-----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, Qs32sdGWF6/5Aj9NK6iu2AhszzTuqSsIR2YxYImjEqwWGPoh5Bhi1Xf0Huj/pC27 0T+OWns/y2r6ttK7EyWzQA== 0000950132-00-000218.txt : 20000411 0000950132-00-000218.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950132-00-000218 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 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: 582631 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 1 0 - K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 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 1 South Second Street P.O. Box 42 Clearfield, Pennsylvania 16830 (Address of principal executive office) 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 preceeding 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 8, 2000. Common Stock, $1.00 Par Value - $80,614,798 The number of shares outstanding of the issuer's common stock as of March 8, 2000: Common Stock, $1.00 Par Value - 3,664,309 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Shareholders' Report for the year ended December 31, 1999 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 18, 2000 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 13 ITEM 11. EXECUTIVE COMPENSATION............................ 13 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
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 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 the Corporation 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, Cambria 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 150,000. 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 18 full-service branch offices and 1 limited service branch facility 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 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. 3 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, 1999 FOR LAST FIVE YEARS - ------------------------------------------- ---------------------- -------------------------------------- JAMES P. MOORE 64 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 52 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 56 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. JOSEPH B. BOWER, JR. 36 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
4 MARK D. BREAKEY 41 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 DONALD E. SHAWLEY 44 SENIOR VICE PRESIDENT AND TRUST OFFICER COUNTY NATIONAL BANK, SINCE 9/29/98 TRUST OFFICER SINCE 11/1/85.
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 County National Bank. As of December 31, 1999, the Bank had a total of 248 employees of which 190 were full time and 58 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, 1999 December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------ Average Annual Interest Average Annual Interest Balance Rate Inc./Exp. Balance Rate Inc./Exp. - ------------------------------------------------------------------------------------------------------------------------------ Assets Interest-bearing deposits with banks $ 1,133 5.30% $ 60 $ 208 5.77% $ 12 Federal funds sold and securities purchased under agreements to resell 7,347 5.25% 386 6,809 5.42% 369 Investment Securities: Taxable 82,345 5.67% 4,665 67,610 6.05% 4,089 Tax-Exempt (1) 37,830 6.96% 2,632 26,921 7.28% 1,961 Equity Investments (1) 5,671 5.27% 299 5,741 5.02% 288 - ------------------------------------------------------------------------------------------------------------------------------ Total Investments 134,326 5.99% 8,042 107,289 6.26% 6,719 Loans Commercial (1) 66,475 8.59% 5,712 57,134 8.41% 4,806 Mortgage (1) 196,295 8.47% 16,624 173,983 8.75% 15,229 Installment 42,324 9.18% 3,884 41,699 9.27% 3,866 Leasing 28,875 7.41% 2,140 19,793 7.74% 1,532 - ------------------------------------------------------------------------------------------------------------------------------ Total Loans (2) 333,969 8.49% 28,360 292,609 8.69% 25,433 Total earning assets 468,295 7.77% 36,402 399,898 8.04% 32,152 Non Interest Bearing Assets Cash & Due From Banks 12,944 - 10,031 - Premises & Equipment 11,279 - 10,179 - Other Assets 13,972 - 8,370 - Allowance for Possible Loan Losses (3,603) - (3,246) - - ------------------------------------------------------------------------------------------------------------------------------ Total Non Interest Earning Assets 34,592 0.00% - 25,334 0.00% - - ------------------------------------------------------------------------------------------------------------------------------ Total Assets $502,887 $36,402 $425,232 $32,152 ======================================================================== Liabilities and Shareholders' Equity Interest-Bearing Deposits Demand - interest-bearing 107,341 2.49% 2,676 90,818 2.84% 2,582 Savings 67,717 3.32% 2,249 61,958 3.30% 2,046 Time 209,709 5.08% 10,654 166,641 5.45% 9,086 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 384,767 4.05% 15,579 319,417 4.29% 13,714 Short-term borrowings 4,568 4.99% 228 2,202 4.63% 102 Long-term borrowings 14,977 5.03% 753 15,074 5.52% 832 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 404,312 4.10% 16,560 336,693 4.35% 14,648 Demand - non-interest-bearing 43,420 - 35,838 - Other liabilities 6,120 - 4,768 - - ------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 453,852 3.65% 16,560 377,299 3.88% 14,648 Shareholders' Equity 49,035 0.00% - 47,933 0.00% - - ------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity 502,887 16,560 425,232 14,648 ======================================================================== Interest Income/Earning Assets 7.77% 36,402 8.04% 32,152 Interest Expense/Interest Bearing Liabilities 4.10% 16,560 4.35% 14,648 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Spread 3.67% $19,842 3.69% $17,504 ============================================================ Interest Income/Interest Earning Assets 7.77% 36,402 8.04% 32,152 Interest Expense/Interest Earning Assets 3.54% 16,560 3.66% 14,648 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Margin 4.23% $19,842 4.38% $17,504 ============================================================ December 31, 1997 - ------------------------------------------------------------------------------------- Average Annual Interest Balance Rate Inc./Exp. - ------------------------------------------------------------------------------------- Assets Interest-bearing deposits with banks $ 43 2.33% $ 1 Federal funds sold and securities purchased under agreements to resell 4,959 5.46% 271 Investment Securities: Taxable 55,119 6.31% 3,477 Tax-Exempt (1) 24,742 6.63% 1,641 Equity Investments (1) 3,880 6.80% 264 - ------------------------------------------------------------------------------------- Total Investments 88,743 6.37% 5,654 Loans Commercial (1) 55,504 8.04% 4,462 Mortgage (1) 158,145 8.66% 13,701 Installment 44,434 9.26% 4,114 Leasing 10,396 7.95% 826 - ------------------------------------------------------------------------------------- Total Loans (2) 268,479 8.61% 23,103 Total earning assets 357,222 8.05% 28,757 Non Interest Bearing Assets Cash & Due From Banks 10,389 - Premises & Equipment 9,613 - Other Assets 7,652 - Allowance for Possible Loan Losses (2,797) - - ------------------------------------------------------------------------------------- Total Non Interest Earning Assets 24,857 0.00% - - ------------------------------------------------------------------------------------- Total Assets $382,079 $28,757 =============================== Liabilities and Shareholders' Equity Interest-Bearing Deposits Demand - interest-bearing 85,530 2.91% 2,489 Savings 62,256 3.17% 1,971 Time 145,759 5.49% 7,999 - ------------------------------------------------------------------------------------- Total interest-bearing deposits 293,545 4.24% 12,459 Short-term borrowings 3,392 5.28% 179 Long-term borrowings 4,114 6.10% 251 - ------------------------------------------------------------------------------------- Total interest-bearing liabilities 301,051 4.28% 12,889 Demand - non-interest-bearing 32,993 - Other liabilities 3,044 - - ------------------------------------------------------------------------------------- Total Liabilities 337,088 3.82% 12,889 Shareholders' Equity 44,991 0.00% - - ------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity 382,079 12,889 ============================== Interest Income/Earning Assets 8.05% 28,757 Interest Expense/Interest Bearing Liabilities 4.28% 12,889 - ------------------------------------------------------------------------------------- Net Interest Spread 3.77% $15,868 ================== Interest Income/Interest Earning Assets 8.05% 28,757 Interest Expense/Interest Earning Assets 3.61% 12,889 - ------------------------------------------------------------------------------------- Net Interest Margin 4.44% $15,868 ====================
(1) The amounts are reflected on a fully tax equivalent basis using the federal statutory rate of 34% in 1999, 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 unearned income. The amount of loan fees included in the interest income on loans is not material. 6
Net Interest Income For Twelve Months Ended December 31, For Twelve Months Ended December 31, Rate-Volume Variance 1999 over (under) 1998 1998 over (under) 1997 (Dollars in thousands) Due to Change in Due to Change in - ---------------------------------------------------------------------------------------------------------------------------------- Volume Rate Net Volume Rate Net - ---------------------------------------------------------------------------------------------------------------------------------- Assets Securities Interest-Bearing Deposits with Banks $ 53 $ (5) $ 48 $ 4 $ 7 $ 11 Federal Funds Sold 29 (12) 17 101 (3) 98 Investment Securities: - Taxable 891 (315) 576 788 (176) 612 Tax-Exempt 795 (124) 671 145 175 320 Equity Investments (4) 15 11 127 (103) 24 ------------------------- ----------------------- Total Securities 1,764 (441) 1,323 1,165 (100) 1,065 Loans Commercial 786 120 906 131 213 344 Mortgage 1,953 (558) 1,395 1,372 156 1,528 Installment 58 (40) 18 (253) 5 (248) Leasing 703 (95) 608 747 (41) 706 ------------------------- ----------------------- Total Loans 3,500 (573) 2,927 1,997 333 2,330 ------------------------- ----------------------- Total Earning Assets $5,264 $(1,014) $4,250 $3,162 $ 233 $3,395 ========================= ======================= Liabilities and Shareholders' Equity Interest-Bearing Deposits Demand - Interest-Bearing 470 (376) 94 154 (61) 93 Savings 190 13 203 (9) 84 75 Time 2,348 (780) 1,568 1,146 (59) 1,087 ------------------------- ----------------------- Total Interest-Bearing Deposits 3,008 (1,143) 1,865 1,291 (36) 1,255 Short-Term Borrowings 110 16 126 (63) (14) (77) Long-Term Borrowings (5) (74) (79) 669 (88) 581 ------------------------- ----------------------- Total Interest-Bearing Liabilities $3,113 $(1,201) $1,912 $1,897 $(138) $1,759 ========================= ======================= ------------------------- ----------------------- Change in Net Interest Income $2,151 $ 187 $2,338 $1,265 $ 371 $1,636 ========================= =======================
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 $887,300, $394,493 and $341,642 of fees for the years ending 1999, 1998 and 1997, respectively. 3. Income on restructured loans accounted for under SFAS Nos. 114 & 118 are included in interest earning assets. 7
