-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cnp5CfFUQYkCkoYR3RJpBOeblNo1SP2/cnV2d7GP3c2tafrfzvP6xKlz8V7fhggG 4wMXLoVk3DmzvyFfkyyXzA== 0000950132-99-000326.txt : 19990402 0000950132-99-000326.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950132-99-000326 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNB FINANCIAL CORP/PA CENTRAL INDEX KEY: 0000736772 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 251450605 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13396 FILM NUMBER: 99582575 BUSINESS ADDRESS: STREET 1: 1 SOUTH SECOND STREET STREET 2: P.O. BOX 42 CITY: CLEARFIELD STATE: PA ZIP: 16830 BUSINESS PHONE: 8147659621 MAIL ADDRESS: STREET 1: 1 SOUTH SECOND STREET STREET 2: P.O. BOX 42 CITY: CLEARFIELD STATE: PA ZIP: 16830 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 10 - K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File Number 0-13396 CNB FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 25-1450605 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) County National Bank Market and Second Streets P.O. Box 42 Clearfield, Pennsylvania 16830 (Address of principal executive offices) Registrant's telephone number, including area code, (814) 765-9621 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $1.00 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_________ ---------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 10, 1999. Common Stock, $1.00 Par Value - $121,597,937 The number of shares outstanding of the issuer's common stock as of March 10, 1999: Common Stock, $1.00 Par Value - 3,425,294 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Shareholders' Report for the year ended December 31, 1998 are incorporated by reference into Part I and Part II pursuant to Section 13 of the Act. Portions of the proxy statement for the annual shareholders' meeting on April 20, 1999 are incorporated by reference into Part II and Part III. The incorporation by reference herein of portions of the proxy statement shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of regulation S-K. Exhibit index is located on sequentially numbered page 15. INDEX PART I. ITEM 1. BUSINESS...................................................... 3 ITEM 2. PROPERTIES.................................................... 11 ITEM 3. LEGAL PROCEEDINGS............................................. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 11 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................... 12 ITEM 6. SELECTED FINANCIAL DATA....................................... 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 12 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 12 ITEM 11. EXECUTIVE COMPENSATION........................................ 12 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................ 13 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 13 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....................................... 13 SIGNATURES.................................................... 14
2 PART I. ITEM 1. BUSINESS CNB FINANCIAL CORPORATION CNB Financial Corporation (The Corporation) is a Bank Holding Company registered under the Bank Holding Company Act of 1956, as amended. It was incorporated under the laws of the Commonwealth of Pennsylvania in 1983 for the purpose of engaging in the business of a Bank Holding Company. On April 26, 1984, the Corporation acquired all of the outstanding capital stock of County National Bank (the Bank), a national banking chartered institution. The Corporation is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System. In general, The Corporation is limited to owning or controlling banks and engaging in such other activity as the Federal Reserve Board may determine to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Corporation is currently engaged in one nonbanking activity through its wholly owned subsidiary CNB Investment Corporation. CNB Investment Corporation was formed in November 1998 to hold and manage investments that were previously owned by County National Bank and to provide the Corporation with additional latitude to purchase other investments. The Corporation does not currently engage in any operating business activities, other than the ownership and management of County National Bank and CNB Investment Corporation. COUNTY NATIONAL BANK The Bank is a nationally chartered banking institution incorporated in 1934. The Bank's Main Office is located at 1 South Second Street, Clearfield, (Clearfield County) Pennsylvania. The Bank's primary marketing area consists of the Pennsylvania Counties of Clearfield, Elk (excluding the Townships of Millstone, Highland and Spring Creek), McKean and Cameron. It also includes a portion of western Centre County including Philipsburg Borough, Rush Township and the western portions of Snow Shoe and Burnside Townships and a portion of Jefferson County consisting of the boroughs of Brockway, Falls Creek, Punxsutawney, Reynoldsville and Sykesville, and the townships of Washington, Winslow and Henderson. The approximate population of the general trade area is 120,000. The economy is diversified and includes manufacturing industries, wholesale and retail trade, services industries, family farms and the production of natural resources of coal, oil, gas and timber. In addition to the Main Office, the Bank has 13 full-service branch offices and 2 limited service branch facilities located in various communities in its market area. The Bank is a full-service bank engaging in a full range of banking activities and services for individual, business, governmental and institutional customers. These activities and services principally include checking, savings, time and deposit accounts; real estate, commercial, industrial, residential and consumer loans; and a variety of other specialized financial services. Its Trust division offers a full range of client services. The Bank's customer base is such that loss of one customer relationship or a related group of depositors would not have a materially adverse effect on the business of the Bank. The Bank's loan portfolio is diversified so that one industry, group of related industries or changes in household economic conditions does not comprise a material portion of the loan portfolio. The Bank's business is not seasonal nor does it have any risks attendant to foreign sources. COMPETITION The banking industry in the Bank's service area continues to be extremely competitive, both among commercial banks and with financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds and credit unions. The increased competition has resulted from changes in the legal and regulatory guidelines as well as from economic conditions. Mortgage banking firms, leasing companies, financial affiliates of industrial companies, brokerage firms, retirement fund management firms, and even government agencies provide additional competition for loans and other financial services. Some of the financial service providers operating in the Bank's market area operate 3 on a large-scale regional basis and possess resources greater than those of the Bank and the Corporation. The Bank is generally competitive with all competing financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. SUPERVISION AND REGULATION The Bank is subject to supervision and examination by applicable federal and state banking agencies, including the Office of the Comptroller of the Currency. In addition, the Bank is insured by and subject to some or all of the regulations of the Federal Deposit Insurance Corporation ("FDIC"). The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amounts and terms and conditions of loans that may be granted, and limitation on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operation of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board, including actions taken with respect to interest rates, as it attempts to control the money supply and credit availability in order to influence the economy. EXECUTIVE OFFICERS The table below lists the executive officers of The Corporation and County National Bank and sets forth certain information with respect to such persons. AGE AT PRINCIPAL OCCUPATION NAME DECEMBER 31, 1998 FOR LAST FIVE YEARS - ---- ----------------- ------------------- JAMES P. MOORE 63 PRESIDENT AND CHIEF EXECUTIVE OFFICER, CNB FINANCIAL CORPORATION SINCE 9/20/83. CHAIRMAN OF THE BOARD, COUNTY NATIONAL BANK SINCE 3/19/91, PREVIOUSLY, PRESIDENT & CHIEF EXECUTIVE OFFICER, COUNTY NATIONAL BANK SINCE 4/15/82. WILLIAM F. FALGER 51 EXECUTIVE VICE PRESIDENT, CNB FINANCIAL CORPORATION SINCE 3/28/95. PREVIOUSLY VICE PRESIDENT, SECRETARY AND TREASURER. PRESIDENT AND CHIEF EXECUTIVE OFFICER, COUNTY NATIONAL BANK SINCE 1/01/93, PREVIOUSLY, GROUP VICE PRESIDENT, COUNTY NATIONAL BANK SINCE 4/89; WILLIAM A. FRANSON 55 SECRETARY, CNB FINANCIAL CORPORATION SINCE 3/28/95. PREVIOUSLY , ASSISTANT SECRETARY SINCE 3/27/84. EXECUTIVE VICE PRESIDENT AND CASHIER, CHIEF OPERATING OFFICER COUNTY NATIONAL BANK SINCE 1/01/93, PREVIOUSLY SENIOR VICE PRESIDENT, COUNTY NATIONAL BANK SINCE 4/15/82. CARL J. PETERSON 61 ASSISTANT SECRETARY, CNB FINANCIAL CORPORATION, SINCE 3/27/84. SENIOR VICE PRESIDENT AND TRUST OFFICER, COUNTY NATIONAL BANK, SINCE 4/15/82. 