101,000 for 1997 over 1996.
24
CNB Financial Corporation and Subsidiary
1997 Annual Report
NON-INTEREST EXPENSE
Non-interest expense increased $1,462,000 or 16.3% in 1997 compared to 1996.
This increased level of non-interest expense is attributable to the salaries and
benefits and occupancy expenses related to the Acquisition and the opening of a
new branch facility. In addition, included in total non-interest expense is the
amortization of the premium paid for the customer lists obtained in the
Acquisition which added additional expense in 1997 which was not present in
1996. This intangible expense amounted to $315,000 for 1997. These increases
were mitigated by a decline in the cost of employee benefits due to favorable
experience in healthcare costs under our self-funded program and the closing of
two branch facilities acquired in the Acquisition. To further control costs in
1998, we entered into a lease agreement with a tenant for the Clearfield
facility acquired in the Acquisition, which had been previously closed. The
revenue from this lease will be approximately equal to our costs.
YEAR ENDED DECEMBER 31, 1996
OVERVIEW OF THE INCOME STATEMENT
In 1996, net income was $4,126,000 before the cumulative effect of the change in
accounting principle representing an 8% increase over 1995. The main factor to
increased profits was a $1.1 million increase in net interest income. Other
income grew more than 4.7% over 1995 levels after adjusting for security gains
taken on the equity holdings in 1995. Operating expenses rose only by $192,000
to $8,960,000 in 1996 compared to 1995.
INTEREST INCOME AND EXPENSE
The Corporation earned $1,066,000 more in 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.
NON-INTEREST INCOME
Total non-interest income for 1996 was $1.9 million compared to $1.9 million in
1995. Excluding gains on securities, 1996 non-interest income was 4.7% more
than in 1995. 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. 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 recorded in the categories of other bank fee charges and miscellaneous
income. These categories include safe deposit rents, money transfer charges and
check commissions.
NON-INTEREST EXPENSE
The costs associated with operating the Corporation rose by 2.2% over 1995.
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 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. 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 employees.
The Corporation has made a major investment in expanding its markets and
services in the past three years. 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.
Other operating expenses were lower in 1996 as compared to those incurred in
1995. 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
25
CNB Financial Corporation and Subsidiary
1997 Annual Report
1989. Accordingly, in 1996 the Bank was required to pay the minimum insurance
level of only $2 thousand compared to $267 thousand in 1995.
RETURN ON ASSETS
The Corporation's return on average assets ("ROA") totaled 1.23% in 1997 down
from the 1.40% and 1.36% recorded in 1996 and 1995, respectively.
Decreased ROA can be attributed to a narrowing net interest margin and increased
operating costs resulting from the Acquisition. The ROA levels in each quarter
of 1997 have increased every quarter: first quarter 1.04%, second quarter
1.18%, third quarter 1.25% and the fourth quarter 1.39%. Great strides were
made by the Corporation in using the acquired deposits to fund loan growth.
Management targeted the DuBois market as well as auto leasing as markets for
high loan growth. As mentioned above, the Corporation obtained levels which
provided for the quarterly ROA growth. This trend was anticipated due to the
nature of the Acquisition as earning assets have been acquired over time rather
than at the date of the Acquisition.
RETURN ON EQUITY
The return on average shareholder's equity ("ROE") for 1997 was 10.57% compared
to 11.73% and 10.58% for 1996 and 1995 respectively. The decrease compared to
1996 can be attributed primarily to increased equity from retained earnings.
Management recognized continued improvement in ROE during 1997 and anticipates
further increases as earnings grow.
FEDERAL INCOME TAX EXPENSE
Federal income taxes decreased to $1,445,000 in 1997 compared to $1,530,000 in
1996. This decrease year to date can be attributed to the Corporation's lower
taxable income during the period. The effective tax rate was 25.1%, 26.3% and
23.5% for 1997, 1996 and 1995, respectively. We anticipate the effective tax
rate to maintain these levels as our tax exempt income remains stable.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates, and
equity prices. As a financial institution, the Corporation is primarily
sensitive to the interest rate risk component. Changes in interest rates will
affect the levels of income and expense recorded on a large portion of the
Bank's assets and liabilities. Additionally, such fluctuations in interest
rates will impact the market value of all interest sensitive assets. The
Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate
sensitivity position and establishing policies to control exposure to interest
rate fluctuations. The primary goal established by this policy is to increase
total income within acceptable risk limits.
The Corporation monitors interest rate risk through the use of two models:
earnings simulation and static gap. Each model standing alone has limitations,
however taken together they represent a reasonable view of the Corporation's
interest rate risk position.