Investment Portfolio (Dollars In Thousands) December 31, 1999 December 31, 1998 ---------------------------------------------- ------------------------------------------- Unrealized Unrealized Amortized ------------------- Market Amortized ---------------- 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 2,744 40 1 2,783 4,073 152 - 4,225 Other Debt Securities 999 - 5 994 2,003 33 - 2,036 Restricted Equity Securities 2,875 - - 2,875 1,791 - - 1,791 -------------------------------------------- ------------------------------------------- $ 6,618 $ 40 $6 $ 6,652 $ 7,867 $ 185 $ - $ 8,052 ============================================ =========================================== Securities Available for Sale: U.S. Treasury $ 24,127 $ 1 $ 156 $ 23,972 $ 14,117 $ 160 $ - $ 14,277 U.S. Government agencies and corporations 27,867 - 221 27,646 11,730 71 4 11,797 Obligations of States and Political Subdivisions 35,822 151 1,111 34,862 33,721 1,013 - 34,734 Other Debt Securities 47,923 116 1,145 46,894 40,081 304 184 40,201 Marketable Equity Securities 3,221 622 272 3,571 3,845 1,069 115 4,799 -------------------------------------------- ------------------------------------------- $138,960 $890 $2,905 $136,945 $103,494 $2,617 $303 $105,808 ============================================ =========================================== Investment Portfolio (Dollars In Thousands) December 31, 1997 -------------------------------------------- Unrealized Amortized ----------------- Market Cost Gains Losses Value --------------------------------------------- Securities held to maturity: U.S. Treasury $ - $ - $ - $ - U.S. Government agencies and corporations - - - - Obligations of States and Political Subdivisions 6,398 180 - 6,578 Other Debt Securities 6,006 18 5 6,019 Restricted Equity Securities 1,107 - - 1,107 ------------------------------------------ $13,511 $ 198 $ 5 $13,704 ========================================== Securities Available for Sale: U.S. Treasury $21,672 $ 120 $ 5 $21,787 U.S. Government agencies and corporations 19,088 100 37 19,151 Obligations of States and Political Subdivisions 18,888 720 - 19,608 Other Debt Securities 5,352 8 43 5,317 Marketable Equity Securities 3,237 961 1 4,197 ------------------------------------------ $68,237 $1,909 $86 $70,060 ==========================================
Maturity Distribution of Investment Securities (Dollars In Thousands) December 31, 1999
Collaterialized Mortgage Within After One But After Five But After Obligation and Other One Year Within Five Years Within Ten Years Ten Years Asset Backed 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 1,450 9.38% 1,294 8.35% - - - - - - Other Debt Securities - 999 - - - - - - -------------------------------- ------------------------------- --------------- $ 1,450 9.38% $ 2,293 7.45% - - - - - - Securities Available for Sale: U.S. Treasury 1,003 5.51% 7,973 5.49% 15,151 5.54% - - - - U.S. Government agencies and corporations 6,982 5.47% 20,885 5.92% - - - - - - Obligations of States and Political Subdivisions 1,125 7.06% 2,731 7.67% 15,588 7.21% 16,378 6.98% - - Other Debt Securities - - 15,446 6.59% - - 3,848 7.17% 28,629 6.47% -------------------------------- --------------------------------- --------------- 9,110 5.67% 47,035 6.17% 30,739 6.39% 20,226 7.01% 28,629 6.47% -------------------------------- --------------------------------- --------------- TOTAL $10,560 6.18% $49,328 6.23% $30,739 6.39% $20,226 7.01% $28,629 6.47% ================================ ================================= ===============
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 (Dollars in thousands) A. TYPE OF LOAN
1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Commercial, Financial and Agricultural $ 78,588 $ 66,257 $ 61,066 $ 48,242 $ 52,406 Residential Mortgage 159,884 134,998 128,161 114,994 92,023 Commercial Mortgage 49,549 46,701 37,702 31,451 30,658 Installment 43,772 38,393 44,661 46,548 48,005 Lease Receivables 35,918 29,362 18,231 6,069 - -------- -------- -------- -------- -------- GROSS LOANS 367,711 315,711 289,821 247,304 223,092 Less: Unearned Income 4,947 4,570 3,708 3,308 3,667 -------- -------- -------- -------- -------- TOTAL LOANS NET OF UNEARNED 362,764 311,141 286,113 243,996 219,425
B. LOAN MATURITIES AND INTEREST SENSITIVITY
December 31, 1999 ----------------------------------------------------- One Year One Through Over Total Gross or Less Five Years Five Years Loans ------- ----------- ---------- ----------- Commercial, Financial and Agricultural -------------------------------------- Loans With Predetermined Rate $ 2,844 $22,114 $16,874 $41,832 Loans With Floating Rate 29,847 3,033 3,876 36,756 ------- ------- ------- ------- $32,691 $25,147 $20,750 $78,588 ======= ======= ======= =======
C. RISK ELEMENTS
1999 1998 1997 1996 1995 -------- -------- -------- -------- ------- Loans on non-accrual basis $ 862 $ 198 $ 323 $ 271 $ 114 Accruing loans which are contractually past due 90 days or more as to interest or principal payment 886 1,479 601 2,168 2,503 Troubled Debt Restructurings - 538 597 654 705 ------ ------ ------ ------ ------ $1,748 $2,215 $1,521 $3,093 $3,322 ====== ====== ====== ====== ======
1. Interest income recorded on the non-accrual loans for the year ended December 31, 1999 was $6,580. Interest income which would have been recorded on these loans had they been on accrual status was $35,797. 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, 1999 there was $7,255,256 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 (Dollars In Thousands)
Analysis of the Allowance for Loan Losses Years Ended December 31, 1999 1998 1997 1996 1995 --------- -------- -------- -------- -------- Balance at beginning of Period $3,314 $3,062 $2,683 $2,328 $2,201 Charge-Offs: Domestic: Commercial, Financial and Agricultural 90 77 88 5 59 Commercial Mortgages 54 - - - 28 Residential Mortgages - 16 28 - 18 Consumer Loans and Credit Cards 379 459 529 358 298 Leasing 93 42 25 - - ------ ------ ------ ------ ------ 616 594 670 363 403 ====== ====== ====== ====== ====== Recoveries: Domestic: Commercial, Financial and Agricultural 80 21 2 5 - Commercial Mortgages 4 - - 1 - Residential Mortgages - 2 1 1 14 Consumer Loans and Credit Cards 103 115 115 86 106 Leasing 6 1 - - - ------ ------ ------ ------ ------ 193 139 118 93 120 Net Charge-Offs: (423) (455) (552) (270) (283) Provision for Loan Losses 643 707 931 625 410 Adjustments due to acquisition 356 - - - - ------ ------ ------ ------ ------ Balance at End-of-Period $3,890 $3,314 $3,062 $2,683 $2,328 ====== ====== ====== ====== ====== Percentage of net charge-offs during the period to average loans outstanding 0.13 0.16 0.2 0.11 0.14
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 economic condition on borrowers, and other relevant factors. ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES (Dollars In Thousands)
1999 1998 1997 1996 1995 --------------------------------------------------------------------------------------------------- % 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 --------------------------------------------------------------------------------------------------- Domestic: Real Estate Mortgages $ 720 56.96% $ 521 57.55% $ 678 57.23% $ 592 59.22% $ 550 54.99% Installment Loans to Individuals 592 11.90% 453 12.16% 429 15.41% 643 18.82% 442 21.52% Commercial, Financial and Agricultural 626 21.37% 435 20.99% 361 21.07% 583 19.50% 446 23.49% Leasing 177 9.77% 140 9.30% 80 6.29% - 2.46% - 0.00% Unallocated 1,775 0.00% 1,765 0.00% 1,514 0.00% 865 0.00% 890 0.00% --------------------------------------------------------------------------------------------------- TOTALS $3,890 100.00% $3,314 100.00% $3,062 100.00% $2,683 100.00% $2,328 100.00% ===================================================================================================
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 (Dollars In Thousands)
December 31, 1999 1998 1997 Amount Amount Amount -------- -------- -------- Demand - Non Interest Bearing $ 54,891 $ 38,970 $ 35,062 Demand - Interest Bearing 121,615 127,809 84,344 Savings Deposits 73,005 62,102 59,892 Time Deposits 251,240 169,201 166,462 -------- -------- -------- TOTAL DEPOSITS $500,751 $398,082 $345,760 ======== ======== ========
The maturity of certificates of deposits and other time deposits in denomination of $100,000 or more as of December 31, 1999. (Dollars In Thousands)
Maturing in: Three months or less $14,380 Greater than three months and through six months 7,382 Greater than six months and through twelve months 8,660 Greater than twelve months 7,607 ------- $38,029 =======
RETURN ON EQUITY AND ASSETS Information required by this section is presented on pages 26 and 27 of the Annual Report to Shareholders for the year ended December 31, 1999 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 19 full-service and 1 limited service offices. Of these 20 offices, 16 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 routing 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, 1999. 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 page 11 of the information section and page 20 of the Annual Shareholders' Report for the year ended December 31, 1999 and is herein incorporated by reference. There were 1,568 registered shareholders of record as of March 8, 2000. ITEM 6. SELECTED FINANCIAL DATA Information required by this section is presented on pages 18 and 19 of the Annual Shareholders' Report for the year ended December 31, 1999 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 21-29 of the Annual Shareholders' Report for the year ended December 31, 1999 and is incorporated herein by reference. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this section is presented on pages 27 and 28 of the Annual Shareholders' Report for the year ended December 31, 1999 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, 1999, are incorporated herein by reference to such annual report:
Pages in Annual Report ------------- Report of Independent Auditors 1 Consolidated Statements of Condition 2 Consolidated Statements of Income 3 Consolidated Statements of Cash Flows 4 Consolidated Statements of Changes in Shareholders' Equity.. 5 Notes to Consolidated Financial Statements 6-17
Quarterly financial data relating to the results of operations for the year ended December 31, 1999 and 1998, appears in the Annual Shareholders' Report for the year ended December 31, 1999 under the caption "Quarterly Summary of Earnings" at Page 20 and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 12 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 18, 2000. ITEM 11. EXECUTIVE COMPENSATION Information required by this section is presented on pages 5-7 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 18, 2000 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this section is presented on pages 3 and 4 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 18, 2000 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this section is presented on page 10 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 18, 2000 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, 1999.