4 JOSEPH B. BOWER, JR. 35 TREASURER, CNB FINANCIAL CORPORATION SINCE 11/18/97. SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER, COUNTY NATIONAL BANK SINCE 11/10/97. PRIOR THERETO, CONTROLLER, MIFFLINBURG BANK MARK D. BREAKEY 40 SENIOR VICE PRESIDENT, SENIOR LOAN OFFICER, COUNTY NATIONAL BANK SINCE 3/28/95. PREVIOUSLY VICE PRESIDENT, COMMERCIAL BANKING SINCE 4/93, ASSISTANT VICE PRESIDENT COMMUNITY LENDING, ST. MARYS, SINCE 12/23/91 PRIOR THERETO, LENDING OFFICER, MELLON BANK Officers are elected annually at the reorganization meeting of the Board of Directors. There are not any arrangements or understandings between any and all of the above officers and any other persons pursuant to which they were selected as officers. In addition, there are not any family relationships between the above officers. EMPLOYEES The Corporation has no employees who are not employees of the County National Bank. As of December 31, 1998, the Bank had a total of 207 employees of which 167 were full time and 40 were part time. MONETARY POLICIES The earnings and growth of the banking industry are affected by the credit policies of monetary authorities, including the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market activities in U.S. Government Securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These operations are used in varying combinations to influence overall economic growth and indirectly, bank loans, investments and deposits. These variables may also affect interest rates charged on loans or paid for deposits. The monetary policies of the Federal Reserve authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future. In view of the changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities including the Federal Reserve System, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or their effect on the business and earnings of the Corporation and the Bank. DISTRIBUTION OF ASSETS, LIABILITIES, & SHAREHOLDER'S EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following tables set forth statistical information relating to the Registrant and its wholly-owned subsidiaries. The table should be read in conjunction with the consolidated financial statements of the Registrant which are incorporated by reference hereinafter. 5 CNB FINANCIAL CORPORATION AVERAGE BALANCES AND NET INTEREST MARGIN (DOLLARS IN THOUSANDS)
DECEMBER 31, 1998 DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------------------------------ AVERAGE ANNUAL INTEREST AVERAGE ANNUAL INTEREST BALANCE RATE INC./EXP. BALANCE RATE INC./EXP. - ------------------------------------------------------------------------------------------------------------------------ ASSETS Interest-bearing deposits with banks $ 3,887 0.31% $ 12 $ 43 2.33% $ 1 Federal funds sold and securities purchased under agreements to resell 4,812 5.44% 262 3,814 5.48% 209 Investment Securities: Taxable 61,927 6.01% 3,720 48,016 6.26% 3,005 Tax-Exempt (1) 26,840 7.28% 1,955 24,642 6.62% 1,632 Equity Investments (1) 5,562 4.98% 277 3,717 6.83% 254 - ------------------------------------------------------------------------------------------------------------------------ Total Investments 103,028 6.04% 6,226 80,232 6.36% 5,101 LOANS Commercial (1) 54,060 8.45% 4,566 52,735 8.04% 4,240 Mortgage (1) 157,590 8.85% 13,952 142,978 8.74% 12,495 Installment 38,351 9.38% 3,596 41,082 9.36% 3,847 Leasing 19,793 7.74% 1,532 10,396 7.95% 826 - ------------------------------------------------------------------------------------------------------------------------ Total loans (2) 269,794 8.76% 23,646 247,191 8.66% 21,408 Total earning assets 372,822 8.01% 29,872 327,423 8.10% 26,509 NON INTEREST BEARING ASSETS Cash & Due From Banks 5,731 0 9,745 0 Premises & Equipment 9,745 0 9,151 0 Other Assets 8,073 0 7,321 0 Allowance for Possible Loan Losses (3,033) 0 (2,579) 0 - ------------------------------------------------------------------------------------------------------------------------ Total Non-interest earning assets 20,516 -- 0 23,638 -- 0 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $393,338 $29,872 $351,061 $26,509 ====================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST-BEARING DEPOSITS Demand - interest-bearing $ 88,869 2.86% $ 2,546 $ 83,244 2.94% $ 2,450 Savings 32,836 1.71% 561 35,052 1.68% 588 Time 173,054 5.46% 9,455 151,242 5.52% 8,354 - ------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 294,759 4.26% 12,562 269,538 4.23% 11,392 Short-term borrowings 2,202 4.63% 102 3,392 5.28% 179 Long-term borrowings 15,074 5.52% 832 4,114 6.10% 251 - ------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 312,035 4.33% 13,496 277,044 4.27% 11,822 Demand - non-interest-bearing 33,384 0 30,513 0 Other liabilities 4,524 0 2,789 0 - ------------------------------------------------------------------------------------------------------------------------ Total Liabilities 349,943 3.86% 13,496 310,346 3.81% 11,822 Shareholders' equity 43,395 -- 0 40,715 0 - ------------------------------------------------------------------------------------------------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $393,338 $13,496 $351,061 $11,822 ====================================================================== Interest income/earning assets 8.01% 29,872 8.10% $26,509 Interest expense/interest bearing liabilities 4.33% 13,496 4.27% 11,822 - ------------------------------------------------------------------------------------------------------------------------ NET INTEREST SPREAD 3.69% $16,376 3.83% $14,687 ================== ================== Interest Income/Interest Earning Assets 8.01% $29,872 8.10% $26,509 Interest expense/Interest Earning Assets 3.62% 13,496 3.61% 11,822 - ------------------------------------------------------------------------------------------------------------------------ NET INTEREST MARGIN 4.39% $16,376 4.49% $14,687 ================== ================== DECEMBER 31, 1996 - ------------------------------------------------------------------------------------------ AVERAGE ANNUAL INTEREST BALANCE RATE INC./EXP. - ------------------------------------------------------------------------------------------ ASSETS Interest-bearing deposits with banks $ 14 0.00% $ 0 Federal funds sold and securities purchased under agreements to resell 1,597 5.45% 87 Investment Securities: Taxable 52,103 6.35% 3,309 Tax-Exempt (1) 24,740 7.30% 1,806 Equity Investments (1) 2,999 5.44% 163 - ------------------------------------------------------------------------------------------ Total Investments 81,453 6.59% 5,365 LOANS Commercial (1) 47,679 8.09% 3,856 Mortgage (1) 116,233 8.96% 10,411 Installment 40,860 9.40% 3,841 Leasing 1,149 8.09% 93 - ------------------------------------------------------------------------------------------ Total loans (2) 205,921 8.84% 18,201 Total earning assets 287,374 8.20% 23,566 NON INTEREST BEARING ASSETS Cash & Due From Banks 8,579 0 Premises & Equipment 8,297 0 Other Assets 3,724 0 Allowance for Possible Loan Losses (2,301) 0 - ------------------------------------------------------------------------------------------ Total Non-interest earning assets 18,299 -- 0 - ------------------------------------------------------------------------------------------ TOTAL ASSETS $305,673 23,566 =================================== LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST-BEARING DEPOSITS Demand - interest-bearing $ 76,496 3.13% $ 2,397 Savings 36,266 1.66% 601 Time 117,339 5.47% 6,423 - ------------------------------------------------------------------------------------------ Total interest-bearing deposits 230,101 4.09% 9,421 Short-term borrowings 7,186 5.23% 376 Long-term borrowings 0 #DIV/0! 0 - ------------------------------------------------------------------------------------------ Total interest-bearing liabilities 237,287 4.13% 9,797 Demand - non-interest-bearing 27,852 0 Other liabilities 2,054 0 - ------------------------------------------------------------------------------------------ Total Liabilities 267,193 3.67% 9,797 Shareholders' equity 38,480 -- 0 - ------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $305,673 $ 9,797 =================================== Interest income/earning assets 8.20% 23,566 Interest expense/interest bearing liabilities 4.13% 9,797 - ------------------------------------------------------------------------------------------ NET INTEREST SPREAD 4.07% $13,769 ===================== Interest Income/Interest Earning Assets 8.20% $23,566 Interest expense/Interest Earning Assets 3.41% 9,797 - ------------------------------------------------------------------------------------------ NET INTEREST MARGIN 4.79% $13,769 =====================
