[Logo CNB Financial Corporation]
[Photo]
[Photo]
[Photo]
County National Bank
Annual Report 98
Table of Contents
- --------------------------------------------------------------------------------
Financial Highlights of 1998................................ 1.
Letter to Shareholders...................................... 2.
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...................... 21.
Quarterly Summary of Earnings............................... 21.
Selected Financial Data - Five Year Comparison.............. 22.
Management Discussion and Analysis.......................... 24.
Board of Directors.......................................... 33.
Officers.................................................... 34.
Business and Personal Financial Services.................... 36.
Shareholder Information
and Corporate Description................................. Inside Back Cover.
Consolidated Financial Highlights
(in thousands, except per share data)
- ----------------------------------------------------------------------
For the Year 1998 1997 % Change
--------- --------- ---------
Interest Income $ 29,100 $ 26,205 11.0%
Interest Expense 13,496 11,822 14.2
Net Interest Income 15,604 14,383 8.5
Net Income 4,747 4,302 10.3
Return on:
Average Assets 1.20% 1.23%
Average Equity 10.87% 10.57%
At Year End
Assets $436,852 $372,867 17.2%
Deposits 370,814 319,473 16.1
Loans 288,389 263,902 9.3
Shareholders' Equity 44,781 42,208 6.1
Trust Assets Under Management
(at market value) 188,534 154,834 21.8
Per Share Data
Net Income $ 1.38 $ 1.25 10.4%
Dividends 0.72 0.68 5.9
Book Value 13.00 12.25 6.1
[Graph of Asset Growth]
[Graph of Equity Growth]
[Graph of Dividends Paid Per Share]
[Graph of Earnings Per Share]
1
CNB Financial Corporation and Subsidiaries
1998 Annual Report
[Photo of William F. Falger, President & CEO,
County National Bank (left)
James P. Moore, President & CEO,
CNB Financial Corporation (right)]
Forging ahead in
implementing our
long-term growth
strategies...
December 31, 1998
TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS:
1998 - another year of strong performance for your company.
The Corporation is pleased to report that 1998 was another year of strong
performance for CNB. By paying close attention to the basics, the successful
execution of our strategies in 1998 produced gains in the majority of our
financial indicators.
Financial Performance
Annual earnings increased 10.3% to $4,747,000. This level of earnings
represents a return on average equity of 10.87%, return on average assets of
1.20%, and earnings per share of $1.38 compared to $1.25 in 1997. Much of the
growth in earnings is attributable to our strong growth in the loan portfolio of
$25 million or 9.3% over 1997. Also, total assets grew 17.0% to $436.8 million.
Through our comprehensive product line and the efforts of our employees, this
growth was achieved within our current market area.
CNB Financial Corporation showed an increase in non-interest income over 1997.
The increase of $341,000 or 12.7% is closely related to two main areas. The
Trust & Asset Management area had fee increases of $146,000. This department
has grown from $154.8 million in assets under management to $188.5 million
during 1998. The second area of increased non-interest income was service
charges on deposit accounts. The change for 1998 was $230,000 or a 24.4%
increase over 1997. The fee increases were predominately derived from an
increase in the customer base of the Corporation as our basic fee structure
remained unchanged.
Shareholder Focus
Two major accomplishments occurred to increase the market value of the
Corporation's stock. At the annual meeting on April 21, 1998, the shareholders
authorized to increase the authorized shares of common stock from 2.5 million to
10 million shares. The board declared a 2 for 1 stock split to shareholders of
record on April 30, 1998. In addition, CNB Financial Corporation's stock
officially began trading on the NASDAQ National Market on October 22, 1998 under
the symbol, CCNE. During 1998, the market value of CNB Financial Corporation's
common stock experienced an increase of 72%. The purpose of this national
market listing was to maintain and improve liquidity in the stock and narrow the
spread between the bid and ask price.
Forging ahead in implementing our long-term growth strategies, we have stepped
into another new market for the Bank by acquiring an office in Punxsutawney in
mid-February, 1999. This acquisition will expand our community banking
philosophy within central Pennsylvania to include a sixteenth branch location in
a fifth county, Jefferson County.
Enhanced Service Delivery
With the advancement of technology and relationship `packaging', it has become
quite apparent that banks have developed more complex products and services over
time. And with today's bank merger environment, these products and services
even become more complicated. That is why we have
2
[Photo of Kimberly M. Bennett, Customer Service Center Supervisor]
made the commitment to keeping our products and services basic, simple to
understand, without eliminating those state-of-art innovative services that
customers want. For example, we recognized the need to target a key segment of
our market, the 16 through 21 year old customer. Being a community bank, we felt
it was necessary to approach these customers to begin a banking relationship
early in an effort to better serve their financial needs throughout their life.
Following the purchase of the DuBois facility in 1996, we found it necessary
to expand the services of this new office in order to provide a more complete
community banking environment for our current and future customers. In
September, 1998, a new building was constructed consisting of a more convenient
and full service CNB office with two adjoining business locations.
The effort to achieve the loan growth for 1998 included two marketing
strategies, focusing on Home Equity Lines of Credit and Home Equity Loans. Both
campaigns were highly successful as goals set for number of loans and volume
were exceeded. This type of credit greatly contributes to the improved quality
of our entire loan portfolio. In addition, we have completed our second full
year in providing vehicle leasing with outstanding results. Leasing is becoming
a very popular choice for our customers.
ServiceCall, our 24 hour automated voice response system, a two year old
product, has proven to be a great service to our customers. In 1998, we
implemented some enhancements such as being able to connect to a Customer
Service Representative; make loan payments; and have automatic bill payment
service. With our new enhanced system, we have expanded our quality of service
to our customers and lowered our operational costs.
When enhancing service delivery, it is extremely important that we have the
availability of the `right' human resources. During 1998, we were fortunate to
secure highly qualified professionals in two key bank divisions. The Trust &
Asset Management division has added personnel this year to accommodate the
significant growth it has been experiencing over the last few years. With the
addition of a trust administrator and clerical support, we are positioned to
continue to grow this segment of our business.
To ensure that we continue to expand our commercial loan and business
development efforts, we increased our business development staff who will
concentrate on the new Punxsutawney market along with the growth in our existing
markets. This staff will continue to carry out our philosophy to provide value-
added services and financial solutions that are in the business customers' best
interest and not just focus on short-term transactions that end when a loan is
repaid.
Y2K Efforts
Shareholders and customers need to be assured that the Bank is taking
appropriate steps in preparation for the century date change. The Bank has been
proactive in preparing all of our bank equipment and systems for the Year 2000.
Presently, we are right on target in implementing our Year 2000 Plan, and have
performed extensive testing with more testing scheduled in 1999. We realize the
necessity to educate customers about the Y2K issue to minimize public alarm.
Therefore, a Customer Awareness
[Photo of Left to right: Calvin R. Thomas, Jr., Assistant Vice President, Trust
Officer; Carl J. Peterson, Senior Vice President, Senior Trust Officer; Donald
E. Shawley, Senior Vice President, Senior Trust Officer; and Lisa A. Fredette,
Trust Officer]
3
[Photo of Business Development: (left to right) Robin L. Hay, Vice
President; Stanley G. Kaizer, Vice President;
Richard L. Sloppy, Vice President
Communication Plan has been developed that will be focused on diffusing many of
our customers' concerns throughout 1999. Let us assure you that the banking
industry is still the best safeguard for your hard earned dollars.
People
In 1998, we set some lofty goals for our staff and we are proud to acknowledge
their great efforts in achieving these objectives. They not only exceeded our
deposit and loan goals, but they helped achieve our Earnings Per Share of $1.38.
The goals are set to enhance the value of the Corporation through increased
earnings. Since we have worked diligently in achieving these goals, our
shareholders have gained value through those efforts. As we progress into 1999,
we will continue to intensify our sales training and modify our incentive plans,
keeping focused on creating employee loyalty all the while further enhancing the
overall value of the Corporation through community minded banking.
In June, 1998, L.E. Soult, Jr. retired from CNB Financial Corporation's Board
of Directors as Chairman. Mr. Soult had been chairman since 1991 and an
organizing director of the Corporation in 1984. He also retired from the County
National Bank Board with thirty one years of dedicated service. We especially
like to recognize the many contributions of Mr. Soult over the years and look
forward to working with him in the capacity of Director Emeritus.
William R. Owens, an existing member of the CNB Financial Corporation's Board
of Directors, has been named Chairman of the Board by his colleagues. Mr. Owens
is the fourth chairman of the Corporation since its formation in 1984. Bill
Owens started his banking career with County National Bank in 1959 and became
president of the Bank and vice president of the CNB Financial Corporation in
1991. In 1993, he retired from active management and has remained on both
boards and served on various committees. Bill's goals for the Corporation are
to expand its subsidiary base, in addition to County National Bank; develop
other financial service providers; and keep a strong focus on continuing
excellent shareholder returns by offering customers efficient and friendly
community banking at its best.
The upcoming year will offer opportunities and challenges but we will continue
to maximize value for you, our shareholders, which means always looking for
better ways to do business. Thank you for your continued confidence by
investing in CNB Financial Corporation.
Sincerely,
County National Bank CNB Financial Corporation
/s/ William F. Falger /s/ James P. Moore
William F. Falger James P. Moore
President and Chief Executive Officer President and Chief Executive Officer
4
CNB Financial Corporation and Subsidiaries
1998 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 subsidiaries as of December 31, 1998 and 1997, 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, 1998.