Pages in Annual Report ------------- CNB Financial Corporation and Subsidiary: Report of Independent Auditors 1 Consolidated Statements of Condition 2 Consolidated Statements of Income 3 Consolidated Statements of Cash Flows 4 Consolidated Statements of Changes in Shareholders' Equity.. 5 Notes to Consolidated Financial Statements 6-17 Quarterly Summary of Earnings and Per Share Data 20
2. FINANCIAL STATEMENT SCHEDULES: All schedules are omitted since they are not applicable. (B) REPORTS ON FORM 8-K Forms 8-K dated March 5, 1999 and May 10, 1999 were filed announcing the merger of The First National Bank of Spangler. The Bank acquired is in Northern Cambria, PA and consists of approximately $29 million in deposits and $23 million in loans. The Bank was merged into County National Bank. Form 8-K dated May 10, 1999 was filed announcing the acquisition of four branches from PNC Bank. The branches acquired are in Bradford, Johnsonburg, Kane and Ridgway and consist of approximately $116.2 million in deposits and $21.7 million in loans. The branches were 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 23, 2000 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 23, 2000. /s/ James P. Moore - ----------------------- President and Chief Executive JAMES P. MOORE Officer, Director /s/ William F. Falger Executive Vice President - ----------------------- WILLIAM F. FALGER /s/ William A. Franson Secretary - ----------------------- WILLIAM A. FRANSON /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/ James B. Ryan - ----------------------- ---------------------------- DENNIS L. MERREY JAMES B. RYAN /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. /s/ Carl J. Peterson Director - ----------------------- CARL J. PETERSON 14 EXHIBITS: The exhibits listed below are filed herewith or are incorporated herein by reference to other filings: EXHIBIT NUMBER DESCRIPTION ------ ----------- 10 Material Contracts 13 Annual Report to Shareholders for 1999 21 Subsidiaries of the Registrant 23 1998 Audit Opinion Consent 27 Financial Data Schedule 15 EX-10 2 MATERIAL CONTRACT EXHIBIT 10 CNB FINANCIAL CORPORATION Form 10-K For The Year Ended December 31, 1999 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 13. These financial statements are incorporated herein by reference from the Annual Shareholder's Report for the year ended December 31, 1999. EX-13 3 ANNUAL REPORT [CNB LOGO] 1999 ANNUAL REPORT FINANCIAL SECTION TABLE OF CONTENTS 1 Report of Independent Auditors 2 Consolidated Statements of Condition 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Consolidated Statements of Changes in Shareholders' Equity 6 Notes to Consolidated Financial Statements 18 Selected Financial Data - Five Year Comparison 20 Maturity Distribution of Balance Sheet 20 Quarterly Summary of Earnings 21 Management Discussion and Analysis CNB Financial Corporation and Subsidiaries 1999 Annual Report Report of Ernst & Young LLP, Independent Auditors Board of Directors and Shareholders CNB Financial Corporation We have audited the accompanying consolidated statements of condition of CNB Financial Corporation and subsidiaries as of December 31, 1999 and 1998, 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, 1999. 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 did not audit the 1998 and 1997 financial statements of The First National Bank of Spangler, a wholly-owned subsidiary acquired in 1999, which statements reflect total assets constituting 6.8% in 1998, and total revenues constituting 6.0% in 1998 and 6.6% in 1997 of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, in so far as it relates to data included for The First National Bank of Spangler, is based solely on the report of other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, 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, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP February 15, 2000 Pittsburgh, Pennsylvania 1 CNB Financial Corporation and Subsidiaries 1999 Annual Report Consolidated Statements of Condition
(in thousands, except share data) December 31 ------------------------- Assets 1999 1998 --------- -------- Cash and due from banks $ 20,893 $ 11,082 Interest bearing deposits with other banks 321 256 Federal funds sold -- 14,755 Loans held for sale 2,381 4,299 Investment securities available for sale 136,945 105,808 Investment securities held to maturity, fair value of $6,652 at December 31, 1999 and $8,052 at December 31, 1998 6,618 7,867 Loans and leases 367,711 315,711 Less: unearned discount 4,947 4,570 Less: allowance for loan and lease losses 3,890 3,314 --------- -------- NET LOANS 358,874 307,827 Premises and equipment, net 12,854 10,670 Accrued interest receivable 3,463 2,627 Intangible assets, net 15,899 2,522 Other assets 2,914 1,204 --------- -------- TOTAL ASSETS $561,162 $468,917 ========= ======== Liabilities Deposits: Non-interest bearing deposits $ 54,891 $ 38,970 Interest bearing deposits 445,860 359,112 --------- -------- TOTAL DEPOSITS 500,751 398,082 Other borrowings 6,750 16,378 Accrued interest and other liabilities 6,018 5,083 --------- -------- TOTAL LIABILITIES 513,519 419,543 --------- -------- Shareholders' Equity Common stock $1.00 par value for 1999 and 1998 Authorized 10,000,000 shares for 1999 and 1998 Issued 3,693,500 shares for 1999 and 1998 3,694 3,694 Additional paid in capital 3,717 3,693 Retained earnings 42,278 40,571 Treasury stock, at cost (29,191 shares for 1999 and 11,106 shares for 1998). (715) (112) Accumulated other comprehensive income (1,331) 1,528 --------- -------- TOTAL SHAREHOLDERS' EQUITY 47,643 49,374 --------- -------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $561,162 $468,917 ========= ========
The accompanying notes are an integral part of these statements 2 CNB Financial Corporation and Subsidiaries 1999 Annual Report Consolidated Statements of Income
(in thousands, except per share data) Year ended December 31, ----------------------------------------------- 1999 1998 1997 ------- -------- -------- Interest and Dividend Income Loans including fees $28,148 $25,250 $23,208 Deposits with banks 60 12 1 Federal funds sold 386 369 271 Investment securities: Taxable 4,665 4,101 3,488 Tax-exempt 1,888 1,414 1,307 Dividends 264 230 176 ------- -------- -------- TOTAL INTEREST AND DIVIDEND INCOME 35,411 31,376 28,451 Interest Expense Deposits 15,579 13,714 12,459 Borrowed funds 981 934 430 ------- -------- -------- TOTAL INTEREST EXPENSE 16,560 14,648 12,889 ------- -------- -------- Net interest income 18,851 16,728 15,562 Provision for loan losses 643 707 931 ------- -------- -------- Net interest income after provision for loan losses 18,208 16,021 14,631 Other Income Trust & asset management fees 797 758 612 Service charges - deposit accounts 1,703 1,211 978 Other service charges and fees 468 469 467 Realized security gains 36 350 529 Gain on sale of loans 73 31 26 Other 440 269 137 ------- -------- -------- TOTAL OTHER INCOME 3,517 3,088 2,749 Other Expenses Salaries 5,689 5,149 4,778 Employee benefits 1,929 1,577 930 Net occupancy expense of premises 2,056 1,822 1,748 Data processing 1,145 801 788 Amortization 1,072 329 315 Other 3,770 2,553 2,478 ------- -------- -------- TOTAL OTHER EXPENSES 15,661 12,231 11,037 ------- -------- -------- Income before income taxes 6,064 6,878 6,343 Applicable income taxes 1,460 1,835 1,648 ------- -------- -------- Net income $ 4,604 $ 5,043 $ 4,695 ======= ======== ======== EARNINGS AND DIVIDENDS* Net income $ 1.26 $ 1.37 $ 1.27 Net income, fully diluted $ 1.25 $ 1.37 $ 1.27 Cash dividends per share $ 0.80 $ 0.72 $ 0.68
* 1998 and 1997 per share data are restated to reflect the 2 for 1 stock split effective April 30, 1998 The accompanying notes are an integral part of these statements 3 CNB Financial Corporation and Subsidiaries 1999 Annual Report Consolidated Statements of Cash Flows
(in thousands) Year ended December 31, -------------------------------------------- 1999 1998 1997 -------- -------- -------- Cash Flows from Operating Activities: Net income $ 4,604 $ 5,043 $ 4,695 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses 643 707 931 Depreciation and amortization 2,036 1,201 1,123 Amortization and accretion of deferred loan fees 61 (70) (580) Deferred taxes 611 1,365 766 Security gains (36) (350) (529) Gain on sale of loans (73) (31) (26) Net losses (gains) on dispositions of acquired property 19 (98) -- Changes in: Proceeds from sales of loans 13,914 15,977 3,175 Origination of loans for sale (11,923) (18,728) (3,583) Interest receivable (823) (237) (40) Other assets and intangibles (2,086) (278) (484) Interest payable 517 1 270 Other liabilities 1,190 210 (281) -------- -------- -------- Net cash provided by operating activities 8,654 4,712 5,437 Cash Flows from Investing Activities: Proceeds from maturities of: Securities held to maturity 2,325 6,322 5,235 Securities available for sale 26,035 25,566 15,098 Proceeds from sales of securities available for sale 17,513 4,888 5,925 Purchase of securities available for sale (79,392) (66,089) (22,102) Net principal disbursed on loans (51,057) (24,850) (42,714) Purchase of Federal Reserve Bank Stock and Federal Home Loan Bank Stock (1,269) (499) (39) Acquisitions, net of cash received (14,382) -- -- Purchase of premises and equipment (3,148) (2,306) (268) Proceeds from the sale of foreclosed assets 277 192 18 -------- -------- -------- Net cash used in investing activities (103,098) (56,776) (38,847) Cash Flows from Financing Activities: Net change in: Checking, money market and savings accounts 20,597 49,617 (1,372) Certificates of deposit 82,072 2,706 50,013 Net acquisition of treasury stock (579) -- -- Cash dividends paid (2,897) (2,588) (2,430) Net advances (repayments) from other borrowings (9,628) 8,307 (6,585) -------- -------- -------- Net cash provided by financing activities 89,565 58,042 39,626 Net increase (decrease) in cash and cash equivalents (4,879) 5,978 6,216 Cash and cash equivalents at beginning of year 26,093 20,115 13,899 -------- -------- -------- Cash and cash equivalents at end of period $ 21,214 $ 26,093 $ 20,115 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (including amount credited directly to certificate accounts) $ 17,077 $ 14,649 $ 13,159 Income taxes 2,125 755 1,359 Noncash Investing Activities (Decrease) increase in net unrealized gain on securities available for sale $ (2,859) $ 324 $ 538
The accompanying notes are an integral part of these statements 4 CNB Financial Corporation and Subsidiaries 1999 Annual Report Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except per share data) Accumulated Additional Other Total Paid-In Retained Treasury Comprehensive Stockholders' Common Stock Capital Earnings Stock Income Equity -------------------------------------------------------------------------------- Balance January 1, 1997 $ 7,387 $ -- $35,851 $(100) $ 666 $43,804 Comprehensive income: Net income for 1997 4,695 4,695 Net change in unrealized gains on available for sale securities, net of taxes of $276 and adjustment for gains of $349 538 538 ------- Total comprehensive income 5,233 ------- Cash dividends declared (2,430) (2,430) ($0.68 and $0.36 per share, CNB and Spangler, respectively) -------------------------------------------------------------------------------- Balance December 31, 1997 7,387 -- 38,116 (100) 1,204 46,607 Comprehensive income: Net income for 1998 5,043 5,043 Net change in unrealized gains on available for sale securities, net of taxes of $164 and adjustment for gains of $231 324 324 ------- Total comprehensive income 5,367 ------- Issued 2 for 1 stock split (3,693) 3,693 Purchase of treasury stock (774 shares) (12) (12) Cash dividends declared (2,588) (2,588) ($0.72 and $0.45 per share, CNB and Spangler, respectively) -------------------------------------------------------------------------------- Balance December 31, 1998 3,694 3,693 40,571 (112) 1,528 49,374 Comprehensive income: Net income for 1999 4,604 4,604 Net change in unrealized losses on available for sale securities, net of taxes of $1,473 and adjustment for gains of $24 (2,859) (2,859) ------- Total comprehensive income 1,745 ------- Treasury stock: Purchase (19,600 shares) (617) (617) Reissue (1,515 shares) 24 14 38 Cash dividends declared (2,897) (2,897) ($0.80 and $0.26 per share, CNB and Spangler, respectively) ------------------------------------------------------------------------------- Balance December 31, 1999 $ 3,694 $3,717 $42,278 $(715) $(1,331) $47,643 ===============================================================================