(1) The amounts are reflected on a fully tax equivalent basis using the federal statutory rate of 34% in 1998 and 1997, adjusted for certain tax preferences. (2) Average outstanding includes the average balance outstanding of all non- accrual loans. Loans consist of the average of total loans less average 6
Net Interest Income For Twelve Months Ended December 31, For Twelve Months Ended December 31, RATE-VOLUME VARIANCE 1998 over(under) 1997 1997 over(under) 1996 (DOLLARS IN THOUSANDS) Due to Change in Due to Change in - ---------------------------------------------------------------------------------------------------------------------------------- VOLUME RATE NET VOLUME RATE NET - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS SECURITIES Interest-Bearing Deposits with Banks $ 89 ($78) $ 11 $ 0 $ 1 $ 1 Federal Funds Sold 55 (2) 53 121 1 122 INVESTMENT SECURITIES: Taxable 871 (156) 715 (260) (44) (304) Tax-Exempt 146 177 323 (7) (167) (174) Equity Investments 126 (103) 23 39 52 91 ----------------------------- --------------------------------- Total Securities 1,287 (162) 1,125 (107) (157) (264) LOANS Commercial 107 219 326 409 (25) 384 Mortgage 1,277 180 1,457 2,396 (312) 2,084 Installment (256) 5 (251) 21 (15) 6 Leasing 747 (41) 706 748 (15) 733 ----------------------------- --------------------------------- Total loans 1,875 363 2,238 3,574 (367) 3,207 ----------------------------- --------------------------------- TOTAL EARNING ASSETS $3,162 $ 201 $3,363 $3,467 ($524) $2,943 ============================= ================================= LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST-BEARING DEPOSITS Demand - Interest-Bearing $ 166 ($70) $96 $ 211 ($158) $ 53 Savings (37) 10 (27) (20) 7 (13) Time 1,205 (104) 1,101 1,856 75 1,931 ----------------------------- --------------------------------- Total Interest-Bearing Deposits 1,334 (164) 1,170 2,047 (76) 1,971 Short-Term Borrowings (63) (14) (77) (199) 2 (197) Long-Term Borrowings 669 (88) 581 251 0 251 ----------------------------- --------------------------------- Total Interest-Bearing Liabilities $1,940 ($266) $1,674 $2,099 ($74) $2,025 ============================= ================================= ============================= ================================= CHANGE IN NET INTEREST INCOME $1,222 $467 $1,689 $1,368 ($450) $ 918 ============================= =================================
1. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. 2. Included in interest income is $389,465, $336,912 and $228,576 of fees for the years ending 1998, 1997 and 1996, respectively. 3. Income on restructured loans accounted for under SFAS Nos. 114 & 118 are included in interest earning assets; there is no income being recognized on a cash basis. 7 INVESTMENT PORTFOLIO
(DOLLARS IN THOUSANDS) December 31, 1998 December 31, 1997 --------------------------------------- ---------------------------------------------- Amortized Unrealized Market Amortized Unrealized Market ---------------- ----------------- Cost Gains Losses Value Cost Gains Losses Value --------------------------------------- ---------------------------------------------- SECURITIES HELD TO MATURITY: U.S. Treasury.................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- U.S. Government agencies and corporations........... -- -- -- -- -- -- -- -- 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 $ 0 $ 7,867 $13,511 $ 198 $ 5 $13,704 ======================================= ============================================== 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 ======================================= ============================================== (DOLLARS IN THOUSANDS) December 31, 1996 ------------------------------------------- Amortized Unrealized Market ----------------- Cost Gains Losses Value ------------------------------------------- SECURITIES HELD TO MATURITY: U.S. Treasury.................. $ -- $ -- $ $ -- $ -- U.S. Government agencies and corporations........... 997 -- 1 996 Obligations of States and Political Subdivisions..... 7,319 289 -- 7,608 Other Debt Securities.......... 9,071 66 24 9,113 Restricted Equity Securities... -- -- -- -- ------------------------------------------- $17,387 $ 355 $ $ 25 $17,717 ------------------------------------------- SECURITIES AVAILABLE FOR SALE: U.S. Treasury.................. $13,496 $ 36 $ $ 24 $13,508 U.S. Government agencies and corporations........... 26,192 118 203 26,107 Obligations of States and Political Subdivisions..... 17,562 486 -- 18,048 Other Debt Securities.......... 1,047 4 6 1,045 Marketable Equity Securities 2,080 538 17 2,601 ------------------------------------------- $60,377 $1,182 $250 $61,309 ===========================================
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (DOLLARS IN THOUSANDS) DECEMBER 31, 1998 Collateralized Mortgage Obligations and Other Within After One But After Five But After Asset Backed One Year Within Five Years Within Ten Years Ten Years Securities $ Amt Yield $ Amt Yield $ Amt Yield $ Amt Yield $ Amt Yield ------------------------------------ ---------------------------------- -------------------- SECURITIES HELD TO MATURITY: U.S. Government agencies and corporations.......... $ -- -- $ -- -- $ -- -- $ -- -- $ -- -- Obligations of States and Political Subdivisions.... 1,015 8.85% 999 6.29% -- -- -- -- -- -- Other Debt Securities......... 1,004 6.52% 3,058 8.65% -- -- -- -- -- -- ------------------------------------ ---------------------------------- -------------------- 2,019 7.69% 4,057 8.07% -- -- -- -- -- -- Securities Available for Sale: U.S. Treasury................. 7,497 6.00% 2,025 5.55% -- -- -- -- -- -- U.S. Government agencies and corporations.......... 5,040 6.53% 5,988 5.73% -- -- -- -- -- -- Obligations of States and Political Subdivisions.... 935 6.44% 3,352 8.04% 16,832 7.31% 12,302 6.85% -- -- Other Debt Securities......... 1,029 5.17% 3,643 6.06% -- -- -- -- 35,407 5.93% ------------------------------------ ---------------------------------- -------------------- 14,501 6.18% 15,008 6.30% 16,832 7.31% 12,302 6.85% 35,407 5.93% ------------------------------------ ---------------------------------- -------------------- ==================================== ================================== ==================== TOTAL $16,520 6.36% $19,065 6.67% $16,832 7.31% $12,302 6.85% $35,407 5.93% ==================================== ================================== ====================
The weighted average yields are based on book value and effective yields weighted for the scheduled maturity with tax-exempt securities adjusted to a taxable-equivalent basis using a tax rate of 34%. 8 LOAN PORTFOLIO A. TYPE OF LOAN
(Dollars in thousands); 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Commercial, Financial and Agricultural $ 63,400 $ 58,282 $ 45,037 $ 49,643 $ 40,643 Residential Mortgage 118,245 112,393 100,402 78,111 68,907 Commercial Mortgage 46,701 37,702 31,451 30,658 31,039 Installment 35,251 41,001 43,448 45,294 44,196 Lease Receivables 29,362 18,231 6,069 0 0 -------- -------- -------- -------- -------- GROSS LOANS 292,959 267,609 226,407 203,706 184,785 Less: Unearned Income 4,570 3,707 3,304 3,668 2,996 -------- -------- -------- -------- -------- TOTAL LOANS NET OF UNEARNED $288,389 $263,902 $223,103 $200,038 $181,789
B. LOAN MATURITIES AND INTEREST SENSITIVITY
December 31, 1998 One Year One Through Over Total Gross Commercial, Financial and Agricultural or Less Five Years Five Years Loans ------- ----------- ---------- ----------- Loans With Predetermined Rate $ 3,385 $13,690 $12,239 $29,314 Loans With Floating Rate 28,622 2,398 3,066 34,086 ------------------------------------------------------------------------------ $32,007 $16,088 $15,305 $63,400 ==============================================================================
C. RISK ELEMENTS