STATIC GAP: Gap analysis is intended to provide an approximation of projected
repricing of assets and liabilities at a point in time on the basis of stated
maturities, prepayments, and scheduled interest rate adjustments within selected
time intervals. A gap is defined as the difference between the principal amount
of assets and liabilities which reprice within those time intervals. The
cumulative one year gap at year end was (7.4%) of total earning assets compared
to policy guidelines of plus or minus 10.0%.
Fixed rate securities, loans and CDs are included in the gap repricing based on
time remaining until maturity. Mortgage prepayments are included in the time
frame in which they are expected to be received using a prepayment factor of 100
PSA. Non maturity deposits are assigned time frames using a decay factor
determined by historical analysis within the Corporation.
Certain shortcomings are inherent in the method of analysis presented in Static
Gap. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may not react correspondingly to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate with changes in market interest rates,
while interest rates on other types of assets may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features, like annual and lifetime rate caps, which restrict changes in interest
rates both on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate from those assumed in the table. Finally, the ability of
certain borrowers to make scheduled payments on their adjustable-rate loans may
decrease in the event of an interest rate increase.
26
CNB Financial Corporation and Subsidiary
1997 Annual Report
EARNINGS SIMULATION: This model forecasts the projected change in net income
resulting from an increase or decrease in the level of interest rates. The
model assumes a one time shock of plus or minus 200 basis points or 2%. The
earnings simulation model at year end projects an increase of 9.7% of stable net
income if rates decline 200 basis points and a decrease of 12.0% if rates were
to rise by 200 basis points.
The model makes various assumptions about cash flows and reinvestments of these
cash flows in the different rate environments. Generally, repayments,
maturities and calls are assumed to be reinvested in like instruments and no
significant change in the balance sheet mix is assumed. Actual results could
differ significantly from these estimates which would produce significant
differences in the calculated projected change in income. The limits stated
above do not necessarily represent measures that would be taken by management in
order to stabilize income results. The instruments on the balance sheet do
react at different speeds to various changes in interest rates as discussed
above under Static Gap. In addition, there are strategies available to
management that minimize the decline in income caused by a rapid rise in
interest rates.
The following table below summarizes the 1997 information from the interest rate
risk measures:
Year-end
1997
--------
Static 1-Yr. Cumulative Gap -7.4%
Earnings Simulation
-200 bps vs. Stable Rate 9.7%
+200 bps vs. Stable Rate -12.0%
The interest rate sensitivity position at December 31, 1997, was liability
sensitive in the short-term and asset sensitive for periods longer than one
year. Management measures the potential impact of significant changes in
interest rates on both earnings and equity. By the use of computer generated
models, the potential impact of these changes has been determined to be
acceptable with modest affects on net income and equity given an interest rate
shock of an increase or decrease in rates of 2.0%. We continue to monitor the
interest rate sensitivity through the ALCO and use this data to make strategic
decisions.
YEAR 2000
Management is aware of the possibility of exposure by banks to a computer issue
known as the "Year 2000 Issue" (the inability of some computer hardware and
software systems to distinguish between the year 1900 and 2000). We have
assessed the costs and extent of vulnerability of our computer systems to this
issue. Plans to modify or replace computer systems are underway with a timeline
for completion of this process and the testing of the modified or replaced
systems to be completed by mid 1999. The implementation phase is to be finished
by September 1999. We believe that, with the plans and procedures mentioned
above, that the Year 2000 will not pose a significant operational problem for
the Corporation. However, many third party vendors are used for different
services and their non-compliance would affect our systems. Steps to
communicate with these third party vendors has begun with many vendors having
already started certification testing for compliance. The Corporation is
sensitive to the need to continually monitor current systems which are modified
or replaced. All purchases of hardware and software are being checked for
compliance prior to installation on our current system.
In addition to our own systems, the Corporation is concerned that our customers
may not be able to comply or may be unaware of the significance of their
exposure. We have developed a plan for educating our customers on the issue as
well as implemented a process for new commercial customers of our institution.
The process is to begin in mid 1998.
Currently the costs to achieve Year 2000 compliance has not been significant and
has been expensed as incurred. In addition, we do not anticipate future
financial impact to be significant this year or in 1999.
FUTURE OUTLOOK
Management continues to focus on asset growth resulting from ongoing generation
of new deposits from the customer lists acquired via the Acquisition and also
general growth via increased market share. Management continues to be
encouraged by the growth in the DuBois market which represents a new community
served by the Bank. Planning is in progress on the design of a new banking
facility for that location with a projected opening date in mid summer of 1998.
