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ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-30665
CNB Financial Services, Inc.
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(Exact name of registrant as specified in its charter)
United States of America 55-0773918
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
212 S. Washington Street, Berkeley Springs, WV 25411
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, (304) 258 - 1520
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Securities to be registered under Section 12(b) of the Act:
None
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Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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 the 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 non-affiliates of the
Registrant as of March 24, 2001 was approximately $61,836,480.
As of March 24, 2001, there were 458,048 shares of Common Stock, Par Value $1.00
per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business....................................................................................3
Item 2. Properties..................................................................................6
Item 3. Legal Proceedings...........................................................................6
Item 4. Submission of Matters to a Vote of Security Holders.........................................6
Item 4A. Executive Officers of the Registrant........................................................7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................8
Item 6. Selected Financial Data.....................................................................9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................22
Item 8. Financial Statements and Supplementary Data................................................25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures......54
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................54
Item 11. Executive Compensation.....................................................................55
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................55
Item 13. Certain Relationships and Related Transactions.............................................56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................57
SIGNATURES ...........................................................................................58
FORWARD LOOKING STATEMENTS
In our Annual Report and Form 10-K, we may include certain forward
looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products and
similar matters. The words or phrases "are expected to", "is anticipated",
"project", "will continue", "will likely result", "plans to" or similar
expressions are intended to "identify" forward looking statements. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for forward
looking statements. In order to comply with the terms of the safe harbor, we
must inform you that a variety of factors could cause CNB Financial Services,
Inc.'s actual results and experiences to differ materially from the anticipated
results or other expectations expressed in these forward looking statements. Our
ability to predict the results or the effect of future plans and strategies is
inherently uncertain. The risks and uncertainties that may affect the
operations, performance, development and results of CNB Financial Services,
Inc.'s business include:
o Changes in market interest rates;
o Local and national economic trends and conditions;
o Competition for products and services among community, regional and
national financial institutions;
o New services and product offerings by competitors;
o Changes in customer preferences;
o Changes in technology;
o Legislative and regulatory changes;
o Delinquency rates on loans;
o Changes in accounting principles, policies or guidelines;
You should consider these factors in evaluating any forward looking
statements and not place undue reliance on such statements. We are not obligated
to publicly update any forward looking statements we may make in this Annual
Report to reflect the impact of subsequent events.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATIONAL HISTORY AND SUBSIDIARIES
CNB Financial Services, Inc. was organized under the laws of West
Virginia in March 2000 at the direction of the Board of Directors of Citizens
National Bank for the purpose of becoming a financial services holding company.
The company, its subsidiary, bank and CNB Insurance Services, Inc. are
collectively referred to herein as "CNB".
A special meeting of the bank's shareholders was held on August 4,
2000, and the shareholders approved the Agreement and Plan of Merger between the
bank and the company, whereby the bank became a wholly-owned subsidiary of the
company and the shareholders of the bank became shareholders of the company. The
merger became effective on August 31, 2000. Each bank shareholder received two
shares of the company stock for each share of the bank's common stock. On August
31, 2000, the company consummated its merger with the bank and subsidiary, in a
tax-free exchange of stock. Shareholders of the bank received two shares of CNB
Financial Services, Inc. common stock for each of the 229,024 shares of the
bank's common stock. We accounted for the merger as a pooling of interests.
The bank was organized on June 20, 1934, and has operated in Berkeley
Springs, Morgan County, West Virginia, as a national banking association
continuously since that time. The Bank formed CNB Insurance Services, Inc., a
wholly owned subsidiary, which is a property and casualty insurance agency
selling primarily personal lines of insurance.
BUSINESS OF CNB FINANCIAL SERVICES, INC. AND CITIZENS NATIONAL BANK
The company's primary function is to direct, plan and coordinate the
business activities of the Bank and its subsidiary.
Citizens National Bank is a full-service commercial bank conducting
general banking and trust activities through three full-service offices and four
automated teller machines located in Morgan and Berkeley Counties, West
Virginia. It accepts time, demand and savings deposits including NOW accounts,
regular savings accounts, money market accounts, fixed-rate certificates of
deposit and club accounts. In addition, the Bank provides safe deposit box
rentals, wire transfer services and 24-hour ATM services through a regional
network known as STAR. STAR is a participant in the nationwide Cirrus network.