1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Loans on non-accrual basis $ 120 $ 305 $ 230 $ 114 $ 957 Accruing loans which are contractually past due 90 days or more as to interest or principal payments 1,480 600 2,166 2,503 307 Troubled Debt Restructurings 538 597 654 705 -- ----------------------------------------------------------------------- $2,138 $1,502 $3,050 $3,322 $1,264 =======================================================================
1. Interest income recorded on the non-accrual loans for the year ended December 31, 1998 was $500. Interest income which would have been recorded on these loans had they been on accrual status was $2,000. 2. Loans are placed in non-accrual status when the interest or principal is 90 days past due, unless the loan is in collection, well secured and it is believed that there will be no loss of interest or principal. 3. At December 31, 1998 there was $6,959,000 in loans which are considered problem loans. In the opinion of management, these loans are adequately secured and losses are believed to be minimal. 9 SUMMARY OF LOAN LOSS EXPERIENCE ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS) YEARS ENDED DECEMBER 31,
1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Balance at beginning of Period $2,849 $2,473 $2,145 $2,033 $1,750 Charge-offs: Domestic: Commercial, Financial and Agricultural 47 88 5 59 0 Commercial Mortgages 0 0 0 28 95 Residential Mortgages 16 14 0 0 33 Consumer Loans and Credit Cards 454 513 355 282 254 Leasing 42 25 0 0 0 ------- ------- ------- ------- -------- 559 640 360 369 382 Recoveries: Domestic: Commercial, Financial and Agricultural 21 2 5 0 19 Commercial Mortgages 0 0 1 0 0 Residential Mortgages 2 0 0 0 0 Consumer Loans and Credit Cards 111 114 82 101 121 Leasing 1 0 0 0 0 ------- ------- ------- ------- -------- 135 116 88 101 140 Net Charge-offs: (424) (524 (272) (268) (242) Provision for Loan Losses 675 900 600 380 525 ======= ======= ======= ======= ======= Balance at End-of Period $3,100 $2,849 $2,473 $2,145 $2,033 ======= ======= ======= ======= ======= Percentage of net charge-offs during the period to average loans outstanding 0.16 0.21 0.13 0.14 0.18
The Provision for loan losses reflects the amount deemed appropriate by management to establish an adequate reserve to meet the present and foreseeable risk characteristics of the present loan portfolio. Management's judgement is based on the evaluation of individual loans, the overall risk characteristics of various portfolio segments, past experience with losses, the impact of econmic conditions on borrowers, and other relevant factors. ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES (in thousands)
1998 1997 1996 1995 1994 ------------------------------------------------------------------------------------------------ Domestic: % of Loans in % of Loans in % of Loans in % of Loans in % of Loans in each Category each Category each Category each Category each Category $ Amt. to Total $ Amt. to Total $ Amt. to Total $ Amt. to Total $ Amt. to Total ------------------------------------------------------------------------------------------------ Real Estate Mortgages $521 56.31% $492 56.09% $425 58.24% $387 53.40% $60 54.09% Installment Loans to Individuals 453 12.04% 402 15.32% 600 19.19% 422 22.24% 210 23.92% Commercial, Financial and 435 21.65% 361 21.78% 583 19.89% 446 24.36% 895 21.99% Agricultural Leasing 140 10.00% 80 6.81% 0 2.68% 0 0.00% 0 0.00% Unallocated 1,551 N/A 1,514 N/A 865 N/A 890 N/A 868 N/A =============================================================================================== TOTALS $3,100 100.00% $2,849 100.00% $2,473 100.00% $2,145 100.00% $2,033 100.00% ===============================================================================================
1. In determining the allocation of the allowance for possible credit losses, County National Bank considers economic trends, historical patterns and specific credit reviews. 2. With regard to the credit reviews, a "watchlist" is evaluated on a monthly basis to determine potential commercial losses. Consumer loans and mortgage loans are allocated using historical loss experience. The total of these reserves is deemed "allocated", while the remaining balance is "unallocated". 10 DEPOSITS (in thousands) December 31, 1998 1997 1996 Amount Amount Amount ---------- ---------- ------------- Demand - Non Interest Bearing $ 36,612 $ 32,893 $ 30,812 Demand - Interest Bearing 125,822 82,339 82,184 Savings Deposits 31,581 32,676 36,183 Time Deposits 176,799 171,565 120,877 ========= ========= ========== TOTAL DEPOSITS $ 370,814 $ 319,473 $ 270,056 ========= ========= ========== The maturity of certificates of deposits and other time deposits in denomination of $100,000 or more as of December 31, 1997 (in thousands): Maturing in: Three months or less......................................... $ 3,292 Greater than three months and through six months............. 5,114 Greater than six months and through twelve months............ 6,162 Greater than tweleve months.................................. 7,756 ========== TOTAL $22,324 ========== RETURN ON EQUITY AND ASSETS Information required by this section is presented on pages 22 and 23 of the Annual Report to Shareholders for the year ended December 31, 1998, and is incorporated herein by reference. ITEM 2. PROPERTIES The headquarters of the Corporation and the Bank is located at 1 South Second Street, Clearfield, Pennsylvania. The Bank operates 14 full-service and 2 limited service offices. Of these 16 offices, 12 are owned and 4 are leased from independent owners. There are no incumberances on the offices owned and the rental expense on the leased property is immaterial in relation to operating expenses. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Corporation or the Bank is a party, or of which any of their property is the subject, except ordinary routine proceedings which are incidental to the ordinary conduct of business. In the opinion of management and counsel, pending legal proceedings will not have a material adverse effect on the consolidated financial position of the Corporation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders through the solicitation of proxies, or otherwise, for the three months ended December 31, 1998. 11 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS MATTERS Information relating to the Corporation's common stock is on pages 21 and 36 of the Annual Shareholders' Report for the year ended December 31, 1998 and is herein incorporated by reference. There were 1,484 registered shareholders of record as of March 10, 1999. ITEM 6. SELECTED FINANCIAL DATA Information required by this section is presented on pages 22 and 23 of the Annual Shareholders' Report for the year ended December 31, 1998 and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this section is presented on pages 24-32 of the Annual Shareholders' Report for the year ended December 31, 1998 and is incorporated herein by reference. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this section is presented on pages 30 of the Annual Shareholders' Report for the year ended December 31, 1998 and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements which appear in the Annual Shareholders' Report for the year ended December 31, 1998 are incorporated herein by reference to such annual report: Pages in Annual Report 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 - 20 Quarterly financial data relating to the results of operations for the year ended December 31, 1998 and 1997, appears in the Annual Shareholders' Report for the year ended December 31, 1998 under the caption "Quarterly Summary of Earnings" at Page 21 and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to Executive Officers is included in Part I and information describing the Corporation's directors is included by reference on pages 3 and 4 of the Proxy Statement for the Annual Meeting to be held on April 20, 1999. ITEM 11. EXECUTIVE COMPENSATION Information required by this section is presented on pages 10 - 12 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 20, 1999 and is incorporated herein by reference. 12 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this section is presented on pages 3 - 4 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 20, 1999 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this section is presented on page 12 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 20, 1999 and is incorporated herein by reference. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A.)1. FINANCIAL STATEMENTS FILED The Financial Statements listed below are incorporated herein by reference from the Annual Shareholders' Report for the year ended December 31, 1998.