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 subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, 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
February 19, 1999
Pittsburgh, Pennsylvania
5
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Consolidated Statements of Condition
(in thousands, except share data) December 31
Assets 1998 1997
Cash and due from banks..................................................... $ 5,285 $ 9,555
Interest bearing deposits with other banks.................................. 5,341 31
Federal funds sold.......................................................... 12,475 8,850
Investment securities available for sale.................................... 100,121 63,521
Investment securities held to maturity, fair value of $7,867 at
December 31, 1998 and $13,704 at December 31, 1997....................... 7,682 13,511
Loans and leases............................................................ 292,959 267,609
Less: unearned discount.................................................. 4,570 3,707
Less: allowance for loan and lease losses................................ 3,100 2,849
-------- --------
NET LOANS................................................................ 285,289 261,053
Premises and equipment, net................................................. 10,257 8,795
Accrued interest receivable................................................. 2,454 2,199
Loans held for sale......................................................... 4,299 1,517
Other assets and intangible, net............................................ 3,649 3,835
-------- --------
TOTAL ASSETS............................................................. $436,852 $372,867
======== ========
Liabilities
Deposits:
Non-interest bearing deposits............................................ $ 36,612 $ 32,893
Interest bearing deposits................................................ 334,202 286,580
-------- --------
TOTAL DEPOSITS........................................................... 370,814 319,473
Other borrowings............................................................ 16,378 8,071
Accrued interest and other liabilities...................................... 4,879 3,115
-------- --------
TOTAL LIABILITIES........................................................ $392,071 $330,659
-------- --------
Shareholders' Equity
Common stock $1.00 par value for 1998 and $4.00 for 1997
Authorized 10,000,000 shares for 1998 and 2,500,000 for 1997
Issued 3,456,000 shares for 1998 and 1,728,000 for 1997..................... $ 3,456 $ 6,912
Additional paid in capital.................................................. 3,456 --
Retained earnings........................................................... 36,512 34,246
Treasury stock, at cost (11,106 shares for 1998 and 5,166 shares for 1997).. (112) (100)
Accumulated other comprehensive income...................................... 1,469 1,150
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................................... 44,781 42,208
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY................................. $436,852 $372,867
======== ========
The accompanying notes are an integral part of these statements.
6
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Consolidated Statements of Income
(in thousands, except per share data) Year ended December 31,
1998 1997 1996
Interest and Dividend Income
Loans including fees......................................................................... $ 23,466 $ 21,512 $ 18,231
Deposits with banks.......................................................................... 12 1 --
Federal funds sold........................................................................... 262 209 87
Investment securities:
Taxable................................................................................... 3,720 3,006 3,309
Tax-exempt................................................................................ 1,410 1,301 1,295
Dividends................................................................................. 230 176 136
-------- -------- --------
TOTAL INTEREST AND DIVIDEND INCOME........................................................ 29,100 26,205 23,058
Interest Expense
Deposits..................................................................................... 12,562 11,392 9,421
Borrowed funds............................................................................... 934 430 376
-------- -------- --------
TOTAL INTEREST EXPENSE.................................................................... 13,496 11,822 9,797
-------- -------- --------
Net interest income....................................................................... 15,604 14,383 13,261
Provision for loan losses................................................................. 675 900 600
-------- -------- --------
Net interest income after provision for
loan losses............................................................................ 14,929 13,483 12,661
Other Income
Trust & asset management fees................................................................ 758 612 511
Service charges - deposit accounts........................................................... 1,173 943 700
Other service charges and fees............................................................... 451 443 416
Realized security gains (losses)............................................................. 350 529 (7)
Gain on sale of loans........................................................................ 31 26 24
Other........................................................................................ 264 133 231
-------- -------- --------
TOTAL OTHER INCOME........................................................................ 3,027 2,686 1,875
Other Expenses
Salaries..................................................................................... 4,983 4,624 4,030
Employee benefits............................................................................ 1,513 870 972
Net occupancy expense of premises............................................................ 1,713 1,642 1,460
Data processing.............................................................................. 776 763 576
Amortization................................................................................. 329 315 --
Other........................................................................................ 2,213 2,208 1,922
-------- -------- --------
TOTAL OTHER EXPENSES...................................................................... 11,527 10,422 8,960
-------- -------- --------
Income before income taxes and cumulative effect of
change in accounting principle............................................................ 6,429 5,747 5,576
Applicable income taxes...................................................................... 1,682 1,445 1,450
-------- -------- --------
Income before cumulative effect of change in
accounting principle...................................................................... 4,747 4,302 4,126
Cumulative effect of change in accounting principle, after taxes............................. -- -- 156
-------- -------- --------
Net income................................................................................... $ 4,747 $ 4,302 $ 4,282
======== ======== ========
EARNINGS PER SHARE, BASED ON WEIGHTED
AVERAGE SHARES OUTSTANDING*
Income before cumulative effect of accounting change......................................... $ 1.38 $ 1.25 $ 1.20
Cumulative effect of change in accounting principle.......................................... -- -- 0.05
-------- -------- --------
Net income................................................................................... $ 1.38 $ 1.25 $ 1.25
Cash dividends per share..................................................................... $ 0.72 $ 0.68 $ 0.62
*Per share data are restated to reflect the 2 for 1 stock split effective on April 30, 1998
The accompanying notes are an integral part of these statements.
7
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Consolidated Statements of Cash Flows
(in thousands) Year ended December 31,
1998 1997 1996
Cash Flows from Operating Activities:
Net income................................................................................... $ 4,747 $ 4,302 $ 4,282
Adjustments to reconcile net income to
net cash provided by operations:
Provision for loan losses................................................................ 675 900 600
Depreciation and amortization............................................................ 1,139 1,066 664
Amortization and accretion of deferred loan fees......................................... (154) (652) (653)
Deferred taxes........................................................................... 1,366 762 169
Security (gains) losses.................................................................. (350) (529) 7
Gain on sale of loans.................................................................... (31) (26) (24)
Net gains on dispositions of acquired property........................................... (98) -- --
Changes in:
Proceeds from sales of loans............................................................... 15,977 3,175 1,910
Origination of loans for sale.............................................................. (18,728) (3,583) (1,716)
Interest receivable........................................................................ (269) (18) (84)
Other assets and intangibles............................................................... (281) (479) (3,398)
Interest payable........................................................................... (7) 264 (38)
Other liabilities.......................................................................... 241 (271) 1,164
-------- -------- --------
Net cash provided by operating activities.................................................... 4,227 4,911 2,883
Cash Flows from Investing Activities:
Proceeds from maturities of:
Securities held to maturity.............................................................. 6,322 5,235 7,940
Securities available for sale............................................................ 23,862 13,095 7,742
Proceeds from sales of securities available for sale....................................... 4,888 5,925 4,877
Purchase of:
Securities held to maturity.............................................................. -- -- (1,404)
Securities available for sale............................................................ (65,065) (20,479) (22,390)
Net principal disbursed on loans........................................................... (24,157) (41,303) (23,109)
Purchase of Federal Reserve Bank Stock..................................................... -- (39) --
Purchase of Federal Home Loan Bank Stock................................................... (499) -- --
Purchase of premises and equipment......................................................... (2,272) (234) (2,094)
Proceeds from the sale of foreclosed assets................................................ 192 18 122
-------- -------- --------
Net cash used in investing activities........................................................ (56,729) (37,782) (28,316)
Cash Flows from Financing Activities:
Net change in:
Checking, money market and savings accounts.............................................. 49,621 378 9,064
Certificates of deposit.................................................................. 1,720 49,039 5,205
Cash dividends paid...................................................................... (2,481) (2,345) (2,136)
Net advances (repayments) from other borrowings............................................ 8,307 (6,585) 11,810
-------- -------- --------
Net cash provided by financing activities.................................................... 57,167 40,487 23,943
-------- -------- --------
Net increase (decrease) in cash and cash equivalents......................................... 4,665 7,616 (1,490)
Cash and cash equivalents at beginning of year............................................... 18,436 10,820 12,310
-------- -------- --------
Cash and cash equivalents at end of year..................................................... $ 23,101 $ 18,436 $ 10,820
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (including amount credited directly to
certificate accounts).................................................................. $ 13,503 $ 11,822 $ 9,797
Income taxes............................................................................. 560 1,156 1,739
Noncash Investing Activities
Increase in net unrealized gains on securities available for sale........................... $ 319 $ 535 $ 27
The accompanying notes are an integral part of these statements.
8
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Consolidated Statements of Changes
in Shareholders' Equity
(in thousands)
Accumulated
Additional Other Total
Paid-In Retained Treasury Comprehensive Stockholders'
Common Stock Capital Earnings Stock Income Equity
-------------------------------------------------------------------------------
Balance January 1, 1996.................... $ 6,912 $ -- $30,143 $(100) $ 588 $37,543
Comprehensive income:
Net income for 1996.................... 4,282 4,282
Net change in unrealized gains
on available for sale securities,
net of taxes of $14 and adjustment
for losses of $(5)................... 27 27
Total comprehensive income............. 4,309
Cash dividends declared................ (2,136) (2,136)
-------------------------------------------------------------------------------
Balance December 31, 1996.................. 6,912 -- 32,289 (100) 615 39,716
Comprehensive income:
Net income for 1997.................... 4,302 4,302
Net change in unrealized gains
on available for sale securities,
net of taxes of $276 and adjustment
for gains of $349.................... 535 535
-----------
Total comprehensive income............. 4,837
-----------
Cash dividends declared................ (2,345) (2,345)
-------------------------------------------------------------------------------
Balance December 31, 1997.................. 6,912 -- 34,246 (100) 1,150 42,208
Comprehensive income:
Net income for 1998.................... 4,747 4,747
Net change in unrealized gains
on available for sale securities,
net of taxes of $164 and adjustment
for gains of $231.................... 319 319
-----------
Total comprehensive income............. 5,066
-----------
Issued 2 for 1 stock split............. (3,456) 3,456 --
Purchase of treasury stock
(774 shares)......................... (12) (12)
Cash dividends declared................ (2,481) (2,481)
-------------------------------------------------------------------------------
Balance December 31, 1998 $ 3,456 $3,456 $36,512 $(112) $1,469 $44,781
===============================================================================
The accompanying notes are an integral part of these statements.
9
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization:
CNB Financial Corporation (the "Corporation"), is headquartered in Clearfield,
Pennsylvania, and provides a full range of banking and related services through
its wholly owned subsidiary, County National Bank (the "Bank"). The Bank also
provides trust services, including the administration of trusts and estates,
retirement plans, and other employee benefit plans. The Bank serves individual
and corporate customers and is subject to competition from other financial
institutions and intermediaries with respect to these services. The Corporation
is also subject to examination by Federal regulators. The Corporation's market
area is in the 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 subsidiaries, County National Bank and CNB Investment
Corporation. 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.
Investment Securities:
When purchased, investments are classified as held to maturity, trading or
available for sale securities. Debt securities are classified as held to
maturity when the Corporation has the positive intent and ability to hold the
securities to maturity. Held to maturity securities are stated at amortized
cost. Debt or equity securities are classified as trading when purchased
principally for the purpose of selling them in the near term. Available for sale
securities are those securities not classified as held to maturity or trading
and are carried at their fair market value. Unrealized gains and losses, net of
tax, on securities classified as available for sale are 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.