The bank offers a full spectrum of lending services to its customers,
including commercial loans and lines of credit, residential real estate loans,
consumer installment loans and other personal loans. Commercial loans are
generally secured by various collateral, including commercial real estate,
accounts receivable and business machinery and equipment. Residential real
estate loans consist primarily of mortgages on the borrower's personal
residence, and are typically secured by a first lien on the subject property.
Consumer and personal loans are generally secured, often by first liens on
automobiles, consumer goods or depository accounts. A special effort is made to
keep loan products as flexible as possible within the guidelines of prudent
banking practices in terms of interest rate risk and credit risk. Bank lending
personnel adhere to established lending limits and authorities based on each
individual's lending expertise and experience.
The bank's trust department acts as trustee under trusts and wills, as
executor of wills and administrator of estates, as guardian for estates of
minors and incompetents and serves in various corporate trust capacities.
EMPLOYEES
As of December 31, 2000 and 1999, CNB employed 70 and 74 full-time
equivalent employees, respectively.
COMPETITION
Citizens National Bank faces a high degree of competition for all its
services from local banks. Within its market area of Morgan County, the eastern
section of Berkeley County in West Virginia and Washington County in Maryland,
there exists numerous competing commercial banks.
Nonbank competition has also increased in recent years locally by the
establishment of finance companies and the expansion of insurance operations and
credit unions as well as from mutual funds located throughout the country.
West Virginia banks are allowed unlimited branch banking throughout
the State. The Interstate Banking and Branch Efficiency Act of 1994 also
authorizes interstate branching by acquisition and consolidation nationwide.
These and similar provisions impacting both the banking and thrift industries
may serve to intensify future competition with the Bank's market.
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SUPERVISION AND REGULATION
As a registered bank holding company, CNB is subject to the supervision
of the Federal Reserve Board and is required to file with the Federal Reserve
Board reports and other information regarding its business operations and the
business operations of its subsidiaries. CNB is also subject to examination by
the Federal Reserve Board and is required to obtain Federal Reserve Board
approval prior to acquiring, directly or indirectly, ownership or control of
voting shares of any bank, if, after such acquisition, it would own or control
more than 5% of the voting stock of such bank. In addition, pursuant to federal
law and regulations promulgated by the Federal Reserve Board, CNB may only
engage in, or own or control companies that engage in, activities deemed by the
Federal Reserve Board to be so closely related to banking as to be a proper
incident thereto. Prior to engaging in most new business activities, CNB must
obtain approval from the Federal Reserve Board.
CNB's banking subsidiary has deposits insured by the Bank Insurance
Fund of the FDIC, and is subject to supervision, examination and regulation by
the Office of the Comptroller of the Currency.
The Gramm-Leach-Bliley Act of 1999 was enacted into law on November 12,
1999. The Act removes the Glass-Steagall Act restrictions on affiliation between
banks and securities firms and it authorizes financial holding companies that
own a bank to engage in a full range of insurance activities. The result is that
qualifying bank holding companies may opt to become financial holding companies
and thus to hold subsidiaries that engage in banking, securities underwriting
and dealing, and insurance agency and underwriting. They may also engage in
financial activities listed in the Act, including merchant banking or venture
capital activities, the distribution of mutual funds and securities lending.
Bank holding companies now have the option under the Act to continue to
operate as bank holding companies or, if they qualify, to act as financial
holding companies. CNB has qualified and elected to be a financial holding
company. It is important to note in this regard that both bank holding companies
and financial holding companies and their non-bank operating subsidiaries are
subject to the full panoply of affiliate transaction rules under Sections 23A
and B of the Federal Reserve Act. As a consequence, all transactions between
affiliated depository institutions and these entities will be restricted under
the provisions of those laws.
Under the Act, certain activities are listed as being "financial in
nature" including "underwriting, dealing in, or making a market in securities,"
and "merchant banking". In addition, national banks and state banks (if the
state bank chartering authority permits) may engage in certain "financial in
nature" activities through financial services subsidiaries. Activities
prohibited to financial services subsidiaries include merchant banking but not
securities underwriting and dealing.