In addition to deposits, the traditional funding source for the Corporation, we
will manage potential earning enhancement opportunities using other borrowings
with the Federal Home Loan Bank of Pittsburgh. There are certain interest rate
environments that allow for pricing opportunities from such borrowings. These
opportunities will be evaluated and used when possible to increase earnings
throughout 1998.
27
CNB Financial Corporation and Subsidiary
1997 Annual Report
Loan growth continued to be strong exceeding management's expectations for 1997.
While loan demand is good, competitive pressure from other financing sources has
not resulted in increased loan yields. Management believes that the rate of
loan growth will slow in 1998. Management expects the loan to deposit ratio to
remain relatively stable throughout 1998.
Consumer loan charge-offs continue to comprise the majority of the Bank's
charge-offs. The trend in charge-offs is expected to decline somewhat from the
1997 levels for the Corporation as a whole due in large part to enhanced
monitoring and collection efforts previously mentioned.
Enhancing non-interest income and controlling non-interest expense are important
factors in the success of the Corporation and is measured in the financial
services industry by the efficiency ratio, calculated according to the
following: non-interest expense (less amortization of intangibles) as a
percentage of fully taxable net interest income and non-interest income (net of
provision for ALLL and non-recurring income). For the year December 31, 1997,
the efficiency ratio was 58.7% compared to 56.7% for 1996 and 60.0% for 1995.
The efficiency ratio was negatively impacted by increased non-interest expense
resulting from higher levels of salaries and benefits and occupancy expense
relating to the Acquisitions in late 1996. The efficiency ratio has improved
since the first quarter of 1997 as the level of non-interest expense has
stabilized and non-interest income has increased. Management believes that this
trend will continue.
The interest rate environment will continue to play an important role in the
future earnings of the Corporation. The net interest margin has been declining
as higher cost time deposits continue to be obtained as a result of the
Acquisition. However, overall net interest income continues to increase due to
growth in interest earning assets. Management expects the net interest margin
to stabilize in 1998.
Management concentrates on return on average equity and earnings per share
evaluations, plus other methods, to measure and direct the performance of the
Corporation. While past results are not an indication of future earnings, we
feel the Corporation is positioned to enhance performance of normal operations
through 1998.
"SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
The statements above which are not historical fact are forward looking
statements that involve risks and uncertainties, including, but not limited to,
the interest rate environment, the effect of federal and state banking and tax
regulations, the effect of economic conditions, the impact of competitive
products and pricing, and other risks detailed in the Corporation's Securities
and Exchange Commission filings.
28
CNB Financial Corporation and Subsidiary
1997 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
1997 Annual Report
Officers
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
Joseph B. Bower, Jr.
Treasurer
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
Joseph B. Bower, Jr.
Senior Vice President & Chief Financial Officer
Lending Operations
Robin L. Hay
Vice President, Community Banking
Joseph H. Yaros
Vice President, Community Banking, Bradford
William J. Mills
Vice President, Community Banking, St. Marys
Stanley G. Kaizer
Vice President, Community Banking, DuBois
Ronald E. Billotte
Assistant Vice President, Community Banking, Clearfield
Lending Operations
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
Branch Office Administration
Jacqueline A. Hynd
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
S. Jean Sankey
Community Office Manager, Lending Officer, Osceola Mills Office
Kathy J. McKinney
Community Office Manager, Houtzdale Office
Branch Office Administration
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. Collins
Compliance Officer
Electronic Technology
Edward H. Proud
Assistant Vice President
Dennis J. Sloppy
Assistant Cashier
Finance & Accounting
Rachel E. Larson
Assistant Vice President, Accounting Operations
C. Glenn Myers
Controller & Assistant Financial Officer
Human Resources
Mary Ann Conaway
Vice President
Marketing
Helen G. Kolar
Vice President, Marketing Director
Trust & Asset Management
Services
Donald E. Shawley
Vice President & Trust Officer
Lisa A. Fredette
Trust Officer
Robert J. Knox
Assistant Trust Officer
Eunice M. Peters
Assistant Trust Officer
30
CNB Financial Corporation and Subsidiary
1997 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,
it provides these innovative services, making the Bank the premier financial
provider in its market area.
[CHART OF SERVICES PROVIDED]
31
CNB Financial Corporation and Subsidiary
1997 Annual Report
Shareholder Information
Annual Meeting
The Annual Meeting of the Shareholders of CNB Financial Corporation will be held
Tuesday, April 21, 1998 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) 223-8969
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 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 FEDERAL DEPOSIT INSURANCE CORPORATION]
32