Loans:
Interest income with respect to loans and leases is accrued on the principal
amount outstanding, except on certain installment loans on which interest income
is recognized over their terms using methods which approximate level yields. The
Bank discontinues the accrual of interest when, in the opinion of management,
there exists doubt as to the ability to collect such interest. Loan fees and
certain direct origination costs are deferred and the net amount amortized as an
adjustment to the related loan interest income yield over the terms of the
loans.
Direct Lease Financing
Financing of equipment, principally consisting of automobiles, is provided to
customers under lease arrangements accounted for as direct financing leases.
These leases are reported in the consolidated statements of condition under the
loan caption as a net amount, consisting of the aggregate of lease payments
receivable and estimated residual values, less unearned income. Income is
recognized in a manner which results in an approximate level yield over the
lease term.
Allowance for Loan and Lease Losses:
The allowance for loan and lease losses is established through provisions for
loan losses which are charged against income. Loans which are deemed to be
uncollectible are charged against the allowance account. Subsequent recoveries,
if any, are credited to the allowance account.
Management determines the adequacy of the reserves based on historical
patterns of charge-offs and recoveries, industry experience, and other
qualitative factors relevant to the collectability of the loan portfolio. While
management believes that the allowance is adequate to absorb estimated potential
loan losses, future adjustments may be necessary due to circumstances that
differ substantially from the assumptions used in evaluating the adequacy of the
allowance for loan losses.
10
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Notes to Consolidated Financial Statements (Continued)
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. The property is evaluated regularly and
any decreases in the carrying amount are charged to expense.
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 $0.05 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. Mortgage loans held for sale are separately classified
and carried at the lower of cost or estimated fair value. The MSR's recognized,
$98,000 in 1998, are included in other assets.
Treasury Stock:
The purchase of the Corporation's common stock is recorded at cost. At the
date of subsequent reissue, the treasury stock account is reduced by the cost of
such stock on a first-in-first-out basis.
Comprehensive Income:
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Corporation's net income or shareholders' equity. Prior period financial
statements have been restated to conform to the requirements of SFAS No. 130.
Earnings Per Share:
Earnings per share is calculated on the weighted average number of common
shares outstanding during the year. The number of shares used in the earnings
per share computations presented was 3,444,894 for 1998 and 3,445,668 for 1997
and 1996. The 1997 and 1996 shares are restated to reflect the 2 for 1 stock
split effective on April 30, 1998. On January 27, 1998, the Board of Directors
of the Corporation approved an increase in the authorized shares of 10,000,000.
This was subsequently ratified by the shareholders on April 21, 1998. The
Corporation has no dilutive securities.
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:
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. The Corporation views itself as one
segment of business which is community banking.
11
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Notes to Consolidated Financial Statements (Continued)
Employer's Benefits Disclosures
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures About
Pensions and Other Post Retirement Benefits". This statement revises employers'
disclosures about pension and other post-retirement benefit plans. It does not
change the recognition or measurement of those plans. This statement is
effective for the fiscal years beginning after December 15, 1997. The required
disclosure changes will not affect the financial condition, equity or operating
results of the Corporation.
Accounting for Derivative Instruments
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement provides
for potential of investment reclassification out of the held-to-maturity
category. It is effective for fiscal years beginning after June 15, 1999 with
earlier adoption permitted. This statement is not expected to materially affect
the financial position or operating results of the Corporation.
Accounting for Internal Use Computer Software
The Accounting Standards Executive Committee issued SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use",
effective beginning January 1, 1999. The SOP provides guidance for the
accounting of costs related to developing, obtaining, modifying and/or
implementing internal use software. SOP 98-1 requires companies to capitalize
costs incurred in designing, coding, installing and testing of software. All
other costs are to be expensed as incurred. The implementation of the SOP will
not materially affect the financial condition, equity or operating results of
the Corporation.
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, 1998, was approximately $2,589,000, which was maintained in vault
cash.
3. INVESTMENT SECURITIES
Investment securities at December 31, 1998 and 1997 were as follows (in
thousands):
December 31, 1998 December 31, 1998
--------------------------------------- ---------------------------------------
Unrealized Unrealized
Amortized ---------------- Market Amortized ---------------- Market
Cost Gains Losses Value Cost Gains Losses Value
--------------------------------------- ---------------------------------------
Securities available for sale:
U.S. Treasury..................... $ 9,522 $ 76 $ -- $ 9,598 $15,482 $ 40 $ 4 $15,518
U.S. Government agencies
and corporations................ 11,028 67 4 11,091 19,088 100 37 19,151
Obligations of States and
Political Subdivisions.......... 33,421 1,013 -- 34,434 18,788 718 -- 19,506
Other Debt Securities............. 40,079 304 184 40,199 5,347 8 43 5,312
Marketable Equity Securities...... 3,845 1,069 115 4,799 3,074 961 1 4,034
--------------------------------------- ---------------------------------------
.................................... $97,895 $2,529 $303 $100,121 $61,779 $1,827 $85 $63,521
======================================= =======================================
Securities to be held to maturity:
Obligations of States and
Political Subdivisions.......... $ 4,073 $ 152 $ -- $ 4,225 $ 6,398 $ 180 -- $ 6,578
Other Debt Securities............. 2,003 33 -- 2,036 6,006 18 $ 5 6,019
Restricted Equity Securities...... 1,606 -- -- 1,606 1,107 -- -- 1,107
--------------------------------------- ---------------------------------------
.................................... $ 7,682 $ 185 $ -- $ 7,867 $13,511 $ 198 $ 5 $13,704
======================================= =======================================
12
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Notes to Consolidated Financial Statements (Continued)
Other debt securities include corporate notes and bonds and collateralized
mortgage obligations.
On December 31, 1998 investment securities carried at $24,197,000 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, 1998 (in thousands):
Available for Sale Held to Maturity
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
1 year or less....................... $14,500 $14,610 $2,019 $2,047
1 year-5 years....................... 15,009 15,273 4,057 4,214
5 years-10 years..................... 16,831 17,503 -- --
After 10 years....................... 12,302 12,506 -- --
---------------------------- -----------------------------
58,642 59,892 6,076 6,261
---------------------------- -----------------------------
Collateralized mortgage obligations
and other asset-backed securities.. 35,408 35,430 -- --
---------------------------- -----------------------------
Total investment securities...... $94,050 $95,322 $6,076 $6,261
============================ =============================
Collateralized mortgage obligations and other asset-backed securities are not
due at a single date; periodic payments are received based on the payment
patterns of the underlying collateral.
Information pertaining to security sales is as follows (in thousands):
Proceeds Gross Gains Gross Losses
-------- ----------- ------------
1998 $4,888 $351 $ 1
1997 5,925 556 27
1996 4,877 23 30
4. LOANS
Total Loans at December 31, 1998 and 1997 are summarized as follows (in
thousands):
1998 1997
Commercial, Financial and Agricultural......................................................... $ 63,400 $ 58,282
Residential Mortgage........................................................................... 118,245 112,393
Commercial Mortgage............................................................................ 46,701 37,702
Installment.................................................................................... 35,251 41,001
Lease Receivables.............................................................................. 29,362 18,231
-------- --------
$292,959 $267,609
======== ========
Lease receivables at December 31, 1998 and 1997 are summarized as follows
(in thousands):
1998 1997
Lease payment receivable....................................................................... $ 13,676 $ 8,525
Estimated residual values...................................................................... 15,686 9,706
-------- --------
Gross lease receivables........................................................................ 29,362 18,231
Less unearned income........................................................................... (4,313) (2,788)
-------- --------
Net lease receivables.......................................................................... $ 25,049 $ 15,443
======== ========
At December 31, 1998 and 1997, net unamortized loan costs and fees of $264,060
and $360,776, 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.
13
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Notes to Consolidated Financial Statements (Continued)
The recorded investment in loans that are considered impaired under SFAS No.
114 was $537,590 and $597,040 at December 31, 1998 and 1997, respectively. 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, 1998 and 1997 were approximately $569,457
and $627,038, respectively. For the years ended December 31, 1998 and 1997, the
Corporation recognized accrued interest income on impaired loans of $46,488 and
$49,428, respectively.
Deposit accounts that have overdrawn their current balance, overdrafts, are
reclassified to loans. Overdrafts included in loans are $533,000 in 1998 and
$184,000 in 1997.
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):
1998 1997 1996
Balance, Beginning of Year........... $2,849 $2,473 $2,145
Charge-offs.......................... (559) (640) (360)
Recoveries........................... 135 116 88
------ ------ ------
Net Charge-offs.................. (424) (524) (272)
Provision for Loan and Lease Losses.. 675 900 600
------ ------ ------
Balance, End of Year................. $3,100 $2,849 $2,473
====== ====== ======
6. PREMISES AND EQUIPMENT
The following summarizes Premises and Equipment at December 31 (in thousands):
1998 1997
Land............................................ $ 1,273 $ 1,185
Premises and Leasehold Improvements............. 8,675 7,007
Furniture and Equipment......................... 5,674 5,204
------- -------
15,622 13,396
Less Accumulated Depreciation and Amortization.. (5,365) (4,601)
------- -------
Premises and Equipment, Net................... $10,257 $ 8,795
======= =======
Depreciation on Premises and Equipment amounted to $810,000 in 1998, $751,000
in 1997, and $664,000 in 1996.
Rental expense, net of rental income, charged to occupancy expense for 1998,
1997, and 1996 was $134,000, $126,000 and $105,000, 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
$2,522,000 and $2,837,000 of goodwill for 1998 and 1997, net of accumulated
amortization of $630,000 and $315,000, respectively.
8. DEPOSITS
The following table reflects time certificates of deposit and IRA accounts
included in total deposits and their remaining maturities at December 31, (in
thousands):
Time Deposits Maturing: 1998 1997
Within One Year................ $128,142 $101,626
Within Two Years............... 35,015 39,534
Within Three Years............. 4,504 20,901
Within Four Years.............. 6,925 3,573
Within Five Years and Greater.. 2,213 5,931
-------- --------
$176,799 $171,565
Certificates of Deposit of $100,000 or more totaled $22,324,000 and
$20,839,000 at December 31, 1998 and 1997, respectively.
14
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Notes to Consolidated Financial Statements (Continued)
9. OTHER BORROWINGS
Other borrowings include $359,000 and $2.0 million of demand notes payable to
the U.S. Treasury Department at December 31, 1998 and 1997, 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
$99 million. Also, other borrowings include advances from the Federal Home Loan
Bank (FHLB) at December 31, 1998, and 1997 as follows (in thousands):
December 31,
Interest Rate Maturity 1998 1997
-----------------------------------------------
Fixed
6.75% 9/27/11 $ 569 $ 596
Variable
(a) 5/23/00 5,000 5,000
(b) 1/11/09 450 475
(c) 2/4/03 10,000 --
------- ------
Total borrowed funds $16,019 $6,071
======= ======
(a) Interest Rate floats quarterly based on the 3 month LIBOR which was 5.44%
at December 31, 1998.
