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 three non-banking activities through its wholly owned subsidiaries CNB Investment Corporation, County Reinsurance Company, and CNB Insurance Agency. 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. CNB Insurance Agency was established in February of 2003. The company provides fixed annuity products to banking customers.
The Corporation does not currently engage in any operating business activities, other than the ownership and management of County National Bank, CNB Investment Corporation, County Reinsurance Company, and CNB Insurance Agency.
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 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, 1 limited service branch facility, and 2 loan production offices 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, and time 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 would 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 other 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 or national 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, 2004, the Bank had a total of 242 employees of which 192 were full time and 50 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 tables should be read in conjunction with the consolidated financial statements of the Corporation which are incorporated by reference hereinafter.
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 35% in 2004 and 2003 and 34% in 2002, 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.
Net Interest Income
Rate-Volume Variance
(Dollars in thousands)
1. The change in interest due to both volume and rate had 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 $1,992, $1,878 and $1,621 of fees for the years ending 2004, 2003 and 2002, respectively.
3. Income on restructured loans accounted for under SFAS Nos. 114 & 118 are included in interest earning assets.
Investment Portfolio
(Dollars In Thousands)
Maturity Distribution of Investment Securities
(Dollars In Thousands)
December 31, 2004
The weighted average yields are based on market 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%.
The portfolio contains no holdings of a single issuer that exceeds 10% of shareholders’ equity other than the US Treasury and governmental agencies.
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, 2004 was $99. Interest income which would have been recorded on these loans had they been on accrual status was $258.
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, 2004 there was $12,495 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
The Provision for loan losses reflects the amount deemed appropriate by management to provide for probable incurred losses based on present risk characteristics of the 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 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”.
The unallocated component of the allowance for loan losses has declined over the last several years as management has refined its methodology for monitoring and measuring credit risk. In 2004, additional individual loans were subject to specific review, resulting in an increase in specific allowance allocations. In addition, consideration of current economic risk factors were applied to individual pools of homogeneous pools of loans. In prior years, economic risk factors were applied to the portfolio of loans as a whole and were reflected as 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, 2004.
(Dollars In Thousands)
Maturing in:
Key ratios for the Corporation for the years ended December 31, 2004 and 2003 appear in the Annual Shareholders’ Report for the year ended December 31, 2004 under the caption “Selected Financial Data” on pages 27 and 28 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, 2004.
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, 1 limited service office, and 2 loan production offices. Of these 22 offices, 17 are owned and 5 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 page 28 of the Annual Shareholders’ Report for the year ended December 31, 2004 and is incorporated herein by reference. There were 1,554 registered shareholders of record as of March 10, 2005.
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this item is presented on pages 29 and 30 of the Annual Shareholders’ Report for the year ended December 31, 2004 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 31 to 40 of the Annual Shareholders’ Report for the year ended December 31, 2004 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 37 and 38 of the Annual Shareholders’ Report for the year ended December 31, 2004 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, 2004, are incorporated herein by reference:
Pages in
Annual Report
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Shareholders’ Equity
Notes to Consolidated Financial Statements
9-26
Report of Independent Registered Public Accounting Firm on Financial Statements
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and Procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Principal Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective to ensure that the financial and nonfinancial information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act of 1934, including the form 10-K for the period ended December 31, 2004, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation or any significant deficiencies or material weaknesses in such internal controls requiring corrective actions. As a result, no corrective actions were taken.
The Corporation meets the conditions as discussed in SEC Release No. 50754 of November 30, 2004 and intends to use the 45 day extension period to complete documentation before filing Management’s annual report over financial reporting, required by Item 308(a) of Regulation S-K, and the related Attestation report of the registered public accounting firm, required by Item 308(b) of Regulation S-K. As such, the Corporation will file an amended 10-K within the 45 day extension period. As of the date of this filing, management of the Corporation is not aware of any material weaknesses in its internal control over financial reporting for the year ended December 31, 2004.
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 19, 2005 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 6-10 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2005 and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY 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 19, 2005 and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is presented on page 10 of the Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2005 and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND PROCEDURES
Information concerning principal accountant fees and procedures is incorporated herein by reference to the “Concerning the Independent Public Accountants” section of the proxy statement for the 2005 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission on or about March 16, 2005.
PART IV.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this report:
1. The following financial statements of the Corporation incorporated by reference in Item 8:
Consolidated Statements of Condition at December 31, 2004 and 2003
Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm on Financial Statements
2. All financial statement schedules are omitted since they are not applicable.
3. The following exhibits:
* Management contract or compensatory plan.
A Form 8-K was filed on November 9, 2004 announcing the declaration of a 13 cent per share dividend payable on December 15, 2004 to holders of record on December 3, 2004.
A Form 8-K was filed on January 25, 2005 announcing the Corporation’s intent to record an other-than-temporary impairment non-cash after-tax charge of $910,000, or $0.10 per share, in the quarter ending December 31, 2004 related to a perpetual preferred stock issued by Fannie Mae.
A Form 8-K was filed on January 28, 2005 announcing earnings for the quarter ended December 31, 2004.
A Form 8-K was filed on February 8, 2005 announcing the declaration of a 13 cent per share dividend payable on March 15, 2005 to holders of record on March 3, 2005.
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 16, 2005.
/s/ William F. Falger
WILLIAM F. FALGER
President and Chief Executive Officer,
Director
/s/ Robert E. Brown
ROBERT E. BROWN
Director
/s/ Jeffrey S. Powell
JEFFREY S. POWELL
/s/ Michael F. Lezzer
MICHAEL F. LEZZER
Director
/s/ James B. Ryan
JAMES B. RYAN
/s/ James J. Leitzinger
JAMES J. LEITZINGER
Director
/s/ Peter F. Smith
PETER F. SMITH
/s/ Dennis L. Merrey
DENNIS L. MERREY
Director
/s/ Deborah Dick Pontzer
DEBORAH DICK PONTZER
/s/ William R. Owens
WILLIAM R. OWENS
Director
/s/ James P. Moore
JAMES P. MOORE