ITEM 1.
BUSINESS
CNB FINANCIAL CORPORATION
CNB Financial Corporation (the Corporation) is a Financial 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 Financial 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 activities as are properly incident thereto. The Corporation is currently engaged in two non-banking activities through its wholly owned subsidiaries CNB Investment Corporation and County Reinsurance Company. 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. County Reinsurance Company was formed in June of 2001 as a corporation in the state of Arizona. The company provides accidental death and disability and life insurance as a part of lending relationships of the Bank.
The Corporation does not currently engage in any operating business activities, other than the ownership and management of County National Bank, CNB Investment Corporation and County Reinsurance Company.
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 19 full-service branch offices and 2 limited service branch facility located in various communities in its market area. In the third quarter of 2002, the Bank opened a loan production office in Johnstown, PA and is offering loans to small businesses in communities located throughout the western part of Pennsylvania.
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.
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.
Officers are elected annually at the reorganization meeting of the Board of Directors.
EMPLOYEES
The Corporation has no employees who are not employees of County National Bank. As of December 31, 2002, the Bank had a total of 238 employees of which 180 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, securities, 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 Corporation and its wholly-owned subsidiaries. The table should be read in conjunction with the consolidated financial statements of the Corporation which are incorporated by reference hereinafter.
CNB Financial Corporation
Average Balances and Net Interest Margin
(Dollars in thousands)
(1)
The amounts are reflected on a fully tax equivalent basis using the federal statutory rate of 34% in 2002, 2001 and 2000, 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 in not material.
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 $1,621, $1,453 and $1,008 of fees for the years ending 2002, 2001 and 2000, respectively.
3.
Income on restructured loans accounted for under SFAS Nos. 114 & 118 are included in interest earning assets.
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%. No single issuer represented more than 10% of the portfolio.
LOAN PORTFOLIO
(Dollars in thousands)
A. TYPE OF LOAN
B. LOAN MATURITIES AND INTEREST SENSITIVITY
C. RISK ELEMENTS
1.
Interest income recorded on the non-accrual loans for the year ended December 31, 2002 was $120. Interest income which would have been recorded on these loans had they been on accrual status was $201.
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, 2002 there was $20,289 in loans which are considered problem loans which were not included in the table above. In the opinion of management, these loans are adequately secured and losses are believed to be minimal.
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars In Thousands)
Analysis of the Allowance for Loan Losses
Years Ended December 31,
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)
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”.
DEPOSITS
(Dollars In Thousands)
The maturity of certificates of deposits and other time deposits in denomination of $100,000 or more as of December 31, 2002.
(Dollars In Thousands)
Key ratios for the Corporation for the years ended December 31, 2002 and 2001 appear in the Annual Shareholders’ Report for the year ended December 31, 2002 under the caption “Selected Financial Data” on pages 25 and 26 and are incorporated herein by reference. Short-term borrowings for the Corporation were less on average than 30% of the Corporation’s stockholders’ equity at December 31, 2002.
ITEM 2.
ITEM 2. PROPERTIES
The headquarters of the Corporation and the Bank are located at 1 South Second Street, Clearfield, Pennsylvania, in a building owned by the Corporation. The Bank operates 19 full-service and 2 limited service offices. Of these 21 offices, 16 are owned and five 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.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Corporation or the Bank is a party, or of which any of their property is the subject, except ordinary routine proceedings which are incidental to the 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II.
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information relating to the Corporation’s common stock is on pages 27 and 40 of the Annual Shareholders’ Report for the year ended December 31, 2002 and is incorporated herein by reference. There were 1,557 registered shareholders of record as of March 5, 2003.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Information required by this item is presented on pages 25 and 26 of the Annual Shareholders’ Report for the year ended December 31, 2002 and is incorporated herein by reference.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information required by this item is presented on pages 28-36 of the Annual Shareholders’ Report for the year ended December 31, 2002 and is incorporated herein by reference.
ITEM 7A
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is presented on pages 34 and 35 of the Annual Shareholders’ Report for the year ended December 31, 2002 and is incorporated herein by reference.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and report, which appear in the Annual Shareholders’ Report for the year ended December 31, 2002, are incorporated herein by reference:
Pages in
Annual Report
Consolidated Statements of Condition
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Shareholders’ Equity
Notes to Consolidated Financial Statements
9-23
Report of Independent Auditors
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Corporation’s directors appears on pages 3 and 4 of the Proxy Statement for the Annual Meeting to be held on April 15, 2003 and is incorporated herein by reference. Information relating to Executive Officers is included in Part I.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
Information required by this item is presented on pages 7-11 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 15, 2003 and is incorporated herein by reference.
ITEM 12.
ITEM 12.
SECUR ITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is presented on pages 2-4 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 15, 2003 and is incorporated herein by reference.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is presented on page 11 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 15, 2003 and is incorporated herein by reference.
ITEM 14.
ITEM 14.
CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an evaluation was carried out under the supervision and with the participation of the Corporation’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13A-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that there were no significant changes in the Corporation’s internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV.
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
3.
The following exhibits:
(B)
A report on Form 8-K dated November 13, 2002 was filed by the Corporation during the fourth quarter of 2002 announcing under Item 5 (1) the approval of a plan to repurchase up to 180,000 shares of its common stock, (2) the approval of the conversion of the Corporation into a Financial Holding Company, (3) the fourth quarter dividend of 27 cents per share to shareholders of record on December 4, 2002 and a special dividend of 15 cents per share with the same record date, and (4) the resignation of Richard D. Gathagan as a Director.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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 21, 2003.
/s/ WILLIAM F. FALGER
President and Chief Executive Officer,
Director
WILLIAM F. FALGER
/s/ WILLIAM A. FRANSON
Executive Vice-president and Secretary,
Director
WILLIAM A. FRANSON
/s/ ROBERT E. BROWN
Director
/s/ JEFFREY S. POWELL
ROBERT E. BROWN
JEFFREY S. POWELL
/s/ ROBERT C. PENOYER
Director
/s/ JAMES B. RYAN
ROBERT C. PENOYER
JAMES B. RYAN
/s/ JAMES J. LEITZINGER
Director
/s/ PETER F. SMITH
JAMES J. LEITZINGER
PETER F. SMITH
/s/ DENNIS L. MERREY
Director
/s/ JOSEPH L. WAROQUIER, SR.
DENNIS L. MERREY
JOSEPH L. WAROQUIER, SR
/s/ WILLIAM R. OWENS
Director
/s/ JAMES P. MOORE
WILLIAM R. OWENS
JAMES P. MOORE
CERTIFICATIONS
I, William F. Falger, certify that:
1. I have reviewed this annual report on Form 10-K of CNB Financial Corporation.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statement were made, not misleading with respect to the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.
6. The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003
/s/ WILLIAM F. FALGER
William F. Falger
President
(Principal Executive Officer)
I, Joseph B. Bower, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of CNB Financial Corporation.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statement were made, not misleading with respect to the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.
6. The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003
/s/ JOSEPH B. BOWER, JR.
Joseph B. Bower, Jr.
Treasurer
(Principal Financial Officer)
CERTIFICATE
As required by 18 U.S.C. 1350, the undersigned certify that this Report on Form 10-K fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the registrant.