(b) Interest Rate ranges from 5.28% to 6.51%.
(c) Interest Rate is fixed for one year at which time FHLB has option to float
the interest rate based on the 3 month LIBOR +.09, the interest rate was
5.17% at December 31, 1998.
Following are maturities of borrowed funds as of December 31, 1998 (in
thousands):
1999 $ 415
2000 5,060
2001 65
2002 69
2003 10,075
Thereafter 694
-------
Total Borrowed Funds $16,378
=======
10. INCOME TAXES
The following is a summary of the tax provision (in thousands):
1998 1997 1996
Current......................... $ 316 $ 683 $1,361
Deferred........................ 1,366 762 169
------ ------ ------
Net provision for Income Taxes.. $1,682 $1,445 $1,530
====== ====== ======
The applicable portion of the current year provision related to the gains on
sales of available for sale securities is $119,000, $180,000, and $0 in 1998,
1997 and 1996, respectively.
15
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Notes to Consolidated Financial Statements (Continued)
The components of the net deferred tax liability as of December 31, 1998 and
1997 are as follows (in thousands):
1998 1997
Deferred tax assets
Allowance for loan losses.................................... $ 769 $ 684
Post-retirement benefits..................................... 49 29
Intangible................................................... 71 36
Deferred compensation........................................ 47 --
------ ------
936 749
Deferred tax liabilities
Premises and equipment....................................... 346 379
Vehicle leasing.............................................. 2,617 1,031
Unrealized gain on investment securities available for sale.. 779 592
------ ------
3,742 2,002
------ ------
Net deferred tax liability....................................... $2,806 $1,253
====== ======
The reconciliation of income tax attributable to continuing operations at the
Federal statutory tax rates to income tax expense is as follows (in thousands):
1998 % 1997 % 1996 %
Tax at statutory rate... $2,186 34.0 $1,954 34.0 $1,977 34.0
Tax exempt income, net.. (579) (9.0) (516) (9.0) (508) (8.7)
Other................... 75 1.2 7 0.1 61 1.0
------ ---- ------ ---- ------ ----
Income tax provision.... $1,682 26.2 $1,445 25.1 $1,530 26.3
====== ==== ====== ==== ====== ====
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 $68,400. The Corporation recognized expense of
$405,000 in 1998, $350,000 in 1997, and $304,000 in 1996.
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, $30,000, and $26,000 in 1998, 1997, and 1996,
respectively.
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,
1998 1997 1996
Accumulated post-retirement benefit obligation:
Retirees $ 55,682 $ 52,508 $ 53,742
Fully eligible active plan participants 30,395 40,053 39,921
Other active plan participants 377,030 337,917 319,350
--------- --------- ---------
Total accumulated post-retirement benefit obligation 463,107 430,478 413,013
Unrecognized net transition obligation (110,183) (117,528) (124,873)
Unrecognized net loss (63,262) (75,639) (96,621)
--------- --------- ---------
Accrued post-retirement obligation $ 289,662 $ 237,311 $ 191,519
========= ========= =========
Net periodic post-retirement benefit cost:............... 1998 1997 1996
------ ------ ------
Service cost......................................... $ 23,383 $ 21,737 $ 18,531
Interest cost........................................ 27,671 26,580 21,725
Amortization of transition obligation over 21 years.. 8,685 9,701 7,566
--------- --------- ---------
$ 59,739 $ 58,018 $ 47,822
========= ========= =========
16
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Notes to Consolidated Financial Statements (Continued)
The weighted average discount rate used to calculate net periodic benefit cost
and the accrued post-retirement liability was 6.50% in 1998. The health care
cost trend rate used to measure the expected costs of benefits for 1999 is 9.0%,
and 8.0% thereafter. A one percent increase in the health care trend rates would
result in an increase of $71,852 in the benefit obligation of December 31, 1998,
and would increase the service and interest costs by $10,915 in future periods.
The presentation above for the years 1998, 1997 and 1996 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 $5,793,000 on
December 31, 1998 compared to $6,732,000 at December 31, 1997. During 1998,
$32,834,000 of new loans were made and repayments totaled $33,773,000.
In 1998, the Bank entered into an operating lease with a director of the
Corporation expiring in 1999. The annual lease payments were determined based on
prevailing terms in the market area. All ongoing operating and general
maintenance expenses will be the responsibility of the director.
13. REGULATORY MATTERS
The Corporation and Bank are subject to minimum capital requirements set by
Federal regulatory agencies, namely the Federal Reserve Bank and the Office of
the Comptroller of the Currency. Regulators require capital ratios of 4.0% Tier
1 capital to total risk based assets, 8.0% or more of total qualifying capital
to total risk weighted assets and total Tier 1 capital to total assets of 4.0%
for an institution to be considered well capitalized. The Corporation and Bank
were reported as well capitalized under the regulatory framework for prompt
corrective action as of the most recent notification of the regulators. There
are no conditions or events since that notification that management believes
would change the Corporation's status. The table below ($'s in thousands)
summarizes the Corporation and Bank's regulatory capital levels:
December 31
Risk Based Capital 1998 1997
Regulatory Ratio to Minimum Regulatory Ratio to Minimum
Tier 1 Capital Risk Assets Required Capital Risk Assets Required
- ------ ----------------------------------- -----------------------------------
CNB Financial Corporation 40,821 13.97% 4.0% $38,221 15.05% 4.00%
County National Bank 31,577 10.99% 4.0% $35,210 14.09% 4.00%
Tier 1 + Tier 2 Capital
- -----------------------
CNB Financial Corporation 43,921 15.03% 8.0% $41,070 16.17% 8.00%
County National Bank 34,677 12.07% 8.0% $38,059 15.23% 8.00%
Leverage
- --------
CNB Financial Corporation 40,821 10.37% 4.0% $38,221 10.93% 4.00%
County National Bank 31,577 8.13% 4.0% $35,210 10.14% 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.
17
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Notes to Consolidated Financial Statements (Continued)
Certain restrictions exist regarding the ability of the Bank to transfer funds
to the Corporation in the form of cash dividends, loans or advances. Dividends
payable by the Bank to the Corporation without prior approval of the Office of
the Comptroller of the Currency (OCC) are limited to the Bank's retained net
profits for the preceding two calendar years plus retained net profits up to the
dividend declaration in the current calendar year. Retained net profits are
defined by the OCC as net income, less dividends declared during the periods
under regulatory accounting principles. As of December 31, 1998, $2.1 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, 1998, the Bank had $13.5 million of unused
credit card lines; $7.7 million of unfunded home equity lines of credit; $32.7
million in other outstanding loan commitments and $2.8 million in standby
letters 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.
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, 1998 and 1997.
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.
18
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Notes to Consolidated Financial Statements (Continued)
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, 1998 December 31, 1997
(in thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
------------------ ------------------
ASSETS
Cash and short-term assets................ $ 23,101 $ 23,101 $ 18,436 $ 18,436
Investment securities..................... 107,803 107,988 77,032 77,225
Net Loans................................. 260,240 265,671 247,281 250,462
LIABILITIES
Deposits.................................. 370,814 373,510 319,473 318,704
Advances from the Federal Home Loan Bank.. 16,019 16,093 6,071 5,624
Other Borrowings.......................... 359 359 2,000 2,000
16. SUBSEQUENT EVENTS (unaudited)
On February 12, 1999, the Bank will consummate the acquisition of the
Punxsutawney office of a regional bank competitor. The purchase includes
approximately $11,000,000 in loans, $36,000,000 in deposits and certain fixed
assets associated with the office. The purchase and assumption agreement was
signed on October 13, 1998. In conjunction with this transaction, the Bank will
pay the seller a premium which will be amortized on a straight line basis.
On February 23, 1999, the Corporation signed a letter of intent to acquire the
First National Bank of Spangler, headquartered in Spangler, PA. The shareholders
of Spangler will receive shares of CNB Financial Corporation common stock in
exchange for First National Bank of Spangler's common stock. The merger will
require 237,500 shares of common stock be issued and is subject to Spangler's
shareholder approval as well as regulatory approval.