The accompanying notes are an integral part of these statements. 5 CNB Financial Corporation and Subsidiaries 1999 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 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 accounting principles generally accepted in the United States. 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. Operating Segments: FAS No.131 requires disclosures about an enterprise's operating segments in financial reports issued to shareholders. The Statement defines an operating segment as a component of an enterprise that engages in business activities that generate revenue and incur expense, and the operating results of which are reviewed by the chief operating decision maker in the determination of resource allocation and performance. The Corporation's business activities are currently confined to one segment which is community banking. 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 recorded as other comprehensive income. Unrealized gains and losses on securities classified as trading are included in other income. Management has not classified any debt or equity securities as trading. The amortized cost of debt securities classified as held to maturity or available for sale is adjusted for the amortization of premiums and the accretion of discounts over the period through contractual maturity or, in the case of mortgage-backed securities and collateralized mortgage obligations, over the estimated life of the security. Such amortization is included in interest income from 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. 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. 6 CNB Financial Corporation and Subsidiaries 1999 Annual Report Notes to Consolidated Financial Statements (Continued) 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. Intangibles: Intangible assets represent the present value of future net income to be earned from deposits and are being amortized on an accelerated basis over a ten year period. The excess of cost over the fair value of net assets acquired (goodwill) is being amortized on a straight-line basis over a period of ten years. Income Taxes: The Corporation files a consolidated U. S. income tax return. Deferred taxes are recognized for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities using enacted tax laws and rates. 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, $168,000 in 1999 and $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. Stock Options: FAS No. 123 defines a fair value-based method of accounting for stock-based employee compensation plans. Under the fair value-based method compensation cost is measured at the grant date based upon the value of the award and is recognized over the service period. The standard encourages all entities to adopt this method of accounting for all employee stock compensation plans. However, it also allows an entity to continue to measure compensation costs for its plans as prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Since the Corporation has elected to use the accounting in ABP No. 25, pro forma disclosures of net income and earnings per share are made as if the fair value method of accounting, as defined by FAS No. 123, had been applied. Comprehensive Income: The Corporation presents comprehensive income as part of the Statement of Changes in Stockholders' Equity. Other comprehensive income (losses) are comprised exclusively of unrealized holding gains (losses) on the available for sale securities portfolio. Earnings per Share: Basic earnings per share is determined by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share is determined by dividing net income by the weighted average number of shares outstanding increased by the number of shares that would be issued assuming the exercise of stock options. Cash and Cash Equivalents: For purposes of the consolidated statement of cash flows, the Corporation defines cash and cash equivalents as cash and due from banks, and Federal funds sold. New Accounting Standards: Accounting for Derivative Instruments The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which 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. As amended by FAS No. 137, the standard is effective for fiscal years beginning after June 15, 2000 with earlier adoption permitted. The effect of this standard will depend upon the nature and extent of derivative instruments in place at the time of adoption. The Corporation had no derivative instruments as of December 31, 1999. Reclassifications: Certain prior year amounts have been reclassified for comparative purposes. 7 CNB Financial Corporation and Subsidiaries 1999 Annual Report Notes to Consolidated Financial Statements (Continued) 2. EARNINGS PER SHARE Earnings per share (EPS) is calculated on the weighted average number of common shares outstanding during the year. Currently a dual presentation of basic and diluted EPS is required. The computation of basic and diluted EPS is shown below:
Years Ended December 31 1999 1998 1997 -------- --------- ---------- Net income applicable to common stock $ 4,604 $ 5,043 $ 4,695 Weighted-average common shares outstanding 3,665 3,682 3,682 -------- --------- ---------- Basic earnings per share $ 1.26 $ 1.37 $ 1.27 -------- --------- ---------- Net income applicable to common stock $ 4,604 $ 5,043 $ 4,695 -------- --------- ---------- Weighted-average common shares outstanding 3,665 3,682 3,682 Common stock equivalents due to effect of stock options 6 -- -- -------- --------- ---------- Total weighted-average common shares and equivalents 3,671 3,682 3,682 -------- --------- ---------- Diluted earnings per share $ 1.25 $ 1.37 $ 1.27 ======== ========= ==========
3. 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, 1999, was approximately $4,343,000, which was maintained in vault cash. 4. INVESTMENT SECURITIES Investment securities at December 31, 1999 and 1998 were as follows (in thousands):
December 31, 1999 December 31, 1998 ------------------------------------ ----------------------------------------------- Unrealized Unrealized Amortized -------------- Market Amortized ----------------- Market Cost Gains Losses Value Cost Gains Losses Value ------------------------------------ ----------------------------------------------- Securities available for sale: U.S. Treasury $ 24,127 $ 1 $ 156 $ 23,972 $ 14,117 $ 160 $ -- $ 14,277 U.S. Government agencies and corporations 27,867 -- 221 27,646 11,730 71 4 11,797 Obligations of States and Political Subdivisions 35,822 151 1,111 34,862 33,721 1,013 -- 34,734 Other Debt Securities 47,923 116 1,145 46,894 40,081 304 184 40,201 Marketable Equity Securities 3,221 622 272 3,571 3,845 1,069 115 4,799 ------------------------------------ ----------------------------------------------- Total securities available for sale $138,960 $ 890 $2,905 $136,945 $103,494 $2,617 $303 $105,808 ==================================== =============================================== Securities to be held to maturity: Obligations of States and Political Subdivisions $ 2,744 $ 40 $ 1 $ 2,783 $ 4,073 $ 152 $ -- $ 4,225 Other Debt Securities 999 -- 5 994 2,003 33 -- 2,036 Restricted Equity Securities 2,875 -- -- 2,875 1,791 -- -- 1,791 ------------------------------------ ----------------------------------------------- Total securities to be held to maturity $ 6,618 $ 40 $ 6 $ 6,652 $ 7,867 $ 185 $ -- $ 8,052 ==================================== ===============================================
Other debt securities include corporate notes and bonds and collateralized mortgage obligations. On December 31, 1999 investment securities carried at $49,858,000 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, 1999 (in thousands):
Available for Sale Held to Maturity Amortized Cost Market Value Amortized Cost Market Value -------------- ------------ -------------- ------------ 1 year or less $ 17,083 $ 17,024 $1,450 $1,465 1 year-5 years 54,213 53,672 2,293 2,312 5 years-10 years 16,604 16,513 -- -- After 10 years 20,225 19,396 -- -- ---------------------------- --------------------------- 108,125 106,605 3,743 3,777 ---------------------------- --------------------------- Collateralized mortgage obligations and other asset-backed securities 27,614 26,769 -- -- ---------------------------- --------------------------- Total investment securities $135,739 $133,374 $3,743 $3,777 ---------------------------- ---------------------------
8 CNB Financial Corporation and Subsidiaries 1999 Annual Report Notes to Consolidated Financial Statements (Continued) 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 -------- ----------- ------------ 1999 $17,513 $124 $88 1998 4,888 351 1 1997 5,925 556 27
5. LOANS Total Loans at December 31, 1999 and 1998 are summarized as follows (in thousands):
1999 1998 -------- -------- Commercial, Financial and Agricultural $ 78,588 $ 66,257 Residential Mortgage 159,884 134,998 Commercial Mortgage 49,549 46,701 Installment 43,772 38,393 Lease Receivables 35,918 29,362 -------- -------- $367,711 $315,711 ======== ========
Lease receivables at December 31, 1999 and 1998 are summarized as follows (in thousands):
1999 1998 -------- -------- Lease payment receivable $ 16,494 $ 13,676 Estimated residual values 19,424 15,686 -------- -------- Gross lease receivables 35,918 29,362 Less unearned income (4,902) (4,313) -------- -------- Net lease receivables $ 31,016 $ 25,049 ======== ========
At December 31, 1999 and 1998, net unamortized loan costs of $601,000 and $264,000, respectively, have been included in the carrying value of loans. The Bank's outstanding loans and related unfunded commitments are primarily concentrated within Central Pennsylvania. The Bank attempts to limit concentrations within specific industries by utilizing dollar limitations to single industries or customers, and by entering into participation agreements with third parties. Collateral requirements are established based on management's assessment of the customer. The recorded investment in loans that are considered impaired under SFAS No. 114 was $-0- and $537,590 at December 31, 1999 and 1998, respectively. The 1998 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 year ended December 31, 1999 and 1998 was $0 and $569,457, respectively. For the year ended December 31, 1998, the Corporation recognized accrued interest income on impaired loans of $46,488. Deposit accounts that have overdrawn their current balance, overdrafts, are reclassified to loans. Overdrafts included in loans are $1,691,000 in 1999 and $533,000 in 1998. 6. 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):
1999 1998 1997 ------ ------ ------ Balance, Beginning of Year $3,314 $3,062 $2,683 Charge-offs (616) (594) (670) Recoveries 193 139 118 ------ ------ ------ Net Charge-offs (423) (455) (552) Provision for Loan and Lease Losses 643 707 931 Acquisition 356 -- -- ------ ------ ------ Balance, End of Year $3,890 $3,314 $3,062 ====== ====== ======
9 CNB Financial Corporation and Subsidiaries 1999 Annual Report Notes to Consolidated Financial Statements (Continued) 7. PREMISES AND EQUIPMENT The following summarizes Premises and Equipment at December 31 (in thousands):
1999 1998 -------- -------- Land $ 1,527 $ 1,315 Premises and Leasehold Improvements 10,831 9,116 Furniture and Equipment 6,738 6,082 -------- -------- 19,096 16,513 Less Accumulated Depreciation and Amortization (6,242) (5,843) -------- -------- Premises and Equipment, Net $12,854 $10,670 ======== ========
Depreciation on Premises and Equipment amounted to $957,000 in 1999, $872,000 in 1998, and $808,000 in 1997. Rental expense, net of rental income, charged to occupancy expense for 1999, 1998, and 1997 was $184,000, $134,000 and $126,000, respectively. 8. INTANGIBLE During 1999, the Corporation purchased the deposits, certain loans and the fixed assets of five branches of super-regional competitors. In conjunction with this transaction, the Corporation paid premiums totaling $14.4 million, which has been identified as an intangible and is being amortized on a straight line basis over a period of 10 years. The following table reflects the components of the intangible assets at December 31, (in thousands):