Pages in Annual Report ------------- CNB Financial Corporation and Subsidiary: 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 to 20 Quarterly Summary of Earnings and Per Share Data 21
2. FINANCIAL STATEMENT SCHEDULES: All schedules are omitted since they are not applicable. (B.)REPORTS ON FORM 8-K Form 8-K dated October 13, 1998 was filed announcing a branch acquisition from First Western Bank, N.A. The branch acquired is in Punxsutawney, PA and consists of approximately $36 million in deposits and $11.5 million in loans. The branch was consolidated into County National Bank. 13 Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CNB FINANCIAL CORPORATION (Registrant) Date: March 25, 1999 By: /s/ James P. Moore --------------------------- ------------------------------------- JAMES P. MOORE President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 25, 1999. /s/ James P. Moore President and Chief Executive Officer, - -------------------------------- JAMES P. MOORE Director /s/ William F. Falger Executive Vice President, Principal Financial Officer, - -------------------------------- WILLIAM F. FALGER Principal Accounting Officer /s/ William A. Franson Secretary - -------------------------------- WILLIAM A. FRANSON /s/ Carl J. Peterson Assistant Secretary, Director - -------------------------------- CARL J. PETERSON /s/ Robert E. Brown Director /s/ Jeffrey S. Powell - -------------------------------- ----------------------------------- ROBERT E. BROWN JEFFREY S. POWELL /s/ Richard D. Gathagan Director /s/ Edward B. Reighard - -------------------------------- ----------------------------------- RICHARD D. GATHAGAN EDWARD B. REIGHARD /s/ James J. Leitzinger Director /s/ Peter F. Smith - -------------------------------- ----------------------------------- JAMES J. LEITZINGER PETER F. SMITH /s/ Dennis L. Merrey Director /s/ L.E. Soult, Jr. - -------------------------------- ----------------------------------- DENNIS L. MERREY L.E. SOULT, JR. /s/ William R. Owens Director /s/ Robert G. Spencer - -------------------------------- ----------------------------------- WILLIAM R. OWENS ROBERT G. SPENCER /s/ Robert C. Penoyer Director /s/ Joseph L. Waroquier, Sr. - -------------------------------- ----------------------------------- ROBERT C. PENOYER JOSEPH L. WAROQUIER, SR.
14 EXHIBITS: The exhibits listed below are filed herewith or are incorporated herein by reference to other filings: EXHIBIT NUMBER DESCRIPTION ------ ----------- 3 (i) Articles of Association 3 (ii) By-Laws 10 Material Contracts 10 (iii) A Deferred Compensation Plan 13 Annual Report to Shareholders for 1998 21 Subsidiaries of the Registrant 27 Financial Data Schedule 15 EX-3.(I) 2 ARTICLES OF ASSOCIATION OF CNB FINANCIAL EXHIBIT 3 (I) CNB FINANCIAL CORPORATION Form 10-K For The Year Ended December 31, 1998 ARTICLES OF ASSOCIATION OF CNB FINANCIAL CORPORATION - -------------------------------------------------------------------------------- Filed this 12th day of COMMONWEALTH OF PENNSYLVANIA September ____, 1983 DEPARTMENT OF STATE CORPORATION BUREAU Commonwealth of Pennsylvania Department of State Articles of CNB FINANCIAL CORPORATION /s/ William R. Davis Domestic Business Corporation Secretary of the Commonwealth - -------------------------------------------------------------------------------- In compliance with the provisions of the Act of May 5, 1933, as amended, specifically, Title 15 Purdon's Pennsylvania Statutes Annotated, Section 1204, the undersigned, desiring to be incorporated as a business corporation, hereby certifies that: 1. The name of the corporation is: CNB FINANCIAL CORPORATION 2. The location and post office address of the initial registered office of the corporation in this Commonwealth is: Market and Second Streets Clearfield, PA 16830 3. PURPOSE: ------- The corporation shall have unlimited power to engage in and to do any lawful act concerning any or all lawful business for which corporations may be incorporated under this act and the corporation is incorporated under the provisions of the Act of May 5, 1933, as amended, specifically, Title 15 Purdon's Pennsylvania Statutes Annotated, Section 1204. 4. TERM: ---- Perpetual 5. NUMBER OF SHARES: (AMENDED MARCH 18, 1986) ---------------- (AMENDED APRIL 21, 1998) The total number of authorized shares shall be 10,000,000 with a par value of $1.00. The shares of the corporation shall not have preemptive rights but shall have the right of cumulative voting in regard to the election of Directors only as hereinafter set forth. 6. Except as set forth in paragraph five hereof, there are no special rights, designations, preferences, qualifications, limitations or restrictions imposed upon the stock of the corporation except as provided in these Articles of Incorporation. 7. The Board of Directors shall have no authority to change any designations, preferences, limitations, qualifications or restrictions or special or relative rights of the stock described in paragraph five hereof. 8. The name and post office address of the incorporators and the number and class of shares subscribed by him/her is: NUMBER and CLASS NAME ADDRESS OF SHARES ---- ------- --------- JOHN LEITZINGER 205 SW Third Avenue One Clearfield, PA 16830 Common JOHN W. POWELL 27 Coventry Lane One State College, PA 16801 Common FRANCIS E. REED R.D. 2 Box 269 One Clearfield, PA 16830 Common WILLIAM U. SMITH 120 W. Walnut Street One Clearfield, PA 16830 Common L. E. SOULT, JR. 108 Elizabeth St. One Clearfield, PA 16830 Common JAMES K. NEVLING 1019 Linden Street One Clearfield, Pa 16830 Common WILLIAM R. OWENS R 1307 Riverview Road One Clearfield, PA 16830 Common ROBERT G. SPENCER Grampian, PA 16838 One Common RONALD B. STRATTAN 909 S. Second Street One Clearfield, PA 16830 Common W. K. ULERICH 724 South Second Street One Clearfield, PA 16830 Common ROBERT E. BROWN 46 West Pauline Drive One Clearfield, PA 16830 Common ROBERT S. KEPNER 804 Hannah Street One Clearfield, PA 16830 Common JAMES P. MOORE 508 South Fourth Street One Clearfield, Pa 16830 Common ROBERT C. PENOYER 1220 South Second Street One Clearfield, PA 16830 Common EDWARD B. REIGHARD 8 Turnpike Avenue One Clearfield, PA 16830 Common E. DORSE ALBERT 111 East Pine Street One Clearfield, PA 16830 Common 9. OTHER PROVISIONS AS PERMITTED UNDER THE ACT: ------------------------------------------- A. NUMBER, TERM AND QUALIFICATION OF DIRECTORS: All Directors shall have equal vote but shall be elected by classes as follows: Known as Class 1, consisting of not more than five (5) Directors; Class 2, consisting of not more than five (5) Directors; and Class 3, consisting of not more than five (5) Directors. The initial Directors of Class 1 shall serve until the third (3rd) annual meeting of the shareholders. At the third (3rd) annual meeting of the shareholders, the Directors of Class 1 shall be elected for a term of three (3) years and, after expiration of such term, shall thereafter be elected every three (3) years for three (3) year terms. The initial Directors of Class 2 shall serve until the second (2nd) annual meeting of shareholders. At the second (2nd) annual meeting of the shareholders, the Directors of Class 2 shall be elected for a term of three (3) years and, after expiration of such term, shall thereafter be elected every (3) years for three (3) year terms. The initial Directors of Class 3 shall serve until the first (1st) annual meeting of the shareholders. At the first (1st) annual meeting of the shareholders, the Directors of Class 3 shall be elected for a term of three (3) years and, after the expiration of such term, shall thereafter be elected every three (3) years for three (3) year terms. Each Director shall serve until his/her successor shall have been elected and shall qualify, even though his/her term of office as provided herein has otherwise expired, except in the event of his/her earlier resignation, removal or disqualification. Annual Meeting shall mean the first (1st) annual meeting after the organizational meeting and for this purpose, the initial terms of all Classes of Directors shall in the first instance not necessarily be in even twelve month increments. B. BY-LAW QUALIFICATIONS: The Board of Directors of the corporation may subject to the provisions contained in Article V of the By-Laws, increase the number of Directors to eighteen, twenty-one or twenty-four members. Any proposed nominee shall then stand for election consistent with the principles of A above at the next annual meeting. C. INITIAL BOARD OF DIRECTORS: 1. Elected for a term of three years: JOHN LEITZINGER JOHN W. POWELL FRANCIS E. REED WILLIAM U. SMITH L. E. SOULT, JR. 2. Elected for a term of two years: JAMES K. NEVLING WILLIAM R. OWENS ROBERT G. SPENCER RONALD B. STRATTAN W. K. ULERICH 3. Elected for a term of one year: ROBERT E. BROWN ROBERT S. KEPNER JAMES P. MOORE ROBERT C. PENOYER EDWARD B. REIGHARD D. CONDITIONS PRECEDENT TO MERGER, CONSOLIDATION OR DISSOLUTION OF THE CORPORATION: 1. In order to effect the merger or consolidation of the corporation into another corporation which is not a wholly owned subsidiary of this corporation the affirmative action of 75% of the outstanding shares entitled to vote shall be required. 