19
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Notes to Consolidated Financial Statements (Continued)
17. PARENT COMPANY ONLY FINANCIAL INFORMATION (in thousands)
BALANCE SHEETS December 31,
1998 1997
ASSETS
Cash.................................................. 388 $ 104
Investment in bank subsidiary......................... 34,854 38,562
Investment in non-bank subsidiary..................... 5,115 --
Securities-available for sale......................... 4,799 4,034
Other assets.......................................... 7 --
------- -------
TOTAL ASSETS........................................ $45,163 $42,700
======= =======
LIABILITIES
Income taxes payable................................. $ 30 $ 166
Deferred tax liability............................... 345 326
Other liabilities.................................... 7 --
TOTAL LIABILITIES................................... 382 492
TOTAL SHAREHOLDERS' EQUITY.......................... 44,781 42,208
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $45,163 $ 42,700
======= =======
STATEMENTS OF INCOME Year ended December 31,
1998 1997 1996
INCOME
Dividends from:
Bank subsidiary..................................... $ 3,481 $ 2,852 $ 2,494
Securities available for sale....................... 130 99 75
Other................................................. 350 542 8
------- ------- -------
TOTAL INCOME.................................... 3,961 3,493 2,577
======= ======= =======
EXPENSES........................................... (234) (89) (76)
INCOME BEFORE INCOME TAXES AND EQUITY
IN DISTRIBUTED NET INCOME OF SUBSIDIARY........... 3,727 3,404 2,501
Applicable income tax (obligation) benefit....... (53) (166) 15
Equity in undistributed net income of bank
subsidiary........................................ 1,062 1,064 1,766
Equity in undistributed net income of non-bank
subsidiary........................................ 11 -- --
------- ------- -------
NET INCOME...................................... $ 4,747 $ 4,302 $ 4,282
======= ======= =======
STATEMENTS OF CASH FLOWS Year ended December 31,
1998 1997 1996
Cash flows from operating activities:
Net income............................................. $ 4,747 $ 4,302 $ 4,282
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of bank subsidiary. (1,062) (1,064) (1,766)
Equity in undistributed net income of non-bank
subsidiary........................................... (11) -- --
(Increase) Decrease in other assets................... (7) 20 (20)
Increase (Decrease) in other liabilities.............. (131) 166 (34)
Gain on sale of available for sale securities......... (349) (539) (6)
------- ------- --------
Net cash provided by operating activities............. 3,187 2,885 2,456
------- ------- --------
Cash flows from investing activities:
Purchase of securities available for sale.............. (1,976) (2,065) (737)
Proceeds from the sale of securities available for sale 1,554 1,612 68
------- ------- --------
Net cash used in investing activities................. (422) (453) (669)
Cash flows from financing activities:
Dividends paid......................................... (2,481) (2,345) (2,136)
------- ------- --------
Net cash used in financing activities................. (2,481) (2,345) (2,136)
------- ------- --------
Net increase (decrease) in cash........................ 284 87 (349)
Cash beginning of year................................. 104 17 366
------- ------- --------
Cash end of year....................................... $ 388 $ 104 $ 17
======= ======= ========
20
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Statistical Information
MATURITY DISTRIBUTION
Remaining maturity/earliest repricing as of December 31, 1998 ($'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..................................... $12,475 $ -- $ -- $ -- $ 12,475
Investment securities.................................. 9,809 22,238 39,258 36,498 107,803
Interest bearing deposits.............................. 5,341 -- -- -- 5,341
Loans (net)............................................ 52,789 83,768 129,138 19,594 285,289
----------------------------------------------------------------
Total................................................ $80,414 $106,006 $168,396 $56,092 $410,908
Interest bearing liabilities:
Interest bearing deposits.............................. $12,624 $ 52,603 $ 31,560 $29,035 125,822
Savings................................................ -- 15,039 8,000 8,542 31,581
Time................................................... 40,096 76,294 60,241 168 176,799
Borrowed funds......................................... 15,393 22 269 694 16,378
----------------------------------------------------------------
Total................................................ $68,113 $143,958 $100,070 $38,439 $350,580
----------------------------------------------------------------
Gap.................................................... $12,301 $(37,952) $ 68,326 $17,653 $ 60,328
Cumulative gap......................................... $12,301 $(25,651) $ 42,675 $60,328
Sensitivity ratio...................................... 1.18 0.74 1.68 1.46 1.17
Cumulative sensitivity ratio........................... 1.18 0.88 1.14 1.17
QUARTERLY SUMMARY OF EARNINGS
The unaudited quarterly results of operations for the years ended December
1998 and 1997 are as follows (in thousands, except per share data):
Quarters Ended
1998 1997
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
------------------------------------- ------------------------------------
Total interest income...... $7,022 $7,232 $7,305 $7,541 $6,095 $6,427 $6,754 $6,929
Net interest income........ 3,764 3,925 3,882 4,033 3,380 3,593 3,709 3,701
Provision for loan losses.. 225 150 150 150 150 150 150 450
Other income............... 637 716 825 849 585 489 566 1,046
Other expense.............. 2,714 2,699 3,051 3,063 2,642 2,580 2,572 2,628
Net income................. 1,076 1,296 1,134 1,241 869 1,039 1,118 1,276
Net income per share....... 0.31 0.38 0.33 0.36 0.25 0.30 0.33 0.37
QUARTERLY SHARE DATA
The following table sets forth, for the periods indicated, the quarterly high
and low bid price of stock as reported through the National Quotation Bureau and
actual cash dividends paid per share. The stock is traded on the NASDAQ Stock
Market under the symbol, CCNE. As of December 31, 1998, the approximate number
of shareholders of record of the Corporation's common stock was 1,484.
Price Range of Common Stock Cash Dividends Paid
1998 1997
High Low High Low 1998 1997
First Quarter...... $23.13 $19.94 $17.88 $17.75 First Quarter...... $0.18 $0.17
Second Quarter..... 29.50 23.13 17.88 17.75 Second Quarter..... 0.18 0.17
Third Quarter...... 30.13 29.00 18.75 17.88 Third Quarter...... 0.18 0.17
Fourth Quarter..... 34.25 30.00 19.94 18.75 Fourth Quarter..... 0.18 0.17
----- -----
$0.72 $0.68
===== =====
TRUST AND ASSET MANAGEMENT DIVISION
FUNDS UNDER MANAGEMENT (MARKET VALUE)
($'s in thousands) 1998 1997
Personal Trusts, Estates and Agency Accounts........ $172,079 $138,674
Corporate Accounts.................................. 16,455 16,160
-------- --------
Total............................................... $188,534 $154,834
======== ========
21
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Selected Financial Data
Year Ended December 31
(dollars in thousands, except per share data) 1998
Interest income
Loans including fees.......................... $ 23,466
Deposits with banks........................... 12
Federal funds sold............................ 262
Investment securities:
U.S. treasury securities.................. 755
Securities of U.S. government agencies and corporations 2,502
Obligations of states and political subdivisions 1,410
Other securities.......................... 693
--------
Total interest income......................... 29,100
Interest expense
Deposits...................................... 12,562
Other borrowings.............................. 934
--------
Total interest expense........................ 13,496
Net interest income.............................. 15,604
Provision for loan losses........................ 675
--------
Net interest income after provision
for loan losses............................... 14,929
Other income..................................... 3,027
Other expenses................................... 11,527
--------
Income before taxes and cumulative effect adjustment 6,429
Applicable income taxes.......................... 1,682
--------
Income before cumulative effect adjustment....... 4,747
Cumulative effect adjustment..................... --
--------
Net income.................................... $ 4,747
========
Per share data
Income before cumulative effect adjustment.... $ 1.38
Cumulative effect adjustment.................. $ --
Net income.................................... $ 1.38
Dividends declared............................ $ 0.72
Book value per share at year end.............. $ 13.00
At end of period
Total assets.................................. $436,852
Investment securities......................... 107,803
Loans, net of unearned discount............... 288,389
Allowance for loan losses..................... 3,100
Deposits...................................... 370,814
Shareholders' equity.......................... 44,781
Key ratios
Return on average assets...................... 1.20%
Return on average equity...................... 10.87%
Loan to deposit ratio......................... 77.77%
Dividend payout ratio......................... 52.26%
Average equity to average assets ratio........ 11.08%
22
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Five Year Comparison
1997 1996 1995 1994
$ 21,512 $ 18,231 $ 16,849 $ 14,813
1 -- 1 91
209 87 81 43
886 854 747 729
1,662 1,755 1,480 1,060
1,302 1,294 1,222 1,238
633 837 1,038 1,194
---------- -------- -------- --------
26,205 23,058 21,418 19,168
11,392 9,421 8,946 6,986
430 376 277 239
---------- -------- -------- --------
11,822 9,797 9,223 7,225
14,383 13,261 12,195 11,943
900 600 380 525
---------- -------- -------- --------
13,483 12,661 11,815 11,418
2,686 1,875 1,943 1,510
10,422 8,960 8,768 8,082
---------- -------- -------- --------
5,747 5,576 4,990 4,846
1,445 1,450 1,173 1,137
---------- -------- -------- --------
4,302 4,126 3,817 3,709
-- 156 -- --
---------- -------- -------- --------
$ 4,302 $ 4,282 $ 3,817 $ 3,709
========== ======== ======== ========
$ 1.25 $ 1.20 $ 1.11 $ 1.08
$ -- $ 0.05 $ -- $ --
$ 1.25 $ 1.25 $ 1.11 $ 1.08
$ 0.68 $ 0.62 $ 0.58 $ 0.54
$ 12.25 $ 11.53 $ 10.90 $ 10.02
$ 372,867 $327,008 $297,523 $269,698
77,032 78,696 75,928 71,314
263,902 223,103 200,038 181,789
2,849 2,473 2,145 2,033
319,473 270,056 255,787 230,641
42,208 39,716 37,543 34,515
1.23% 1.40% 1.36% 1.39%
10.57% 11.73% 10.58% 11.07%
82.02% 81.70% 77.36% 77.94%
54.46% 49.88% 52.36% 50.18%
11.64% 12.59% 12.86% 12.43%
23
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Management's Discussion and Analysis
of Financial Condition and
Results of Operations
GENERAL
The following discussion and analysis of the consolidated financial statements
of CNB Financial Corporation (the "Corporation") is presented to provide insight
into management's assessment of financial results. The corporation's subsidiary
County National Bank (the "Bank") provides financial services to individuals and
businesses within the Bank's market area made up of the west central
Pennsylvania counties of 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. the Corporation's subsidiary CNB
Investment Corporation is headquartered in Wilmington, DE. CNB Investment
Corporation maintains investments in debt securities and other prudent
investment vehicles. Management's discussion and analysis should be read in
conjunction with the audited consolidated financial statements and related
notes.
Risk identification and management are essential elements for the successful
management of the Corporation. In the normal course of business, the Corporation
is subject to various types of risk, including interest rate, credit, and
liquidity risk. These risks are controlled through policies and procedures
established throughout the Corporation.
Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the direction and frequency of changes in
interest rates. Interest rate risk results from various repricing frequencies
and the maturity structure of the financial instruments owned by the
Corporation. The Corporation uses its asset/liability management policy to
control and manage interest rate risk.
Credit risk represents the possibility that a customer may not perform in
accordance to contractual terms. Credit risk results from loans to customers and
purchasing of securities. The Corporation's primary credit risk is in the loan
portfolio. The Corporation manages credit risk by following an established
credit policy and through a disciplined evaluation of the adequacy of the
allowance for loan losses. Also, the investment policy limits the amount of
credit risk that may be taken in the investment portfolio.
Liquidity risk represents the inability to generate or otherwise obtain funds
at reasonable rates to satisfy commitments to borrowers and obligations to
depositors. The Corporation has established guidelines within its asset
liability management policy to manage liquidity risk. These guidelines include
contingent funding alternatives.
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
The following table presents ending balances ($'s in millions), growth and the
percentage change during the past two years:
1998 Increase % 1997 Increase % 1996
Balance (Decrease) Change Balance (Decrease) Change Balance
Total assets $436.9 $64.0 17.2 $372.9 $45.9 14.0 $327.0
Total loans, net 285.3 24.2 9.3 261.1 40.5 18.4 220.6
Total investments 107.8 30.8 40.0 77.0 (3.0) (3.8) 80.0
Total deposits 370.8 51.3 16.1 319.5 49.4 18.3 270.1
Total shareholders' equity 44.8 2.6 6.1 42.2 2.5 6.3 39.7
The above table is referenced for the discussion in this section of the
report.