1999 1998 --------- -------- Core deposit intangible $17,534 $3,152 Less: accumulated amortization (1,635) (630) --------- -------- Core deposit intangible, net $15,899 $2,522 ========= ========
9. 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):
1999 1998 --------- -------- Within One Year $213,671 $141,805 Within Two Years 35,422 38,984 Within Three Years 16,454 4,864 Within Four Years 4,990 7,081 Within Five Years and Greater 12,618 2,456 --------- -------- $283,155 $195,190 ========= ========
Certificates of Deposit of $100,000 or more totaled $38,029,000 and $25,929,000 at December 31, 1999 and 1998, respectively. 10. OTHER BORROWINGS Other borrowings include $1.8 million and $359,000 of demand notes payable to the U.S. Treasury Department at December 31, 1999 and 1998, 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 $130 million. Also, other borrowings include advances from the Federal Home Loan Bank (FHLB) at December 31, 1999, and 1998 as follows (in thousands):
December 31, Interest Rate Maturity 1999 1998 ---------------------------------------------------- Fixed 6.75% 9/27/11 $ -- $ 569 Variable (a) 5/23/00 -- 5,000 (b) 1/11/09 -- 450 (c) 2/4/03 -- 10,000 (d) 1/20/09 5,000 -- -------- ------- Total borrowed funds $ 5,000 $16,019 ======== =======
10 CNB Financial Corporation and Subsidiaries 1999 Annual Report Notes to Consolidated Financial Statements (Continued) (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% for 1998. (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. (d) Interest rate is fixed for one year at which time FHLB has option to float the interest rate based on the 3 month LIBOR +.15, the interest rate was 4.30% at December 31, 1999. Following are maturities of borrowed funds as of December 31, 1999 (in thousands): 2000 $1,750 2001 -- 2002 -- 2003 -- 2004 -- Thereafter 5,000 ------ Total Borrowed Funds $6,750 ======
11. INCOME TAXES The following is a summary of the tax provision (in thousands):
1999 1998 1997 ------- ------- ------- Current $ 849 $ 470 882 Deferred 611 1,365 766 ------- ------- ------- Net provision for Income Taxes $1,460 $ 1,835 $1,648 ======= ======= ======
The applicable portion of the current year provision related to the gains on sales of available for sale securities is $12,000, $119,000, and $180,000 in 1999, 1998 and 1997, respectively. The components of the net deferred tax liability as of December 31, 1999 and 1998 are as follows (in thousands):
1999 1998 ------- -------- Deferred tax assets Allowance for loan losses $1,054 $ 828 Post-retirement benefits 71 49 Intangible 68 71 Deferred compensation 94 47 Merger costs 76 -- Unrealized loss on investment securities available for sale 685 -- Other 79 -- ------- -------- 2,127 995 Deferred tax liabilities Premises and equipment 380 370 Vehicle leasing 3,505 2,617 Unrealized gain on investment securities available for sale. -- 815 Other 135 -- ------- -------- 4,020 3,802 ------- -------- Net deferred tax liability $1,893 $2,807 ======= ========
The reconciliation of income tax attributable to continuing operations at the Federal statutory tax rates to income tax expense is as follows (in thousands):
1999 % 1998 % 1997 % ------ ----- ------ ----- ------ ----- Tax at statutory rate $2,062 34.0 $2,339 34.0 $2,157 34.0 Tax exempt income, net (749) (12.3) (579) (8.4) (516) (8.1) Other 147 2.4 75 1.1 7 0.1 ------ ----- ------ ----- ------ ----- Income tax provision $1,460 24.1 $1,835 26.7 $1,648 26.0 ====== ===== ====== ===== ====== =====
11 CNB Financial Corporation and Subsidiaries 1999 Annual Report Notes to Consolidated Financial Statements (Continued) 12. STOCK INCENTIVE PLAN The Corporation has a common stock plan for key employees and independent directors. The Stock Incentive Plan, which is administered by a committee of the Board of Directors, provides for 250,000 shares of common stock in the form of qualified options, nonqualified options, stock appreciation rights or restrictive stock. The plan vesting schedule is one-fourth of granted options per year beginning one year after the grant date with 100% vested on the fourth anniversary. The Corporation applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its common stock plan. Accordingly, no compensation expense has been recognized for the plans. Had compensation cost for the plans been determined based on the fair values at the grant dates for awards, consistent with the method of SFAS No. 123, net income and earnings per share for 1999 would have been adjusted to the pro forma amounts indicated below: Net income As reported $4,604,000 Pro forma $4,541,000 Earnings Per Share-Basic As reported $ 1.26 Pro forma $ 1.24
For purposes of the pro forma calculations above, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants issued: Dividend Yield 3.5% Volatility 17.3% Risk-free interest rates 6.0% Expected option lives 6 years
A summary of the status of the common stock plans, adjusted retroactively for the effects of stock splits, is presented below:
Weighted - average Remaining Shares Exercise Price Contractual Life ------- ------------------ ---------------- Outstanding, at January 1, 1999 -- -- Granted 18,250 28.25 10 years Exercised -- -- Forfeited -- -- ------ ------ Outstanding, at December 31, 1999 18,250 28.25 ===== ====== Options exercisable at December 31, 1999 0 Fair value of options granted during the year $ 5.21
13. 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 $72,600. The Corporation recognized expense of $419,000 in 1999, $405,000 in 1998, and $350,000 in 1997. 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 $40,000, $30,000, and $30,000 in 1999, 1998, and 1997, respectively. 12 CNB Financial Corporation and Subsidiaries 1999 Annual Report Notes to Consolidated Financial Statements (Continued) The Corporation provides certain health care benefits for retired employees and their qualifying dependents. The following table sets forth the change in the benefit obligation and funded status:
December 31 1999 1998 --------- ---------- Benefit obligation at beginning of year $ 463,107 $ 430,478 Interest cost 30,102 27,981 Service cost 25,279 23,383 Actual claim expense (26,499) (7,388) Interest on claim expense (390) (310) Actuarial gain (57,771) (11,037) --------- ---------- Benefit obligation at end of year $ 433,828 $ 463,107 ========= ========== December 31 1999 1998 --------- ---------- Funded status of plan $(433,828) $(463,107) Unrecognized actuarial (gain)/loss 4,777 63,262 Unrecognized prior service cost -- -- Unrecognized transition obligation 102,838 110,183 --------- ---------- Accrued pension cost $(326,213) $(289,662) ========= ========== December 31 1999 1998 1997 --------- ---------- ---------- Net periodic post-retirement benefit cost: Service cost $ 25,279 $ 23,383 $ 21,737 Interest cost 29,712 27,671 26,580 Amortization of transition obligation over 21 years 8,059 8,685 9,701 --------- ---------- ---------- $ 63,050 $ 59,739 $ 58,018 ========= ========== ==========
The weighted average discount rate used to calculate net periodic benefit cost and the accrued post-retirement liability was 7.50% and 6.50% in 1999 and 1998. The health care cost trend rate used to measure the expected costs of benefits for 2000 is 9.0%, and 8.0% thereafter. A one percent increase in the health care trend rates would result in an increase of $67,261 in the benefit obligation of December 31, 1999, and would increase the service and interest costs by $10,776 in future periods. A similar one percent decrease in health care trend rates would result in a decrease of $56,227 and $8,750 in the benefit obligation and service and interest costs, respectively, at December 31, 1999. The presentation above for the years 1999, 1998 and 1997 reflects a policy which grants eligibility to these benefits to employees at least 60 years of age with 30 years of service. 14. 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 $4,431,000 on December 31, 1999 compared to $5,793,000 at December 31, 1998. During 1999, $20,896,000 of new loans were made and repayments totaled $22,258,000. The Bank entered into an operating lease with a director of the Corporation for one year terms which can be renewed for one year. The annual lease payments were determined based on prevailing terms in the market area. All ongoing operating and general maintenance expenses will be the responsibility of the director. 15. REGULATORY MATTERS The Corporation and Bank are subject to minimum capital requirements set by Federal regulatory agencies, namely the Federal Reserve Bank and the Office of the Comptroller of the Currency. Regulators require capital ratios of 4.0% Tier 1 capital to total risk based assets, 8.0% or more of total qualifying capital to total risk weighted assets and total Tier 1 capital to total assets of 4.0% for an institution to be considered adequately capitalized. The Corporation is well capitalized while the Bank is reported as adequately capitalized under the regulatory framework for prompt corrective action as of the most recent notification of the regulators. There are no conditions or events since that notification that management believes would change the Corporation's status. 13 CNB Financial Corporation and Subsidiaries 1999 Annual Report Notes to Consolidated Financial Statements (Continued) The table below ($'s in thousands) summarizes the Corporation and Bank's regulatory capital levels:
December 31, Risk Based Capital 1999 1998 ---------------------------------------------- ------------------------------------------------ Ratio to Ratio to Regulatory Risk Minimum Well Regulatory Risk Minimum Well Capital Assets Required Capitalized Capital Assets Required Capitalized ---------------------------------------------- ------------------------------------------------ Tier 1 CNB Financial Corporation $33,745 8.96% 4.0% 6.0% $45,355 14.73% 4.0% 6.0% County National Bank 29,396 7.88% 4.0% 6.0% 36,111 11.93% 4.0% 6.0% Tier 1 + Tier 2 Capital CNB Financial Corporation 37,792 10.04% 8.0% 10.0% 48,669 15.81% 8.0% 10.0% County National Bank 33,286 8.92% 8.0% 10.0% 39,425 13.02% 8.0% 10.0% Leverage CNB Financial Corporation 33,745 6.66% 4.0% 5.0% 45,355 10.66% 4.0% 5.0% County National Bank 29,396 5.90% 4.0% 5.0% 36,111 8.59% 4.0% 5.0%
Failure to maintain the minimum capital level requirements can initiate mandatory and possibly additional discretionary disciplinary actions by regulators. In such an instance, if regulatory action was undertaken, the results could have a direct effect on the Corporation's financial position. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the Corporation's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances. Dividends payable by the Bank to the Corporation without prior approval of the Office of the Comptroller of the Currency (OCC) are limited to the Bank's retained net profits for the 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, 1999, $2.2 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. 16. 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, 1999, the Bank had $14.0 million of unused credit card lines; $13.2 million of unfunded home equity lines of credit; $41.7 million in other outstanding loan commitments and $2.9 million in standby letters of credit. 17. MERGER AND ACQUISITIONS On August 18, 1999, the Corporation acquired The First National Bank of Spangler ("Spangler") located in Spangler, PA. The merger, which was accounted for as a pooling of interest, was affected by issuing 237,500 shares of CNB Financial Corporation common stock in exchange for 100% of the outstanding shares of Spangler. After consummation of the merger, Spangler was merged into County National Bank. All financial information has been restated to reflect the merger. 14 CNB Financial Corporation and Subsidiaries 1999 Annual Report Notes to Consolidated Financial Statements (Continued) The post merger combined operating results provided in the table below are presented to show the 30 day period from September 1, through September 30, 1999 and 1998 as if the merger were in effect for both periods.