2. The shareholders have reserved the right to amend the By-Laws to themselves by affirmative vote of the majority of the shares voting. IN TESTIMONY WHEREOF, the incorporators have signed and sealed these Articles of Incorporation this 30th day of August, 1983. /s/ /s/ _____________________________ ____________________________ John Leitzinger Ronald B. Strattan /s/ /s/ _____________________________ ____________________________ John W. Powell W. K. Ulerich /s/ /s/ _____________________________ ____________________________ Francis E. Reed Robert E. Brown /s/ /s/ _____________________________ ____________________________ William U. Smith Robert S. Kepner /s/ /s/ _____________________________ ____________________________ L. E. Soult, Jr. James P. Moore /s/ /s/ _____________________________ ____________________________ James K. Nevling Robert C. Penoyer /s/ /s/ _____________________________ ____________________________ William R. Owens Edward B. Reighard /s/ /s/ _____________________________ ____________________________ Robert C. Spencer E. Dorse Albert EX-3.(II) 3 BY-LAWS OF CNB FINANCIAL CORP. EXHIBIT 3(II) CNB FINANCIAL CORPORATION Form 10-K For The Year Ended December 31, 1998 August 30, 1983 BY - LAWS OF CNB FINANCIAL CORPORATION ARTICLE I MEETINGS Section 1: (AMENDED MARCH 28, 1995) The annual meeting of the shareholders for - --------- the purpose of electing Directors and such other business as may properly come before the meeting of the shareholders, shall be held on a date determined by the Board of Directors annually at such time and placed as per Board of Directors shall direct. Section 2: Special meetings of the shareholders may be called by the President - --------- of the Company or by order of the Board of Directors, and it shall be the duty of the Board of Directors to call such meetings upon the written request of one- half of the outstanding stock. Section 3: At all meetings of the shareholders, each shareholder shall be - --------- entitled to one vote for each share of stock held by the shareholder. However, in the election of Directors, each shareholder shall have the right of cumulative voting. ARTICLE II NOTICE OF MEETINGS Section 1: Written notice of any regular meeting of the Board of Directors shall - --------- not be required. Written notice of any special meeting of the Board of Directors shall be required. All shareholder's meetings shall only be upon twenty-one (21) days prior written notice. ARTICLE III REGISTERED OFFICE Section 1: The Corporation shall maintain a registered office and the first - --------- office shall be as stated in the Articles of Incorporation. Section 2: Thereafter a majority of the Board of Directors may change the - --------- registered office or place of business as deemed in the best interest of the corporation. ARTICLE IV INSPECTION OF CORPORATE RECORDS Section 1: Any shareholder may inspect and copy at shareholder's expense proper - --------- corporate records upon ten days written notice setting forth specifically, the reason for such inspection. ARTICLE V BOARD OF DIRECTORS Section 1: The affairs of the corporation shall be managed by no more than - --------- twenty-four Directors elected as set forth in the Articles of Incorporation who shall serve until their successors are duly elected and qualified. Section 2: No shareholder shall be eligible for election or serve as a Director who: A. Does not own and continue to own 350 unencumbered shares of the corporation B. Any present Director less than 57 years of age as of the date of these By-Laws and all future Directors shall tender their resignation as Director on or before their 70th year. C. Any Director as of the date of these By-Laws, 57 years of age or more may continue as a Director if properly elected until the Director chooses to retire. D. The Board of Directors may appoint any shareholder as Director Emeritus who may with compensation but without the right to vote, attend Director's meetings. Such person shall have stature in the community in which he/she resides and shall have been a consistent promoter of the interests of the financial industry and specifically, CNB Financial Corporation. E. No incumbent Director shall be proposed for nomination to the Board of Directors without approval of 25% of the Board of Directors. F. No shareholder, not a Director, shall be proposed for the Board of Directors without approval of two-thirds (2/3) of the Board of Directors. Section 3: The Board of Directors may fill any vacancy upon the Board of - --------- Directors. Such appointees shall serve until the next annual meeting at which time, he /she or they shall stand separately for election to serve out the term to which they have been appointed. Section 4: The Directors shall have power to elect or appoint all necessary - --------- officers; to employ agents, clerks and workpersons; to fix their compensation, to prescribe their duties, to dismiss any officers or agents without previous notice, and generally to control and manage the affairs of the corporation. Section 5: A majority of the Board of Directors shall constitute a quorum. - --------- Section 6: The corporation is authorized to pay its Directors a reasonable - --------- compensation for their services. Section 7: A salaried person of the corporation may also be a Director, but - --------- shall not receive Director's fees, except at the discretion of the Board of Directors. Section 8: The Board may if it determines in the best interests of the - --------- corporation, increase the number of Directors to eighteen, twenty-one or twenty- four between annual meetings without shareholder approval and fill the vacancy so created until the next annual meeting at which time such Directors shall stand for election for terms as set forth for the Initial Directors in the Articles of Incorporation. ARTICLE VI OFFICERS Section 1: The Board of Directors of the corporation shall annually elect the - --------- following officers who shall hold their respective offices at the discretion of the Board of Directors and at such salaries as the Board may fix from time to time, to wit: A President, a Secretary, a Treasurer, and one or more Vice Presidents if deemed desirable. Any of the offices, except the office of President, may be combined and held by one person. Section 2: The Board of Directors may, but they shall not be required to do so, - --------- elect an Assistant Secretary and Assistant Treasurer, or to establish any other offices which may be determined necessary for the conduct of the corporation. ARTICLE VII DUTIES OF OFFICERS Section 1: The duties of the officers shall be prescribed by the Board of - --------- Directors. ARTICLE VIII (AMENDED FEBRUARY 22, 1988) DIRECTOR LIABILITY LIMITATION AND INDEMNIFICATION Section 1: A director of the Corporation shall, to the maximum extent permitted - --------- by the laws of the Commonwealth of Pennsylvania, have no personal liability for monetary damages for any action taken, or any failure to take any action as a director, provided that this Section 1, Article VIII shall not eliminate the liability of a director in any case where such elimination is not permitted by law." Section 2: Each person who at any time is or shall have been a director or - --------- officer of the Corporation, or is serving or shall have served at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and his heirs, executors and administrators, shall be indemnified by the Corporation in accordance with and to the full extent permitted by the laws of the Commonwealth of Pennsylvania as in effect at the time of such indemnification. The foregoing right of indemnification shall constitute a contract between the Corporation and each of its directors and officers and shall not be deemed exclusive of other rights to which any director, officer, employee, agent or other person may be entitled in any capacity as a matter of law or under any by-law, agreement, vote or shareholders or directors, or otherwise. If authorized by the Board of Directors, the Corporation may purchase and maintain insurance on behalf of any person to the full extent permitted by the laws of the Commonwealth of Pennsylvania." ARTICLE IX AMENDMENT OR CHANGE TO BY-LAWS Section 1: These By-Laws may only be amended or changed upon appropriate notice - --------- to the shareholders and their affirmative approval. ARTICLE X SAVING CLAUSE Section 1: If any provision of these By-Laws conflicts with any Rule, Regulation - --------- or Statute of the Commonwealth of Pennsylvania or the United States of America, then the By-Laws shall remain in force and effect and construed as such provision did not exist. EX-10 4 MATERIAL CONTRACT EXHIBIT 10 CNB FINANCIAL CORPORATION Form 10-K For The Year Ended December 31, 1998 Material Contracts A lease agreement was entered into between CNB Financial Corporation's wholly owned subsidiary County National Bank and a director of both entities. This lease is discussed in the notes to the consolidated financial statements on page 17. These financial statements are incorporated herein by reference from the Annual Shareholder's Report for the year ended December 31, 1998. EX-10.(III)A 5 DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRS. EXHIBIT 10 (III) A CNB FINANCIAL CORPORATION Form 10-K For The Year Ended December 31, 1998 Deferred Compensation Plan CNB FINANCIAL CORPORATION NON-QUALIFIED DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS -------------------------------------------------------------- 1. Name of Plan. The Plan created in accordance with the terms hereof ------------ shall be known as the CNB FINANCIAL CORPORATION NON-QUALIFIED DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS (hereinafter referred to as the "Plan"). 