OVERVIEW OF BALANCE SHEET
The increase in assets during 1998 can be attributed to the generation of
$51,341,000 in new deposits and an increase in Federal Home Loan Bank borrowings
of $10 million. These new deposits were invested primarily in loans, up
$24,236,000 (or 9.3%), and investments in the amount of $30,771,000. The 17.2%
increase in assets shows the Corporation had a very successful year of growth
when compared to 14.0%, 9.9%, and 10.3% in 1997, 1996 and 1995 respectively.
24
CNB Financial Corporation and Subsidiaries
1998 Annual Report
The Corporation received a large deposit at year end that is expected to be
temporary in nature. Without the effects of this deposit, the asset growth rate
was 11.5%.
CASH AND CASH EQUIVALENTS
Cash and Cash equivalents totaled $23,101,000 at December 31, 1998 compared to
$18,436,000 on December 31, 1997. The increase was the result of continued
strong deposit growth in the fourth quarter of 1998 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, Federal Home Loan Bank financing, and the portion of the
investment and loan portfolios that matures within one year. These sources of
funds will enable the Corporation to meet cash obligations and off-balance sheet
commitments as they come due.
INVESTMENT SECURITIES
Investment securities increased 40% since December 31, 1997. The increase was
created by another good year of growth in deposits. Also, the Corporation
participated in Federal Home Loan Bank (FHLB) financing to purchase certain
investments that were favorable in the market as compared to the funding rates
provided by FHLB. Of the Corporation's total investment portfolio of
$107,803,000 as of December 31, 1998, $100,121,000 (or 92.9%) is classified as
available for sale with the balance of $7,682,000 classified as held to
maturity.
The Corporation experienced significant growth in collateralized mortgage
obligations (CMO's), $35,430,000, and state and political subdivision bonds,
$12,603,000 during 1998 compared to 1997. The shift to higher tax-exempt bonds
is a strategy to more fully recognize the savings from tax-free interest income
which reduces the Corporation's overall effective tax rate. See page 15 of the
annual report for more information. The investment into CMO's resulted from an
overall analysis of the Corporation's balance sheet. This sector of the
portfolio was created as a result of the interest rate risk strategy and to
create current liquidity from principal paydowns in order to fund loan growth.
We monitor the earnings performance and the effectiveness of the liquidity of
the investment portfolio on a regular basis through Asset/Liability Committee
("ALCO") meetings. The ALCO also reviews and manages interest rate risk for the
Corporation. Through active balance sheet management and analysis of the
investment securities portfolio, we maintain a sufficient level of liquidity to
satisfy depositor requirements and various credit needs of our customers.
LOANS
The Corporation's loan volume continues to grow and reflects the additional
credit opportunities in the markets served. Our lending is focused in the west
central Pennsylvania market and consists principally of retail lending, which
includes single family residential mortgages and other consumer lending, and
also commercial lending primarily to locally owned small businesses. The
lending market has grown as a result of the Acquisition which included DuBois as
a new market area. We expect moderate loan growth over the next several
quarters in this and other market areas of the Bank as customers seek
alternatives to competing and consolidating superregional banks.
Commercial mortgage activity has increased by $9 million or 23.9% in 1998 and
$6 million or 19.9% in 1997. This growth has been spurred by a positive economic
outlook within our current markets and an expanded market area as previously
mentioned. The auto leasing portfolio continues to increase since the inception
in 1996. Net lease receivables have increased $9.6 million and $10.3 million in
1998 and 1997. The Corporation had experienced a decline in consumer lending in
1997 and early 1998. During 1998, the home equity products within the Bank were
targeted for growth and expanded $8.1 million or 63.6%, thus providing positive
effects to the consumer loan portfolio.
LOAN CONCENTRATION
The Corporation monitors loan concentrations by individual industries in order
to track potential risk exposures resulting from industry related downturns. At
December 31, 1998, no concentration exists within our commercial or real estate
loan portfolio as related to concentration of 10% of the total loans.
Residential real estate lending along with automobile financing continue to be
the largest component of the loan portfolio.
LOAN QUALITY
The Corporation has established written lending policies and procedures that
require underwriting standards, loan documentation, and credit analysis
standards to be met prior to funding a loan. Subsequent to the funding of a
loan, ongoing review of credits is required. Credit reviews are performed
annually on a minimum of 60% of the commercial loan portfolio by the loan review
staff. See "Allowance for Loan and Lease Losses" for further discussion of
credit review procedures.
25
CNB Financial Corporation and Subsidiaries
1998 Annual Report
The following table sets forth information concerning loan delinquency and
other non-performing assets ($ in thousands):
At December 31, 1998 1997 1996
Nonperforming assets:
Non-accrual loans $ 120 $ 305 $ 230
Accrual loans greater than
89 days past due 1,408 600 1,001
Foreclosed assets held for sale 342 153 33
-------- -------- --------
Total nonperforming assets $ 1,870 $ 1,058 $ 1,264
Total loans, net of unearned
income $288,389 $263,902 $223,103
Nonperforming loans as a
percent of loans, net 0.53% 0.34% 0.55%
Nonperforming assets as a
percent of loans, net 0.65% 0.40% 0.57%
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established by provisions for
possible losses in the loan and lease portfolio. These provisions are charged
against current income. Loans deemed not collectible are charged-off against
the allowance while any subsequent collections are recorded as recoveries and
increase the allowance.
The table below shows activity within the allowance account over the past
three years:
Allowance for Loan and Lease Losses
($'s in thousands)
Years Ended December 31,
1998 1997 1996
Balance at beginning of Period $ 2,849 $ 2,473 $ 2,145
-------- -------- --------
Charge-offs:
Commercial and financial 47 88 5
Commercial mortgages -- -- --
Residential mortgages 16 14 --
Installment 454 513 355
Lease receivables 42 25 --
-------- -------- --------
559 640 360
Recoveries:
Commercial and financial 21 2 5
Commercial mortgages -- -- 1
Residential mortgages 2 -- --
Installment 111 114 82
Lease receivables 1 -- --
-------- -------- --------
135 116 88
Net charge-offs: (424) (524) (272)
Provision for possible
loan losses 675 900 600
======== ======== ========
Balance at end-of-period $ 3,100 $ 2,849 $ 2,473
======== ======== ========
Loans, net of unearned $288,389 $263,902 $223,103
Allowance to net loans 1.07% 1.08% 1.07%
Specific allocation 0.53% 0.51% 0.43%
Unallocated 0.54% 0.57% 0.64%
The adequacy of the allowance for loan and lease losses is subject to a formal
analysis by the loan review staff of the Bank. As part of the formal analysis,
delinquencies and losses are monitored monthly. The loan portfolio is divided
into several categories in order to better analyze the entire pool. First is a
selection of "watch" loans that is given a specific reserve. The remaining
loans will be pooled, by category, into these segments:
Reviewed
. Commercial and financial
. Commercial Mortgages
Homogeneous
. Residential real estate
. Installment
. Lease receivables
The reviewed loan pools are further segregated into three categories:
substandard, doubtful, and unclassified. Historical loss factors are calculated
for each pool based on the previous eight quarters of experience. The
homogeneous pools are evaluated by analyzing the historical loss factors from
the most previous quarter end and the two most recent year ends. The historical
loss factors for both the reviewed and homogeneous pools are adjusted based on
these six qualitative factors:
. Levels of and trends in delinquencies and non-accruals
. Trends in volume and terms of loans
. Effects of any changes in lending policies and procedures
. Experience, ability and depth of management
. National and local economic trends and conditions
. Concentrations of credit
The methodology described above was created using the experience of our loan
review personnel, guidance from the regulatory agencies, and discussions with
our peers. The resulting factors are applied to the pool balances in order to
estimate the inherent risk of loss within each pool. The results of these
procedures are listed in the following chart:
Allocation of the Allowance for Loan and Lease Losses
Balance at end of period 1998 1997
Commercial and financial $ 435 $ 361
Commercial mortgages 179 185
Residential mortgages 342 308
Installment 453 401
Lease receivables 140 80
Unallocated 1,551 1,514
------ ------
Total $3,100 $2,849
====== ======
The results for the previous two years indicate higher allocations required
for specific pools. This result is based on two main factors. First, the growth
of our portfolio requires larger dollars to cover similar credit risks.
Secondly, economic factors both in our market area and nationwide have lead to
trends of increased charge-offs in recent years. The Bank did experience a
slight decrease in charge-offs for 1998 when compared to 1997 but a 56% increase
for 1998
26
CNB Financial Corporation and Subsidiaries
1998 Annual Report
compared to 1996. The unallocated allowance is determined based on management's
knowledge of the portfolio, recent trends within the industry, historical trends
reviewed monthly, and the local economy. Also, management utilizes peer group
data surveying a group of similarly sized organizations which develop current
information for comparative purposes.
Most significantly consumer charge-offs remain high as the national trend is
towards higher delinquencies and more personal bankruptcies. Also, the leasing
portfolio is maturing after 2.5 years in the business. As a result, we are
experiencing an increase in charge-offs in the lease area. The allowance for
loan and lease losses is deemed to be adequate to absorb inherent losses in the
portfolio at December 31, 1998.
FUNDING SOURCES
The Corporation considers deposits, short-term borrowings, and term debt when
evaluating funding sources. Traditional deposits continue to be the most
significant source of funds. In addition, term borrowings from FHLB are used to
meet funding needs not met by deposit growth. During 1998, the Corporation
borrowed $10 million from FHLB. Management plans to maintain access to short-
term and long-term FHLB borrowings as an additional funding source.
The Corporation continued to experience a change in the mix of its deposit
base throughout much of the first three quarters of 1998 at which time the mix
stabilized. The time deposit category has increased by $5,234,000. This results
in time deposits representing 47.7% of total deposits compared to 53.7% as of
year-end 1997. In the last week of December, the Corporation received temporary
deposits that are not expected to be here for the long-term. Excluding these
deposits, time deposits are 52.0% of total deposits. We expect this current
deposit mix to stabilize. The following table reflects the Corporation's deposit
mix by category (in thousands):
1998 1997 1996
Checking, Non-Interest Bearing $ 36,612 $ 32,893 $ 30,812
Checking, Interest Bearing 125,822 82,339 82,184
Savings Accounts 31,581 32,676 36,183
Certificates of Deposit 176,799 171,565 120,877
-------- -------- --------
$370,814 $319,473 $270,056
SHAREHOLDERS' EQUITY
The Corporation's capital continues to provide a strong base for profitable
growth. Total shareholders' equity increased 6.2% in 1998. Growth was the
result of an increase in retained earnings of $2,266,000 and an increase of
$319,000 in accumulated other comprehensive income which represents an increase
in unrealized gains in available-for-sale securities, net of taxes.