1999 1998 ------ ------ Net Interest Income $1,642 $1,377 Net Income $ 408 $ 401 Net Income per common share $ 0.11 $ 0.11
The following represents unaudited selected pro forma fiancial information regarding the effects of the transactions as though the Corporation and Spangler had been combined for all periods presented:
CNB Spangler Combined ----- ------- -------- Six months ended June 30, 1999 Net interest income $ 8,200 $ 558 $ 8,758 Net income 2,145 135 2,280 Earnings per share 0.63 0.57 0.62 Year ended December 31, 1998 Net interest income 15,604 1,124 16,728 Net income 4,747 296 5,043 Earnings per share 1.38 1.25 1.37 Year ended December 31, 1997 Net interest income 14,383 1,179 15,562 Net income 4,302 393 4,695 Earnings per share 1.25 1.66 1.27 December 31, 1998 Assets 436,852 32,065 468,917 Liabilities 392,071 27,472 419,543 Shareholders' equity 44,781 4,593 49,374
On February 12, 1999, the Corporation acquired the Punxsutawney branch from an unaffiliated financial institution. This acquisition included deposits of $36 million, loans of $11 million and certain fixed assets. On September 24, 1999, the Corporation acquired the Johnsonburg, Ridgway, Bradford and Kane branches from an unaffiliated financial institution. This acquisition included deposits of $116.2 million, loans of $21.7 million and certain fixed assets. These acquisitions were accounted for under the purchase method of accounting and the Corporation recorded $14.4 million as intangible assets. The consolidated results include the operations of the acquired branches from the date of acquisition. 18. 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. 15 CNB Financial Corporation and Subsidiaries 1999 Annual Report Notes to Consolidated Financial Statements (Continued) 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, 1999 and 1998. Net Loans: For demand and variable rate commercial, consumer loans, and residential mortgages that reprice frequently, fair values are estimated by reducing carrying amounts by estimated credit loss factors. For fixed rate commercial, consumer and residential mortgage loans, including nonaccrual loans, fair values are estimated using discounted cash flow analyses, with cash flows reduced by estimated credit loss factors and discount rates equal to interest rates currently being offered for similar loans. Lease arrangements are not considered financial instruments. Deposits: The carrying amount for noninterest-bearing demand and interest-bearing money- market and savings deposits approximates fair values. For certificates of deposit fair value has been estimated using discounted cash flow analyses that apply interest rates currently being offered on certificates with similar maturities. Advances from the Federal Home Loan Bank: Fair value is determined by discounting the advances using current rates of advances with comparable maturities. Other Borrowings: Other borrowings consist of short-term demand notes payable to the U.S. Treasury Department under its program of investing treasury tax and loan account balances with depository institutions. Because of their short-term nature carrying value is considered to be fair value. Accrued Interest Payable: The carrying amounts reported in the statement of condition for accrued interest payable approximates its fair value primarily due to its short-term nature. Standby Letters of Credit: The fair value of letters of credit are estimated based upon the amount of deferred fees and the creditworthiness of the counterparties.
December 31, 1999 December 31, 1998 ------------------------- ------------------------ (in thousands) Carrying Fair Carrying Fair Amount Value Amount Value ------------------------- ------------------------ ASSETS Cash and short-term assets $ 21,214 $ 21,214 $ 26,093 $ 26,093 Investment securities 143,563 143,597 113,675 113,860 Net Loans 327,858 325,819 282,992 288,423 LIABILITIES Deposits 500,751 503,075 398,082 400,778 Advances from the Federal Home Loan Bank 5,000 4,999 16,019 16,093 Other Borrowings 1,750 1,750 359 359
16 CNB Financial Corporation and Subsidiaries 1999 Annual Report Notes to Consolidated Financial Statements (Continued) 19. PARENT COMPANY ONLY FINANCIAL INFORMATION (in thousands)
BALANCE SHEETS December 31, 1999 1998 ------- --------- ASSETS Cash $ 52 $ 388 Investment in bank subsidiary 44,231 39,447 Investment in non-bank subsidiary 3,449 5,115 Securities-available for sale -- 4,799 Other assets 926 7 ------- --------- TOTAL ASSETS $48,658 $49,756 ======= ========= LIABILITIES Income taxes payable $ (16) $ 30 Deferred tax liability (15) 345 Other liabilities 1,046 7 ------- --------- TOTAL LIABILITIES 1,015 382 TOTAL SHAREHOLDERS' EQUITY 47,643 49,374 ------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $48,658 $49,756 ======= =========
STATEMENTS OF INCOME Year ended December 31, 1999 1998 1997 ------- -------- ------- Dividends from: Bank subsidiary $ 2,544 $ 3,588 $ 2,937 Non bank subsidiary 750 -- -- Securities available for sale 35 130 99 Other 62 350 542 ------- -------- ------- TOTAL INCOME 3,391 4,068 3,578 ------- -------- ------- EXPENSES (220) (234) (89) INCOME BEFORE INCOME TAXES AND EQUITY IN DISTRIBUTED NET INCOME OF SUBSIDIARY 3,171 3,834 3,489 Applicable income tax (obligation) benefit 50 (53) (166) Equity in undistributed net income of bank subsidiary 1,919 1,251 1,372 Equity in undistributed net income of non-bank subsidiary (536) 11 -- ------- -------- ------- NET INCOME $ 4,604 $ 5,043 $ 4,695 ======= ======== =======
STATEMENTS OF CASH FLOWS Year ended December 31, Cash flows from operating activities: 1999 1998 1997 ------- -------- ------- Net income $ 4,604 $ 5,043 $ 4,695 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of bank subsidiary (1,919) (1,251) (1,372) Equity in undistributed net income of non-bank subsidiary 536 (11) -- (Increase) Decrease in other assets (919) (7) 20 Increase (Decrease) in other liabilities 957 (131) 166 Gain on sale of available for sale securities -- (349) (539) ------- -------- ------- Net cash provided by operating activities 3,259 3,294 2,970 ------- -------- ------- Cash flows from investing activities: Purchase of securities available for sale (119) (1,976) (2,065) Proceeds from the sale of securities available for sale -- 1,554 1,612 ------- -------- ------- Net cash used in investing activities (119) (422) (453) Cash flows from financing activities: Dividends paid (2,897) (2,588) (2,430) Net treasury stock activity (579) -- -- ------- -------- ------- Net cash used in financing activities (3,476) (2,588) (2,430) ------- -------- ------- Net increase (decrease) in cash (336) 284 87 Cash beginning of year 388 104 17 ------- -------- ------- Cash end of year $ 52 $ 388 $ 104 ======= ======== =======
17 CNB Financial Corporation and Subsidiaries 1999 Annual Report Selected Financial Data
Year Ended December 31 (dollars in thousands, except per share data) 1999 ---------- Interest income Loans including fees $ 28,148 Deposits with banks 60 Federal funds sold 386 Investment securities: U.S. treasury securities 989 Securities of U.S. government agencies and corporations 2,383 Obligations of states and political subdivisions 1,888 Other securities 1,557 ---------- Total interest income 35,411 Interest expense Deposits 15,579 Other borrowings 981 ---------- Total interest expense 16,560 Net interest income 18,851 Provision for loan losses 643 ---------- Net interest income after provision for loan losses 18,208 Other income 3,517 Other expenses 15,661 ---------- Income before taxes and cumulative effect adjustment 6,064 Applicable income taxes 1,460 ---------- Income before cumulative effect adjustment 4,604 Cumulative effect adjustment -- ---------- Net income $ 4,604 =========== Per share data Income before cumulative effect adjustment $ 1.26 Cumulative effect adjustment $ -- Net income $ 1.26 *Net income, fully diluted $ 1.25 Dividends declared $ 0.80 Book value per share at year end $ 13.00 At end of period Total assets $561,162 Investment securities 143,563 Loans, net of unearned discount 362,764 Allowance for loan losses 3,890 Deposits 500,751 Shareholders' equity 47,643 Key ratios Return on average assets 0.91% Return on average equity 9.50% Loan to deposit ratio 71.67% Dividend payout ratio 62.92% Average equity to average assets ratio 9.59%
* Earnings per share in 1996 was calculated using the same weighted average shares for basic and diluted computations. 18 CNB Financial Corporation and Subsidiaries 1999 Annual Report Five Year Comparison
1998 1997 1996 1995 -------- ------- ------- ------- $ 25,250 $ 23,209 $ 19,802 $ 18,266 12 1 -- 2 369 271 196 147 1,134 1,366 1,290 1,235 2,503 1,663 1,756 1,480 1,414 1,307 1,301 1,229 694 634 838 1,038 -------- ------- ------- ------- 31,376 28,451 25,183 23,397 13,714 12,459 10,421 9,883 934 430 376 277 -------- ------- ------- ------- 14,648 12,889 10,797 10,160 16,728 15,562 14,386 13,237 707 931 625 410 -------- ------- ------- ------- 16,021 14,631 13,761 12,827 3,088 2,749 1,916 1,997 12,231 11,037 9,541 9,311 -------- ------- ------- ------- 6,878 6,343 6,136 5,513 1,835 1,648 1,639 1,340 -------- ------- ------- ------- 5,043 4,695 4,497 4,173 -- -- 156 -- -------- ------- ------- ------- $ 5,043 $ 4,695 $ 4,653 $ 4,173 ========= ======== ======= ======= $ 1.37 $ 1.27 $ 1.22 $ 1.13 $ -- $ -- $ 0.04 $ -- $ 1.37 $ 1.27 $ 1.26 $ 1.13 $ 1.37 $ 1.27 $ 1.26 $ 1.13 $ 0.72 $ 0.68 $ 0.62 $ 0.58 $ 13.41 $ 12.65 $ 11.89 $ 11.24 $468,917 $403,779 $358,388 $325,253 113,675 83,571 85,604 82,313 311,141 286,113 243,996 219,425 3,314 3,062 2,683 2,328 398,082 345,760 297,118 279,297 49,372 46,606 43,804 41,391 1.18% 1.23% 1.39% 1.36% 10.43% 10.44% 10.95% 10.50% 76.94% 81.86% 81.22% 77.73% 51.32% 51.76% 47.63% 49.68% 11.31% 11.81% 12.66% 12.91%
19 CNB Financial Corporation and Subsidiaries 1999 Annual Report Statistical Information MATURITY DISTRIBUTION Remaining maturity/earliest repricing as of December 31, 1999 ($'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: Investment securities $ 14,670 $ 21,883 $ 60,521 $46,489 $143,563 Interest bearing deposits 321 -- -- -- 321 Loans (net) 140,551 47,976 130,278 40,069 358,874 --------- -------- -------- ------- -------- Total $155,542 $ 69,859 $190,799 $86,558 502,758 Interest bearing liabilities: Interest bearing deposits $ 6,081 $ 24,323 $ 63,239 $27,972 $121,615 Savings 10,214 -- 35,522 27,269 73,005 Time 70,815 110,388 63,937 6,100 251,240 Borrowed funds 6,750 -- -- -- 6,750 --------- -------- -------- ------- -------- Total $ 93,860 $134,711 $162,698 $61,341 $452,610 --------- -------- -------- ------- -------- Gap $ 61,682 $(64,852) $ 28,101 $25,217 $ 50,148 Cumulative gap $ 61,682 $ (3,170) $ 24,931 $50,148 Sensitivity ratio 1.66 .52 1.17 1.41 1.11 Cumulative sensitivity ratio 1.66 .98 1.06 1.11
QUARTERLY SUMMARY OF EARNINGS The unaudited quarterly results of operations for the years ended December 1999 and 1998 are as follows (in thousands, except per share data):
Quarters Ended 1999 March 31 June 30 Sept. 30 Dec. 31 ------------ --------- --------- ---------- Total interest income $ 8,264 $ 8,375 $ 8,837 $ 9,935 Net interest income 4,288 4,470 4,887 5,206 Provision for loan losses 154 153 153 183 Other income 703 890 915 1,009 Other expense 3,507 3,602 3,911 4,641 Net income 1,062 1,218 1,293 1,031 Net income per share 0.29 0.33 0.35 0.28 Net income per share, fully 0.29 0.33 0.35 0.28 diluted
Quarters Ended 1998 March 31 June 30 Sept. 30 Dec. 31 --------- -------- -------- -------- Total interest income $ 7,588 $ 7,798 $ 7,881 $ 8,109 Net interest income 4,047 4,203 4,168 4,310 Provision for loan losses 234 161 158 154 Other income 651 731 840 866 Other expense 2,898 2,893 3,210 3,230 Net income 1,140 1,362 1,218 1,323 Net income per share 0.31 0.37 0.33 0.36 Net income per share, fully 0.31 0.37 0.33 0.36 diluted
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, 1999, the approximate number of shareholders of record of the Corporation's common stock was 1,800.