2. Purpose. The purpose of this Plan is to recognize the value of an ------- Outside Director's past service to the Company, to enhance the Company's ability to attract and retain competent and experienced Outside Directors, and to assure the availability of each participating Outside Director's knowledge and experience as a resource to the Company following his retirement as an Outside Director. The Plan is intended to be an unfunded plan of deferred compensation, not qualified under the Internal Revenue Code ("Code") or Title I of the Retirement Employee Firms Security Act of 1974 ("ERISA"). 3. Effective Date. The Effective Date of the Plan shall be January 1, -------------- 1998. 4. Termination Date of Plan. The Termination Date of the Plan shall be ------------------------ the date of complete distribution of all assets in the Plan or any associated trust to its Participants and/or their beneficiaries. 5. Definitions. As used in the Plan, the following words and terms ----------- shall have the meaning hereinafter set forth unless the context clearly indicates otherwise: (a) Administrative Committee. "Administrative Committee" means the ------------------------ Committee appointed by the Board of Directors, in accordance with Paragraph 21, to administer this Plan. (b) Bank. "Bank" means County National Bank, a corporation and a ---- national banking and financial institution formed under the laws of the Commonwealth of Pennsylvania, and a wholly-owned subsidiary of CNB. (c) Board of Directors. "Board" or "Board of Directors" means the ------------------ Board of Directors of the Company. (d) CNB. "CNB" means CNB Financial Corporation, a Pennsylvania --- corporation and parent company to the Bank. (e) Common Stock. "Common Stock" means shares of Common Stock of ------------ CNB. (f) Compensation. "Compensation" means the annual fees paid to ------------ Outside Directors for their service as a Director of the Company. (g) Company. "Company" means CNB and the Bank. ------- (h) Deferred Compensation Account. "Deferred Compensation Account" ----------------------------- means a book reserve account established by the Company for a Participant which represents the Participant's interest in the Plan. (i) Director. "Director" means a member of the Board. -------- (j) Fair Market Value. "Fair Market Value" of the Common Stock ----------------- means the cash price at which the last sale of Common Stock was made as reported by the National Quotation Bureau on the date prior to the valuation date in question. (k) Outside Director. "Outside Director" means a Director who is ---------------- not an employee of the Company. (l) Participant. "Participant" means any Outside Director of the ----------- Company who elects to defer all or a portion of his Director's Compensation in accordance with the terms of this Plan. 6. Eligibility to Participate in Plan. The individuals who are ---------------------------------- eligible to participate in the Plan are the Company's Outside Directors. A Director's eligibility shall continue from year-to-year during his service as a Director of the Company, regardless of whether he elects to participate or not in any given year. 7. Election to Participate. An Outside Director may elect to ----------------------- participate, alter the extent of his participation, or terminate his participation by delivering a properly executed "Deferral Election Form," a copy of which is attached hereto as Exhibit A, to the Administrative Committee. 8. Effective Date for Participation. The effective date for -------------------------------- participation in the Plan by an Outside Director shall be the first day of the calendar year following the date the Administrative Committee receives the Outside Director's Deferral Election Form. The effective date for participation in the Plan by a newly elected Outside Director shall be the date that he begins active service as a Director of the Company as long as the Administrative Committee has received his Deferral Election Form on or prior to that date. Each Participant may elect to defer receipt of a portion, up to 100% of his Compensation, designated in whole percentage points, effective with any Compensation declared and/or payable on or after the Effective Date, with such election continuing thereafter until changed by the Participant submitting a new or revised Deferral Election Form, or other written statement signed by the Participant, to the Administrative Committee, prior to the year for which the amendment is to be effective. If the Participant fails to notify the Administrative Committee of any change in his deferral, then the last Deferral Election Form or other signed written statement completed by the Participant shall govern his deferral election until changed in the manner set forth herein. 9. Deferred Compensation Account. The Company shall credit to a ----------------------------- Deferred Compensation Account for each Participant an amount equal to the Compensation deferred by the Participant. The Deferred Compensation Account shall be kept only for bookkeeping and accounting purposes and no Company funds shall be transferred or designated to this account. 10. Establishment of Deferred Compensation Units. On the first day -------------------------------------------- following the credit of the Participant's Deferred Compensation Account, the account shall be converted and credited with the number of Units ("Units") calculated by dividing the deferred Compensation credited as of the most recent date by the Fair Market Value of the Company's Common Stock. 11. Credits to Account of Participants. ---------------------------------- (a) So long as this Plan remains in effect, the Company shall credit to each Participant's Deferred Compensation Account throughout the term of his service as a Director with the Company, amounts, calculated in Units, equal to dividends payable in cash or property paid from time to time on issued and outstanding shares of Common Stock equal to the number of Units in his account, so that the amount of each such credit will be equivalent to dividends which the Participant would have received had he been the owner of the number of shares of Common Stock equal to the number of Units in his account. No such credit shall be made with respect to any dividend paid after a Participant's service as a Director of the Company terminates or after any date of termination of this Plan, even though the record date is prior thereto. (b) On the last day of each calendar year, or on the date of termination of his services as a Director, if earlier, each Participant's Deferred Compensation Account, shall be revalued at an amount equal to the number of Units then standing to his credit times the Fair Market Value per share. (c) Upon the termination of service of any Participant as a Director of the Company, there shall be paid to him the aggregate amount then standing to his credit in his Deferred Compensation Account. Such amounts shall be payable in accordance with the elections made under Paragraph 12. (d) In the event of any stock dividend on the Common Stock or any split-up or combination of shares of the Common Stock, appropriate adjustment shall be made by the Administrative Committee in the aggregate number of Units standing to the credit of each Participant in his Deferred Compensation Account provided, however, that the Administrative Committee may, but shall not be required to, establish any fractional Units. 12. Distribution of Deferred Compensation Account. The Deferred --------------------------------------------- Compensation Account of each Participant will be as follows: (a) Payment. Upon termination of an Outside Director's service with ------- the Board, the balance of the Participant's Deferred Compensation Account shall be paid to him according to the method and at the times selected by the Participant in his "Distribution Form" a copy of which is attached hereto as Exhibit B, which must be --------- properly executed and delivered to the Administrative Committee. If the Participant's Distribution Form does not pre-date his termination, the prior Distribution Form will supersede the current form. If no Distribution Form has been in effect for at least one year, a lump sum distribution will occur as early as administratively possible after termination of service. (b) Methods of Payment. The Participant may elect one of the ------------------ following methods of payment of his Deferred Compensation Account on his Distribution Form: 1. A lump sum distribution; or 2. Payments in approximately equal annual installments for a period not to exceed 10 years. (c) Beneficiary Designation. In the event the Participant dies before ----------------------- receiving the entire distribution owned to him, the balance in his Deferred Compensation Account on the Participant's date of death shall be paid in a lump sum to the beneficiary designated by the Participant on his "Beneficiary Designation Form", a copy of which is attached hereto as Exhibit C, which must be properly --------- executed and delivered to the Administrative Committee. (d) Acceleration of Payments. The Company hereby reserves the right ------------------------ to accelerate the payment of any sums specified in the Plan without the consent of the Participant, his estate, beneficiaries, or any other person claiming through or under him. (e) Incapacity of Beneficiary. If Company shall find that any person ------------------------- to whom any payment is payable under the Plan is unable to care for his affairs because of illness or accident or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee, or other legal representative) may be paid to the spouse, a child, parent, or brother or sister, or to any person deemed by the Company have incurred expense for such person otherwise entitled to payment, in accordance with the applicable provisions of Paragraph (c). Any such payment shall be a complete discharge of the Company's liabilities under the Plan. 13. Trust Not Established. Nothing contained in the Plan and no action --------------------- taken pursuant to the provisions of the Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company, its Board of Directors, officers and employees and any Participant or any other person. Any assets, whether cash or investments, which the Company may carmark to pay the amount credited to the Deferred Compensation Account shall continue, for all purposes, to be a part of the general funds of the Company and the Participants shall not by virtue of the provisions of the Plan have any property interest in such funds. The Company may establish one or more trusts, with such trustees as the Board may approve, for the purpose of providing for the payment of deferred Compensation hereunder. Such trusts shall be irrevocable but the assets thereof shall be subject to the claims of the Company's creditors. To the extent that any deferred Compensation provided under the Plan is actually paid from any such trust, the Company shall have no further obligations with respect thereto, but to the extent not so paid, such benefits shall remain the obligation of and shall be paid by the Company. No Director shall have any right, title, or interest in or to any investment reserves, accounts, or funds that the Company may purchase, establish or accumulate to aid in providing benefits under this Plan. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. 14. Alienation and Assignment of Benefits. The right of any Participant ------------------------------------- or any other person to payment of the Deferred Compensation Account under the Plan shall not be anticipated, alienated, sold, assigned, transferred, pledged, encumbered, attached or garnished except by will or by the laws or descent and distribution. 15. Not a Contract of Service. Neither the establishment of, nor the ------------------------- participant or eligibility for participation of any Outside Director in, this Plan shall be construed to confer any right of tenure on the part of any Outside Director or any right of nomination, renomination, election or re-election to the Board of Directors of the Company. The Company shall not incur any liability for any loss of benefits that might result under this Plan from any failure of the stockholders to elect or re-elect any Outside Director to the Board of Directors or any failure of the Board of Directors to nominate any Outside Director for re-election. 16. Binding Effect. The Plan shall be binding upon and inure to the -------------- benefit of the Company, its successors and assigns and the Participant and his heirs, executors, and personal representatives. 17. No Security in Deferred Compensation Account. Participants shall -------------------------------------------- have the status of general unsecured creditors of the Company and the Plan constitutes a mere promise by the Company to make benefit payments in the future. The Plan shall be unfunded for purposes of the Code and for purposes of Title I of ERISA. 18. Governing Law. The Plan shall be governed by and construed in ------------- all respects under the laws of the Commonwealth of Pennsylvania and applicable federal law. 19. Entire Agreement. This Plan and the Exhibits attached hereto and ---------------- executed by a Participant contain the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior contracts, agreements understandings and representations relating hereto. It may not be changed orally but only by an amendment in writing in accordance with the terms hereof. 20. Construction. As used in the Plan, words of masculine gender ------------ shall be construed to include the feminine gender and vice versa. 21. Administration and Interpretation. This Plan shall be --------------------------------- administered by the Administrative Committee consisting of three County National Bank Officers: (1) The Chief Executive Officer (2) Senior Trust Officer and (3) Chief Financial Officer. The members of the Administrative Committee shall not be eligible to participate in the Plan. The Administrative Committee shall have the full power and authority to interpret, construe and administer the Plan and to decide any and all matters arising hereunder, including but not limited to the right to remedy possible ambiguities, inconsistencies or omissions, by general rule or particular decision; provided, that all such interpretations, constructions, and decisions shall be applied in a uniform and nondiscriminatory manner to all Participants similarly situated. In addition, any interpretation, construction, or decision made by the Administrative Committee shall be final, conclusive and binding upon all persons who have or who claim to have any interest in or under the Plan. 22. Indemnification. The members of the Administrative Committee and --------------- its agents, and officers, directors and employees of the Company shall be indemnified and held harmless by the Company to the fullest extent now or hereafter permitted by law against and from any and all loss, cost, liability or expense, including attorneys' fees, fines, civil penalties and excise taxes that may be imposed upon or reasonably incurred by them in connection with or resulting from any actual or threatened civil, criminal, administrative or investigative claim, action, suit or proceeding to which they may be a party or in which they may be involved by reason of any action taken or failure to act under this Plan and against and from any and all amounts paid by them in settlement (with the Company's written approval) or paid by them in satisfaction of a judgment in any such action, suit or proceeding. The indemnification provided by this paragraph shall continue for persons who have ceased to be members or agents of the Administrative Committee, and to former directors, officers and employees of the Company, and shall inure to the benefit of the heirs, executors and administrators of persons entitled to indemnity hereunder. This paragraph shall not be applicable to any person if the loss, cost, liability or expense is finally judicially determined to be due to such person's recklessness or willful misconduct. 23. Compliance With Code and ERISA. The parties intend that the Plan ------------------------------ comply with the provisions of the Code, ERISA and the Regulations in effect thereunder at the time of its execution. If, at a later date, the laws of the United States or the Commonwealth of Pennsylvania are construed in such a way as to make this Plan null and void, it shall be given effect in a manner that shall best carry out the Company's purposes and intentions. 24. Severability. In the event any provision of the Plan shall be ------------ held invalid or illegal for any reason, such illegality or invalidity shall not affect the remaining parts of the Plan, but the Plan shall be construed and enforced as if the illegal or invalid provision had never been inserted, and the Company shall have the privilege and opportunity to correct and remedy such questions of illegality or invalidity by amendment as provided in the Plan. 25. Expenses. The expenses of administering the Plan shall be borne -------- by the Company. 26. Amendment and Termination. The Company expects to continue the ------------------------- Plan indefinitely, but specifically reserves the right, in the sole and unfettered discretion of its Board of Directors, at any time, to amend, in whole or in part, any or all of the provisions of the Plan and to terminate the Plan in whole or in part, provided, however, that no such amendment or termination shall adversely affect any rights of an Outside Director to receive the deferred Compensation which had accrued on his behalf on account of his service as an Outside Director prior to such amendment or termination. IN WITNESS WHEREOF, the Company has caused this Plan to be adopted as of the _____ day of _____, 1997. CNB Financial Corporation By /s/ James P. Moore ---------------------------- President County National Bank By /s/ William F. Falger ---------------------------- President EX-13 6 ANNUAL REPORT [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] EX-21 7 SUBSIDIARIES OF CNB FINANCIAL CORP. EXHIBIT 21 CNB FINANCIAL CORPORATION Form 10-K For The Year Ended December 31, 1998 Subsidiaries of the Registrant Jurisdiction of Incorporation Name or Organization ---- ----------------------------- County National Bank National Banking Association Incorporated in Pennsylvania CNB Investment Corporation Investment Holding Company Incorporated in Delaware EX-27 8 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 5,285 5,341 12,475 0 100,121 7,682 0 288,389 3,100 436,852 370,814 386 4,879 15,992 0 0 6,912 37,869 436,852 23,466 5,360 274 29,100 12,562 934 13,496 675 350 11,527 6,429 4,747 0 0 4,747 1.38 1.38 8.01 120 1,408 538 0 2,849 559 135 3,100 3,100 0 1,551
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