With 92.9% of the investment securities classified as available-for-sale, this
portion of the balance sheet is more sensitive to the change in market value of
investments. In 1998, 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 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 15.03% as of December 31, 1998 is well above the minimum
standard of 8%. The Tier 1 capital ratio of 13.97% also is above the regulatory
minimum of 4%. The leverage ratio, 10.37%, 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 and the sources and uses of liquidity. Additionally, the
portion of the loan portfolio that matures within one year and maturities within
one year in the investment portfolio are considered part of the liquid assets.
Liquidity is monitored by the ALCO which establishes and monitors ranges of
acceptable liquidity. Also, the Bank is a member of FHLB. This relationship
provides the Bank with a borrowing line of $115 million with only $16 million
outstanding at year end 1998. Management feels the Corporation's current
liquidity position is acceptable.
YEAR ENDED DECEMBER 31, 1998
OVERVIEW OF THE INCOME STATEMENT
In 1998, net income was $4,747,000, an increase of 10.3% over 1997 net income
of $4,302,000. Overall net income for 1998 benefitted by a larger base of
earning assets over 1997. The increase in earning assets was $63,942,000, or
18.4%, over 1997 to $410,908,000. Details of this growth have been previously
discussed in the prior sections. Decreases in the net interest margin have
somewhat mitigated the benefit gained by the growth in earning assets. The
decrease in
27
CNB Financial Corporation and Subsidiaries
1998 Annual Report
taxable equivalent net interest margin was 17 basis points or a 3.7% decline
overall. Each basis point meant approximately $41,000 dollars to the
Corporation for 1998. Also, the overall level of non-interest expenses
increased during 1998.
INTEREST INCOME AND EXPENSE
Net interest income totaled $15,604,000 for 1998, an increase of 8.5% over
1997. Continued growth in loans has been the primary factor in this increase
which has been mitigated somewhat by higher interest costs. This was also aided
by the large growth of investments during 1998. A $10 million block of
investments was purchased with funds acquired from FHLB. This transaction had
the effect of increasing both interest income and expense with the end result
being an overall increase in net interest income. Total interest income for 1998
increased by $2,895,000 or 11.0% while interest expense increased by $1,674,000
or 14.2% when compared to 1997. The Corporation has placed an emphasis on the
sale of lower cost transactional deposit accounts. This has kept the margin from
experiencing a larger decline. The success of the sales effort is discussed
within the "Funding Sources" section.
The Corporation recorded a provision for loan and lease losses of $675,000 for
1998 compared to $900,000 for 1997. The decrease in provision is a result of a
better experience level of net charge-offs during 1998 coupled with the other
factors discussed previously in the loan section of this discussion. Also, the
Bank implemented increased loan collection activities which have created more
timely procedures with delinquent loans.
NON-INTEREST INCOME
Non-interest income increased $341,000 or 12.7% in 1998 compared to 1997. Two
major areas contributed to this increase. First, the Trust & Asset Management
division of the Bank had fee increases of $146,000 or 23.9% over 1997. This
results from very good growth within the Trust area. Assets under management
increased from $154,834,000 in 1997 to $188,534,000 in 1998 for a 21.8% increase
in the market value of assets.
Second, the service charges on deposit accounts continues to increase. The
change for 1998 was an increase of $230,000 or 24.4% which is comparable with
the $243,000 increase that occurred during 1997. The overall growth in deposit
customers accounts for the majority of the growth in this area.
The Corporation owns equity securities of various entities that are carried at
their current fair market value. During 1998, the gains realized from these
securities totalled $349,000 compared to $539,000 in 1997. It is intended that
sales will be realized on this portfolio from time to time during the year as
each investment and the Corporation's liquidity position is analyzed.
NON-INTEREST EXPENSE
The costs associated with operating the Corporation rose by 10.6% to
$11,527,000 during 1998 compared to 1997. These costs include but are not
limited to salaries, supplies, data processing expenses, insurance, occupancy,
and amortization expenses. The primary factors in this increase are salaries up
$359,000 or 7.8% over 1997 and employee benefits up $643,000 or 73.9%. Salaries
increased during 1998 based on annual cost of living adjustments for all
personnel as well as some key hirings in order to handle our significant
expansion especially in the commercial arena. Employee benefits have risen
dramatically over 1997 generally due to unfavorable occurrences in our
healthcare plan under our self-funded arrangement. During 1997, we had a
favorable experience as costs declined 10.5% compared to 1996. Due to the nature
of this plan, fluctuations can occur as the Corporation pays on an experience
basis with a stop loss coverage in place to minimize overall exposure. Occupancy
costs, data processing, and other expenses were controlled favorably by the
Corporation with a combined increase of only $103,000 or 2.1%.
The Corporation signed a purchase and assumption agreement on October 13, 1998
to assume the liabilities and purchase certain assets of the Punxsutawney, PA
office of First Western Bank, N.A. The branch size is approximately $36 million
in total deposits with approximately $11 million in consumer and small business
loans. This purchase will create an intangible asset that will be amortized
over its useful life. The amortization will significantly increase non-interest
costs in future periods when compared with 1998. The amortization of the
premium will begin in February 1999 upon consummation of the transaction. The
costs will be offset by increased service charges as well as net interest
income.
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
28
CNB Financial Corporation and Subsidiaries
1998 Annual Report
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 an
increased level of charge-offs, coupled with the other factors discussed
previously in the loan section of this discussion.
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.
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 our costs.
RETURN ON EQUITY
The return on average shareholder's equity ("ROE") for 1998 was 10.87%
compared to 10.57% and 11.73% for 1997 and 1996 respectively. The increase
compared to 1997 can be attributed primarily to the Corporation's efforts to
utilize its excess capital position. During 1998, the Corporation began the
planning process for its capital management plan which will be formalized in
1999. The first step in the process was to purchase debt securities utilizing
funding obtained from FHLB as previously discussed. Further capital utilization
is expected during 1999. Management recognized continued improvement in ROE
during 1998 and anticipates further increases as earnings are expected to
continue growing.
RETURN ON ASSETS
The Corporation's return on average assets ("ROA") was 1.20% in 1998 down from
1.23% and 1.40% recorded in 1997 and 1996, respectively.
Decreased ROA can be attributed to a narrowing net interest margin and
increased operating costs as discussed in 1998 non-interest expense section. The
decrease in ROA was minor (2.4%) considering the overall 17 basis point decline
in the net interest margin. This factor is well documented by the Corporation
and is a constant concern of management. Every attempt is being made to minimize
the decline in the net interest margin in the future. This, however, is a
concern to the Banking industry as a whole due in large part to competitive
pressures with both banks and non-banks. The Corporation had expected the ROA to
decline during 1998 when compared to 1997 for this very reason.
FEDERAL INCOME TAX EXPENSE
Federal income taxes increased to $1,682,000 in 1998 compared to $1,445,000 in
1997. This increase year to date can be attributed to the Corporation's higher
taxable income during the period. The effective tax rate was 26.2%, 25.1% and
26.3% for 1998, 1997 and 1996, respectively. We anticipate the effective tax
rate to maintain these levels as our tax exempt income remains stable.
29
CNB Financial Corporation and Subsidiaries
1998 Annual Report
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates, and
equity prices. As a financial institution, the Corporation is primarily
sensitive to the interest rate risk component. Changes in interest rates will
affect the levels of income and expense recorded on a large portion of the
Bank's assets and liabilities. Additionally, such fluctuations in interest
rates will impact the market value of all interest sensitive assets. The
Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate
sensitivity position and establishing policies to control exposure to interest
rate fluctuations. The primary goal established by this policy is to increase
total income within acceptable risk limits.
The Corporation monitors interest rate risk through the use of two models:
earnings simulation and static gap. Each model standing alone has limitations,
however taken together they represent a reasonable view of the Corporation's
interest rate risk position.
STATIC GAP: Gap analysis is intended to provide an approximation of projected
repricing of assets and liabilities at a point in time on the basis of stated
maturities, prepayments, and scheduled interest rate adjustments within selected
time intervals. A gap is defined as the difference between the principal amount
of assets and liabilities which reprice within those time intervals. The
cumulative one year gap at December 31, 1998 was -6.25% of total earning assets
compared to policy guidelines of plus or minus 10.0%. The ratio improved
slightly from -7.4% at December 31, 1997.
Fixed rate securities, loans and CDs are included in the gap repricing based
on time remaining until maturity. Mortgage prepayments are included in the time
frame in which they are expected to be received using a prepayment factor of 100
PSA. Non maturity deposits are assigned time frames using a decay factor
determined by historical analysis within the Corporation.
Certain shortcomings are inherent in the method of analysis presented in
Static Gap. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may not react correspondingly
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate with changes in market interest rates,
while interest rates on other types of assets may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features, like annual and lifetime rate caps, which restrict changes in interest
rates both on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate from those assumed in the table. Finally, the ability of
certain borrowers to make scheduled payments on their adjustable-rate loans may
decrease in the event of an interest rate increase.
EARNINGS SIMULATION: This model forecasts the projected change in net income
resulting from an increase or decrease in the level of interest rates. The
model assumes a one time shock of plus or minus 200 basis points or 2%. The
earnings simulation model at December 31, 1998 projects an increase of 14.62% of
stable net income if rates decline 200 basis points and a decrease of 14.29% 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 information from the interest rate
risk measures at December 31, 1998 and 1997:
1998 1997
Static 1-Yr. Cumulative Gap (6.25%) (7.40%)
Earnings Simulation
-200 bps vs. Stable Rate 14.62% 9.70%
+200 bps vs. Stable Rate (14.29%) (12.00%)
The interest rate sensitivity position at December 31, 1998, 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 the data to make strategic
decisions.
30
CNB Financial Corporation and Subsidiaries
1998 Annual Report
YEAR 2000
Management is aware of the possibility of exposure by banks to a computer
problem known as the "Year 2000 Issue" or the "Millennium Bug" (the inability of
some computer programs to distinguish between the year 1900 and the year 2000).
Potential impacts to the Corporation may arise from software, computer hardware,
and other equipment both within the Corporation's direct control and outside of
the Corporation's ownership, which the Corporation electronically interfaces
with.