Price Range of Common Stock 1999 1998 High Low High Low --------------- ------------------- First Quarter $35.00 $33.00 $23.13 $19.94 Second Quarter 33.75 29.00 29.50 23.13 Third Quarter 30.13 25.25 30.13 29.00 Fourth Quarter 26.75 23.00 34.25 30.00
Cash Dividends Paid 1999 1998 ------ ------ First Quarter $0.20 $0.18 Second Quarter 0.20 0.18 Third Quarter 0.20 0.18 Fourth Quarter 0.20 0.18 ----- ------ $0.80 $0.72 ===== ======
TRUST AND ASSET MANAGEMENT DIVISION FUNDS UNDER MANAGEMENT (MARKET VALUE)
($'s in thousands) 1999 1998 -------- --------- Personal Trusts, Estates and Agency Accounts $180,664 $172,079 Corporate Accounts 10,801 16,455 -------- --------- Total $191,465 $188,534 ======== =========
20 CNB Financial Corporation and Subsidiaries 1999 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL The following discussion and analysis of the consolidated financial statements of CNB Financial Corporation (the "Corporation") is presented to provide insight into management's assessment of financial results. The Corporation's subsidiary County National Bank (the "Bank") provides financial services to individuals and businesses within the Bank's market area made up of the west central Pennsylvania counties of Cambria, Clearfield, Centre, Elk, Jefferson and McKean. County National Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency ("OCC"). The financial condition and results of operations are not intended to be indicative of future performance. The Corporation's subsidiary, CNB Investment Corporation, is headquartered in Wilmington, DE. CNB Investment Corporation maintains investments in debt and equity securities. 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 with 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. MERGER AND ACQUISITIONS On February 12, 1999 the Bank acquired a full-service banking office and the corresponding liabilities ($36 million) and certain assets ($11 million) of the office from an unaffiliated institution. The office is located in west central Pennsylvania in the community of Punxsutawney. The office will continue to operate as a branch of the Bank. This acquisition has been accounted for as a purchase. On September 24, 1999, the Bank acquired four full service offices in north central PA from an unaffiliated institution. The offices are located in the communities of Johnsonburg and Ridgway in Elk County and Bradford and Kane in McKean County. The purchase included $21.7 million in loans, $116.2 million in deposits and certain fixed assets associated with the offices. All locations continue to operate as full service branches of the Bank. This purchase and the previously discussed purchase of the Punxsutawney office are referred to hereafter as "the Acquisitions". On August 18, 1999, the Corporation acquired The First National Bank of Spangler ("Spangler") located in Spangler, PA. The merger, which was accounted for as a pooling of interest, was affected by issuing 237,500 shares of CNB Financial Corporation common stock in exchange for 100% of the outstanding shares of Spangler. After consummation of the merger, Spangler was merged into County National Bank. The merger included $23.0 million in loans, $29.0 million in deposits, $4.6 million in capital and other assets and liabilities. All historical financial information has been restated to reflect the merger. 21 CNB Financial Corporation and Subsidiaries 1999 Annual Report FINANCIAL CONDITION The following table presents ending balances ($'s in millions), growth (reduction) and the percentage change during the past two years:
1999 Increase % 1998 Increase % 1997 Balance (Decrease) Change Balance (Decrease) Change Balance -------------------------------------------------------------------------------------------------- Total assets $561.2 $ 92.3 19.7 $468.9 $65.1 16.1 $403.8 Total loans, net 358.9 51.1 16.6 307.8 24.7 8.7 283.1 Total investments 143.6 29.9 26.3 113.7 30.1 36.0 83.6 Total deposits 500.8 102.7 25.8 398.1 52.3 15.1 345.8 Total shareholders' 47.6 (1.7) (3.4) 49.3 2.7 5.8 46.6 equity
The above table is referenced for the discussion in this section of the report. OVERVIEW OF BALANCE SHEET The increase in assets during 1999 can be attributed to the Acquisitions, previously mentioned, of $122.8 million in new deposits. These deposits accounted for the increase in loans of $51,047,000 (or 16.6%), and investments of $29,888,000 (26.3%). The 19.7% increase in assets shows the Corporation had a very successful year of growth when compared to 16.1%, 12.7%, and 10.2% in 1998, 1997 and 1996 respectively. CASH AND CASH EQUIVALENTS Cash and cash equivalents totaled $21,214,000 at December 31, 1999 compared to $26,093,000 on December 31, 1998. The decrease was the result of a reduction in Federal Funds at year end. The investment in Federal Funds at year end 1998 was high due to an infusion of cash prior to year end that was temporary in nature. 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 26% since December 31, 1998. The increase was created by another good year of growth in deposits due to the Acquisitions as well as internal growth. 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 $143,563,000 as of December 31, 1999, $136,945,000 (or 95.4%) is classified as available for sale with the balance of $6,618,000 classified as held to maturity. The Corporation experienced significant growth in US government agencies and corporations, $15,849,000 during 1999 compared to 1998. The shift to bonds with greater liquidity is a strategy to provide funding for future loan growth in an economy that has made deposit growth increasingly more difficult. 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 Acquisitions and our purchase of Spangler. We expect moderate loan growth over the next several quarters in these and other market areas of the Bank as customers seek alternatives to competing and consolidating superregional banks. Commercial activity has increased by $12 million or 18.6% in 1999 over 1998. 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 $6.6 million and $9.6 million in 1999 and 1998. During 1998, the home equity products within the Bank were targeted for growth and expanded $8.1 million or 63.6%, thus providing positive effects to the consumer loan portfolio. 22 CNB Financial Corporation and Subsidiaries 1999 Annual Report LOAN CONCENTRATION The Corporation monitors loan concentrations by individual industries in order to track potential risk exposures resulting from industry related downturns. At December 31, 1999, no concentration exists within our commercial or real estate loan portfolio as related to concentration of 10% of the total loans. Residential real estate lending along with automobile financing continue to be the largest components of the loan portfolio. LOAN QUALITY The Corporation has established written lending policies and procedures that require underwriting standards, loan documentation, and credit analysis standards to be met prior to funding a loan. Subsequent to the funding of a loan, ongoing review of credits is required. Credit reviews are performed annually on a minimum of 60% of the commercial loan portfolio by an internal loan review staff. See "Allowance for Loan and Lease Losses" for further discussion of credit review procedures. The following table sets forth information concerning loan delinquency and other non-performing assets ($ in thousands):
at December 31, 1999 1998 1997 Nonperforming assets: $ 862 $ 190 $ 323 Non-accrual loans Accrual loans greater than 89 days past due 886 1,479 601 Foreclosed assets held for sale 394 365 153 -------- -------- -------- Total nonperforming assets $ 2,142 $ 2,034 $ 1,077 Total loans, net of unearned income $362,764 $311,141 $286,113 Nonperforming loans as a percent of loans, net 0.48% 0.54% 0.32% Nonperforming assets as a percent of loans, net 0.59% 0.65% 0.38%
ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses is established by provisions for possible losses in the loan and lease portfolio. These provisions are charged against current income. Loans deemed not collectible are charged-off against the allowance while any subsequent collections are recorded as recoveries and increase the allowance. The table below shows activity within the allowance account over the past three years: Allowance for Loan and Lease Losses ($'s in thousands)
Years Ended December 31, 1999 1998 1997 Balance at beginning of $ 3,314 $ 3,062 $ 2,683 Period Charge-offs: Commercial and financial 59 47 88 Commercial mortgages 30 30 -- Residential mortgages 54 16 28 Installment 380 459 529 Lease receivables 93 42 25 -------- -------- -------- 616 594 670 Recoveries: Commercial and financial 79 21 2 Commercial mortgages 1 -- -- Residential mortgages 4 2 -- Installment 103 115 116 Lease receivables 6 1 -- -------- -------- -------- 193 139 118 Net charge-offs: (423) (455) (552) Provision for possible loan losses 999 707 931 ======== ======== ======== Balance at end-of-period $ 3,890 $ 3,314 $ 3,062 ======== ======== ======== Loans, net of unearned $362,764 $311,141 $286,113 Allowance to net loans 1.07% 1.07% 1.07% Specific allocation 0.58% 0.53% 0.51% Unallocated 0.49% 0.54% 0.57%
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 23 CNB Financial Corporation and Subsidiaries 1999 Annual Report 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 1999 1998 Commercial and financial $ 626 $ 435 Commercial mortgages 216 179 Residential mortgages 504 342 Installment 592 453 Lease receivables 177 140 Unallocated 1,775 1,765 Total $3,890 $3,100
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 net charge-offs for 1999 when compared to 1998 and 1997. 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 has matured after 3.5 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, 1999. 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. 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 1999. The time deposit category has increased by $87,965,000 due in large part to the Acquisitions. This results in time deposits representing 56.5% of total deposits compared to 49.0% as of year-end 1998. The following table reflects the Corporation's deposit mix by category (in thousands):
1999 1998 1997 -------- -------- -------- Checking, Non-Interest Bearing $ 54,891 $ 38,970 $ 35,062 Checking, Interest Bearing 121,614 127,809 84,344 Savings Accounts 41,091 36,113 37,384 Certificates of Deposit 283,155 195,190 188,970 -------- -------- -------- $500,751 $398,082 $345,760 ======== ======== ========
SHAREHOLDERS' EQUITY The Corporation's strong capital provided the strong base for our recent profitable growth. Total shareholders' equity decreased 3.5% in 1999. The decline was the result of a decrease of $2,859,000 in accumulated other comprehensive income which represents a decrease in unrealized gains in available-for-sale securities, net of taxes. With 95.4% 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 1999, interest rates had a significant increase resulting in decreased 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 as discussed below. The Corporation has complied with the standards of capital adequacy mandated by the banking industry. Bank regulators have established "risk-based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of either 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets), is assigned to each asset on the balance sheet. The total risk- based capital ratio of 10.04% as of December 31, 1999 is well above the minimum standard of 8%. The Tier 1 capital ratio of 8.96% also is above the regulatory minimum of 4%. The leverage ratio, 6.66%, was also above the minimum standard of 4%. The Corporation is deemed to be well capitalized under regulatory industry standards as the noted ratios are above the regulatory 24 CNB Financial Corporation and Subsidiaries 1998 Annual Report requirements of 10%, 6% and 5%, respectively. The ratios provide quantitative data demonstrating the strength and future opportunities for use of the Corporation's capital base. An evaluation of risk-based capital ratios and the capital position of the Corporation is a part of its strategic decision making process. LIQUIDITY Liquidity measures an organizations' ability to meet cash obligations as they come due. The Consolidated Statements of Cash Flows presented on page 4 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 $130 million with only $5 million outstanding at year end 1999. Management feels the Corporation's current liquidity position is acceptable. YEAR ENDED DECEMBER 31, 1999 OVERVIEW OF THE INCOME STATEMENT In 1999, net income was $4,604,000 a decrease of 8.7% compared to 1998 net income of $5,043,000. The decline in earnings is primarily the result of merger and acquisition related costs of $477,000, net of tax. Net income for 1999 exclusive of merger cost would be $5,081,000 or a 1% increase. Net income prior to merger and acquisition costs and amortization of intangible assets and goodwill for 1999 was $5.7 million compared to $5.3 million for 1998. This measure is a reflection of the operating earnings of the Corporation comparative for two years. The increase indicates an improvement in 1999 of 8% over 1998. The major reason for the increase is the net interest income which increased $2.1 million or 13% over 1998. While the net interest margin did decline in 1999, the growth of earning assets of $66.2 million to $502,758,000 an increase of 15.2%. INTEREST INCOME AND EXPENSE Net interest income totaled $18,851,000 for 1999, an increase of 12.7% over 1998. Continued growth in loans has been the primary factor in this increase which has been mitigated somewhat by lower yields on the new loans written due to increased competition and the interest rate environment during much of 1999. This was also aided by the large growth of investments during 1999. Total interest income for 1999 increased by $4,035,000 or 12.9% while interest expense increased by $1,912,000 or 13.1% when compared to 1998. The Corporation has placed an emphasis on the sale of lower cost transactional deposit accounts. This has kept the margin from experiencing an increase in our cost of funds. The cost of funds declined 25 basis points from 4.35% to 4.10% in 1999. The Corporation recorded a provision for loan and lease losses of $643,000 for 1999 compared to $707,000 for 1998. The decrease in provision is a result of a better experience level of net charge-offs during 1999 coupled with the other factors discussed previously in the loan section of this discussion. Also, the Bank continued its efforts towards increased loan collection activities which have created more timely procedures with delinquent loans. NON-INTEREST INCOME Non-interest income increased $429,000 or 13.9% in 1999 compared to 1998. The service charges on deposit accounts is the main source of the increase. The change for 1999 was an increase of $492,000 or 40.6%. The overall growth in deposit customers accounts for some of the growth in this area. In addition, the Corporation restructured fees for overdrafts and various other items within transaction accounts. The Corporation owns equity securities of various entities that are carried at their current fair market value. During 1999, the gains (losses) realized from these securities totalled ($25,000) compared to $349,000 in 1998. 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 28.0% to $15,661,000 during 1999 compared to 1998. These costs include but are not limited to salaries, supplies, data processing expenses, insurance, occupancy, and amortization expenses. The primary factors in this increase is amortization expense up $743,000 or 226% over 1998 and merger costs of $627,000 included in other expenses. Amortization expense increased due to the Acquisitions that were previously discussed. These Acquisitions, accounted for using the purchase method, increased our intangible assets by $14,382,000. These intangibles will be written off over a 10 year period beginning with the date of each purchase. The Bank signed an agreement to build a facility to replace the existing office in Punxsutawney. The estimated total cost of this project is $325,000. The project is expected to be completed in mid summer 2000 with little ongoing effect to the annual operating expenses. 25 CNB Financial Corporation and Subsidiaries 1999 Annual Report YEAR ENDED DECEMBER 31, 1998 OVERVIEW OF THE INCOME STATEMENT In 1998, net income was $5,043,000, an increase of 7.4% over the 1997 net income of $4,695,000. Overall net income for 1998 benefitted by a larger base of earning assets over 1997. The increase in earning assets was $63,515,000, or 17%, over 1997 to $436,513,000. 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 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 $16,728,000 for 1998, an increase of 7.5% 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 $2,925,000 or 10.3% while interest expense increased by $1,759,000 or 13.6% 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 $707,000 for 1998 compared to $931,000 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 $339,000 or 12.3% 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 $233,000 or 23.8% 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 10.8% to $12,231,000 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 $371,000 or 7.8% over 1997 and employee benefits up $647,000 or 69.6%. 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 $162,000 or 3.2%. 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. RETURN ON EQUITY The return on average shareholder's equity ("ROE") for 1999 was 9.5% compared to 10.43% and 10.44% for 1998 and 1997 respectively. The decrease compared to 1998 can be attributed primarily to the Corporation's 26 CNB Financial Corporation and Subsidiaries 1999 Annual Report efforts to utilize its excess capital position. The Corporation through the acquisitions and the merger with Spangler, had one time merger related costs of $477,000, net of tax. The ROE exclusive of these one time charges and the amortization expense for recorded intangible assets was 11.81% compared to 10.93% in 1998. Management anticipates increases in the ROE during 2000 as earnings are expected to continue improving. RETURN ON ASSETS The Corporation's return on average assets ("ROA") was 0.91% in 1999 down from 1.18% and 1.23% recorded in 1998 and 1997, respectively. Decreased ROA can be attributed to a narrowing net interest margin and increased operating costs as discussed in 1999 non-interest expense section as well as the previously mentioned merger related expenses. The overall decline in the net interest margin was 18 basis points comparing 1999 with 1998. 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. FEDERAL INCOME TAX EXPENSE Federal income taxes decreased to $1,460,000 in 1999 compared to $1,835,000 in 1998. This decrease year to date can be attributed to the Corporation's lower taxable income during the period. The effective tax rates were 24.1%, 26.7% and 26.0% for 1999, 1998 and 1997, respectively. We anticipate the effective tax rate to maintain these levels as our tax exempt income remains stable. MARKET RISK MANAGEMENT Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. As a financial institution, the Corporation is primarily sensitive to the interest rate risk component. Changes in interest rates will affect the levels of income and expense recorded on a large portion of the Bank's assets and liabilities. Additionally, such fluctuations in interest rates will impact the market value of all interest sensitive assets. The Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position and establishing policies to control exposure to interest rate fluctuations. The primary goal established by this policy is to increase total income within acceptable risk limits. The Corporation monitors interest rate risk through the use of two models: earnings simulation and static gap. Each model standing alone has limitations, however taken together they represent a reasonable view of the Corporation's interest rate risk position. STATIC GAP: Gap analysis is intended to provide an approximation of projected repricing of assets and liabilities at a point in time on the basis of stated maturities, prepayments, and scheduled interest rate adjustments within selected time intervals. A gap is defined as the difference between the principal amount of assets and liabilities which reprice within those time intervals. The cumulative one year gap at December 31, 1999 was -0.30% of total earning assets compared to policy guidelines of plus or minus 10.0%. The ratio improved slightly from -6.25% at December 31, 1998. 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, 1999 projects an increase of 10.60% of stable net income if rates decline 200 basis points and a decrease of 15.40% 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 27 CNB Financial Corporation and Subsidiaries 1998 Annual Report differ significantly from these estimates which would produce significant differences in the calculated projected change in income. The limits stated above do not necessarily represent measures that would be taken by management in order to stabilize income results. The instruments on the balance sheet do react at different speeds to various changes in interest rates as discussed under Static Gap. In addition, there are strategies available to management that minimize the decline in income caused by a rapid rise in interest rates. The following table below summarizes the information from the interest rate risk measures at December 31, 1999 and 1998:
1999 1998 ---- ---- Static 1-Yr. Cumulative Gap (0.30%) (6.25%) Earnings Simulation - - 200 bps vs. Stable Rate 10.60% 14.62% +200 bps vs. Stable Rate (15.40%) (14.29%)
The interest rate sensitivity position at December 31, 1999, was slightly 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. YEAR 2000 During 1999, management completed the process of preparing for the Year 2000 date change. This process involved identifying and remediating date recognition problems in computer systems, software and other operating equipment, working with third parties to address their Year 2000 issues, and developing contingency plans to address potential risks in the event of Year 2000 failures. To date, the Corporation has successfully managed the transition. Although considered unlikely, unanticipated problems in the Corporation's core business processes, including problems associated with non-compliant third parties and disruptions to the economy in general, could still occur despite efforts to date to remediate affected systems and develop contingency plans. Management will continue to monitor all business processes, including interaction with the Corporation's customers, vendors and other third parties, throughout 2000 to address any issues and ensure all processes continue to function properly. Through 1999, the cost of the Year 2000 project totalled $100,000 and included $68,000 in capitalized costs incurred to replace non- compliant hardware and software. No further expense is expected during the Year 2000. FUTURE OUTLOOK Management's focus for 2000 is to streamline the operations of the Corporation. This will enable us to reduce our non-interest expenses and create higher returns through increased profitability. Management continues to be encouraged by the growth in the Elk and McKean county markets served by the Bank. In 1999, renovations will be done at one facility to improve customer service and traffic flow. The addition of the Punxsutawney Office to our branch network has proved beneficial as we have been able to enhance our service area. In 2000, we will be relocating to a new facility. In addition, we have expanded our market to Johnsonburg, Kane and Northern Cambria through merger and acquisition. With the addition of these customers and market area, CNB Financial Corporation continues to enhance the services and accessibility for all of our customers. These additional locations provide us a catalyst for growth in 2000. In addition to deposits, the traditional funding source for the Corporation, we will continue to manage potential earning enhancement opportunities using other borrowings with the Federal Home Loan Bank of Pittsburgh. There are certain interest rate environments that allow for pricing opportunities from such borrowings. These opportunities will be evaluated and used when possible to enhance earnings throughout 2000. Loan growth continued to be good, exceeding management's expectations for 1999. 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 2000. Much of this growth is expected to occur in the commercial loan portfolio. Management expects the loan to deposit ratio to raise slightly throughout 2000. 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, 1999, the efficiency ratio was 58.4% compared to 60.5% for 1998 and 58.7% for 1997. 28 CNB Financial Corporation and Subsidiaries 1999 Annual Report The efficiency ratio was positively impacted by increased non-interest income resulting from more customers as well as increases in some of our fees. Management is placing emphasis on this area during 2000 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 will closely monitor the net interest margin in 2000 as much of the earnings of the Corporation are derived from interest earnings. 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 2000. "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. EX-21 4 SUBSIDIARIES EXHIBIT 21 CNB FINANCIAL CORPORATION Form 10-K For The Year Ended December 31, 1999 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-23 5 CONSENT OF INDEPENDENT AUDITORS Consent of Stokes Kelly & Hinds, LLC, Independent Auditors As independent auditors, we hereby consent to the incorporation by reference in this Annual Report (Form 10-K) of our report dated January 7, 1999 with respect to the financial statements of The First National Bank of Spangler at December 31, 1998 and 1997 and for the years then ended prior to their restatement for the 1999 pooling-of-interests with CNB Financial Corp., included in this Annual Report for the year ended December 31, 1999 filed with the SEC. /S/Stokes Kelly & Hinds, LLC Pittsburgh, Pennsylvania March 28, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 20,893 321 0 0 136,945 6,618 6,652 362,764 3,890 561,162 500,751 1,750 6,018 5,000 0 0 3,694 0 561,162 28,148 6,817 446 35,411 15,579 981 18,851 643 36 15,661 6,064 4,604 0 0 4,604 1.26 1.25 7.77 862 886 0 0 3,100 615 193 3,890 3,890 0 1,775
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