The Corporation has developed and implemented a plan for this issue with the
following major components: Assessment; Remediation; Testing; and
Implementation. The Corporation uses third party vendors for its core
processing, item processing and trust processing needs. The following table
depicts the status for the Corporation during each phase and for its various
exposure types:
Resolution
Phases Assessment Remediation Testing Implementation
- ----------------------------------------------------------------------------------------------------
Information 100% Complete 95% Complete 90% Complete 60% Complete
Technology Expected Expected Expected
(PC's, Servers, Completion by Completion by Completion by
etc.) May 1, 1999 June 1, 1999 June 1, 1999
- ----------------------------------------------------------------------------------------------------
Operating 100% Complete 100% Complete 90% Complete 90% Complete
Equipment with Expected Expected
Embedded chips Completion by Completion by
or software June 1, 1999 June 1, 1999
- ----------------------------------------------------------------------------------------------------
Products The Corporation does not sell or deliver software or hardware items to its customers.
- ----------------------------------------------------------------------------------------------------
Third Party
Vendors:
Core Processing 100% Complete 100% Complete 75% Complete 100% Complete
Expected
Completion by
April 1, 1999
Item Processing 100% Complete 100% Complete 90% Complete 90% Complete
Expected Expected
Completion by Completion by
April 1, 1999 April 1, 1999
Trust Processing 100% Complete 100% Complete 80% Complete 100% Complete
Expected
Completion by
April 1, 1999
Other important segments of the Plan for Year 2000 are to identify customers
whose possible lack of Year 2000 preparedness might expose the Corporation to
financial loss. Our major customers have been reviewed through discussions and
questionnaires for their Year 2000 preparedness. This has become a factor in
the risk weighting characteristics of our loan portfolio. The Corporation has
been in the process of educating and evaluating all customers on the Year 2000
and their own readiness. During this process, a public relations/education plan
has been developed for 1999 to inform customers and the general public about the
Year 2000 and the Corporation's ability to handle the issue.
The Corporation has budgeted total Year 2000 costs not to exceed $100,000.
This estimated cost is based upon currently available information and includes
expenses for the review and testing by third parties, including government
entities. Of the estimated costs of $100,000, $14,000 of capitalized costs and
approximately $20,000 expensed costs have been spent to date. The remaining
$66,000 is expected to be approximately $54,000 of capital costs and $12,000 of
expenses. There can be no guarantee, however, that hardware, software, and
systems created by third parties will be free of unfavorable Year 2000 issues
and therefor not present a material impact upon the Corporation. The cost
estimate may change as the Corporation progresses in its Year 2000 plan and
further information associated with and concerning third parties is obtained. At
this time, no significant projects have been delayed as a result of the
Corporation's Year 2000 effort.
31
CNB Financial Corporation and Subsidiaries
1998 Annual Report
As a precautionary measure, the Corporation has developed a Year 2000
contingency plan. This plan was created to provide for operating procedures in
the event that a failure would occur even after the above five phases were
performed positively. This document while currently complete will be
continually updated as 1999 progresses and more information is provided by third
parties as well as through in house testing.
The federal banking agencies have been conducting Year 2000 compliance
examinations for several months. The failure to implement an adequate Year 2000
program can be identified as an unsafe and unsound banking practice. The
Corporation and the Bank are subject to supervision by the Office of the
Comptroller of the Currency (OCC). Failure to adequately prepare for Year 2000
issues could negatively impact the Corporation's banking operations, including
the imposition of restrictions upon its operations by the OCC.
Despite the Corporation's activities as detailed above, pertaining to the Year
2000, there can be no assurance that partial or total systems interruptions or
the costs necessary to update hardware and software would not have a material
adverse effect upon the Corporation's business, financial condition, results of
operations, and business prospects. Forward looking statements about the Year
2000 should be read in conjunction with the Corporation's disclosures under the
heading: "Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995.
FUTURE OUTLOOK
Management continues to focus on asset growth resulting from ongoing
generation of new deposits from general growth via increased market share.
Management continues to be encouraged by the growth in the Bradford and St.
Marys markets served by the Bank. Activity in the community of Philipsburg has
also proved promising. In 1999, renovations will be done at one facility to
improve customer service and traffic flow. Also, we are excited about the
addition of the Punxsutawney Office to our branch network. With the addition of
these customers and this market area, CNB Financial Corporation will continue to
enhance the services and accessibility for all of our customers. This
acquisition provides us a catalyst for growth in 1999. In addition to deposits,
the traditional funding source for the Corporation, we will continue to manage
potential earning enhancement opportunities using other borrowings with the
Federal Home Loan Bank of Pittsburgh. There are certain interest rate
environments that allow for pricing opportunities from such borrowings. These
opportunities will be evaluated and used when possible to increase earnings
throughout 1999.
Loan growth continued to be strong exceeding management's expectations for
1998. While loan demand is good, competitive pressure from other financing
sources has not resulted in increased loan yields. Management believes that the
rate of loan growth will be moderate in 1999. Management expects the loan to
deposit ratio to remain relatively stable throughout 1999.
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, 1998,
the efficiency ratio was 60.5% compared to 58.7% for 1997 and 56.7% for 1996.
The efficiency ratio was negatively impacted by increased non-interest expense
resulting from higher levels of salaries and benefits. The efficiency ratio
remained fairly stable throughout the final two quarters of 1998. Management is
placing emphasis on this area during 1999 with a goal of improved efficiency to
approach prior levels.
The interest rate environment will continue to play an important role in the
future earnings of the Corporation. The net interest margin has been declining
as higher cost deposits continue to be obtained. However, overall net interest
income continues to increase due to growth in interest earning assets.
Management expects the net interest margin to stabilize in 1999.
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 1999.
"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.
32
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Board of Directors
CNB Financial Corporation
William R. Owens
Chairman of the Board
Retired, Formerly Vice President, Secretary and Treasurer, CNB Financial
Corporation and President & Chief Executive Officer, County National Bank
Robert E. Brown
Vice President, E. M. Brown, Inc. (Coal Producer)
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
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
James B. Ryan
Vice President of Sales & Marketing, Windfall Products, Inc.
(Manufacturer)
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
L. E. Soult,Jr.
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
James B. Ryan
Vice President of Sales & Marketing, Windfall Products, Inc.
(Manufacturer)
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
L. E. Soult, Jr.
W. K. Ulerich
33
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Officers
Corporate and Bank Executive 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
Trust & Asset Management Services
Donald E. Shawley
Senior Vice President & Senior Trust Officer
Calvin R. Thomas, Jr.
Assistant Vice President, Trust Officer
Lisa A. Fredette
Trust Officer
Eunice M. Peters
Assistant Trust Officer
34
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Officers
Lending Operations
Robin L. Hay
Vice President, Community Banking
Richard L. Sloppy
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
Christopher L. Stott
Assistant Vice President, Mortgage Lending
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
Lending Officer, Community Banking, Clearfield
Denise J. Greene
Lending Officer, Community Banking, Clearfield
Jo Potter
Lending Officer, Community Banking, Philipsburg
Ruth Anne Ryan
Lending Officer, Dealer Center
Christopher N. Norris
Collection Officer
Branch Division
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
Keith M. Folmar
Community Office Manager, Lending Officer, Plaza Office, Philipsburg
Kathy J. McKinney
Community Office Manager, Houtzdale Office
Gregory R. Williams
Community Office Manager, Industrial Park Road Office, Clearfield
Gregory J. Urbassik
Community Office Manager, DuBois Mall Office, DuBois
Vickie L. Pingie
Community Office Manager, Bradford Office, Bradford
Administrative Services
Brenda L. Terry
Auditor
Donna J. Collins
Compliance Officer
Edward H. Proud
Assistant Vice President, Electronic Technology
Dennis J. Sloppy
Assistant Cashier, Electronic Technology
Rachel E. Larson
Assistant Vice President, Accounting Operations
C. Glenn Myers
Controller & Assistant Financial Officer
Mary Ann Conaway
Vice President, Human Resources
Helen G. Kolar
Vice President, Marketing & Sales
35
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Business and Personal Financial Services
Consumer Services
Within our market region, County National Bank markets a broad range of
checking, savings, investment and lending products and services tailored to
customers. In addition to those services, it also provides many innovative
services, making the Bank the premier financial provider in its market area by
delivering more value to customers. Some of these services are: Maximum Value
Plan Checking, Rainbow Account Checking, E-Z Access Certificates of Deposit,
Prime Money Fund, Automobile Leasing, First Time Home Buyer Program, and Longer
Term Mortgage Program.
Our consumer services are supported through 16 branch offices in five
counties in North Central Pennsylvania. The Bank also serves consumers by
offering extended customer service alternatives such as its Customer Service
Center; ServiceCall, a 24-hour automated account information system; BillPayer,
an automated bill payment system; CNB CheckCard; Check Imaging; and automated
teller machines.
Business Services
County National Bank markets basic banking products and services that meet
the needs of our business customers. These include Business Checking; Credit
Cards; Merchant Services; Savings; Investment; Cash Management Services;
Automated Clearing House Originations (ACH) & EFT Transactions; Business
Manager, Accounts Receivable Financing; Cash Concentration Accounts through ACH;
Payroll Direct Deposit; Customized Statement Cycles; and lending.
Trust & Asset Management Services
County National Bank's Trust & Asset Management has more than $188 million
assets under management. We offer integrated private banking, trust, investment
and wealth management services to customers and their families. Our services
include Investment Management; Custody Accounts; Corporate Money Management
Services; Land Management; Employee Benefit Administrative & Investment
Services; 401(k) Administration; and Self-Directed IRAs.
How to Reach Us......
Customer Service Center, 1-800-492-3221
ServiceCall, 1-888-641-6554
Home Page, http://www.bankcnb.com
E-mail Address, cnbfin@penn.com
36
CNB Financial Corporation and Subsidiaries
1998 Annual Report
Shareholder Information
Annual Meeting
The Annual Meeting of the Shareholders of CNB Financial Corporation will be
held Tuesday, April 20, 1999 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 21.
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
F.J. Morrissey & Co.
1700 Market Street, Suite 1420
Philadelphia, PA 19103
(800) 842-8928
Parker Hunter, Inc.
484 Jeffers Street
P.O. Box 1105
DuBois, PA 15801
(800) 238-0067
Ryan, Beck & Co.
3 Parkway
Philadelphia, PA 19102
(800) 223-8969
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, Punxsutawney,
St. Marys, and Bradford. 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 FDIC]