To engage in these new activities, all depository institutions and
financial subsidiaries of a financial holding company must be well capitalized,
well managed and have no less than a satisfactory rating under the federal
Community Reinvestment Act. CNB and its subsidiaries meet these requirements.
Dividend Restrictions
There are statutory limits on the amount of dividends the bank can pay
to CNB without regulatory approval. Under applicable federal regulations,
appropriate bank regulatory agency approval is required if the total of all
dividends declared by a bank in any calendar year exceeds the available retained
earnings and exceeds the aggregate of the bank's net profits (as defined by
regulatory agencies) for that year and its retained net profits for the
preceding two years, less any required transfers to surplus or a fund for the
retirement of any preferred stock.
FDIC Insurance
The FDIC has the authority to raise the insurance premiums for
institutions in the Bank Insurance Fund to a level necessary to achieve a target
reserve level of 1.25% of insured deposits within not more than 15 years. In
addition, the FDIC has the authority to impose special assessments in certain
circumstances. The level of deposit premiums affects the profitability of the
bank and thus the potential flow of dividends to parent companies.
Under the risk-based insurance assessment system that became effective
January 1, 1994, the FDIC places each insured depository institution in one of
nine risk categories based on its level of capital and other relevant
information (such as supervisory evaluations).
Federal Deposit Insurance Corporation Improvement Act of 1991
In December 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
makes revisions to several other federal banking statutes.
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Among other things, FDICIA requires federal bank regulatory authorities
to take Prompt corrective action", with respect to depository institutions
that do not meet minimum capital requirements. For these purposes, FDICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
Rules adopted by the Federal banking agencies under FDICIA provide that
an institution is deemed to be: "well capitalized" if the institution has a
total (Tier I plus Tier II) risk-based capital ratio of 10.0% or greater, a Tier
I risk-based ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater,
and the institution is not subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
level for any capital measure; "adequately capitalized" if the institution has a
Total risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital
ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater (or a leverage
ratio of 3.0% or greater if the institution is rated composite 1 in its most
recent report of examination, subject to appropriate Federal banking agency
guidelines), and the institution does not meet the definition of a
well-capitalized institution; "undercapitalized" if the institution has a Total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (or a
leverage ratio that is less than 3.0% if the institution is rated composite 1 in
its most recent report of examination, subject to appropriate Federal banking
agency guidelines) and the institution does not meet the definition of a
significantly undercapitalized or critically undercapitalized institution;
"significantly undercapitalized" if the institution has a Total risk-based
capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is
less than 3.0%, or a leverage ratio that is less than 3.0% and the institution
does not meet the definition of a critically undercapitalized institution; and
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets that is equal to or less than 2%.
At December 31, 2000, CNB qualified as a well-capitalized institution
based on the ratios and guidelines noted above. A bank's capital category,
however, is determined solely for the purpose of applying the prompt corrective
action rules and may not constitute an accurate representation of that bank's
overall financial condition or prospects.
The appropriate Federal banking agency may, under certain
circumstances, reclassify a well-capitalized insured depository institution as
adequately capitalized. The appropriate agency is also permitted to require an
adequately capitalized or undercapitalized institution to comply with the
supervisory provisions as if the institutions were in the next lower category
(but not treat a significantly undercapitalized institution as critically
undercapitalized) based on supervisory information other than the capital levels
of the institution.
The statute provides that an institution may be reclassified if the
appropriate Federal banking agency determines (after notice and opportunity for
hearing) that the institution is in an unsafe and unsound condition or deems the
institution to be engaging in an unsafe or unsound practice.
FDICIA generally prohibits a depository institution from making any
capital distributions (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan. The Federal
banking agencies may not accept a capital restoration plan without determining,
among other things, that the plan is based on realistic assumptions and is
likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of (i) an amount equal to 5% of the
depository institution's total assets at the time it became undercapitalized,
and (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards applicable with
respect to such institution as of the time it fails to comply with the plan. If
a depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of
receiver or conservator.
FDICIA also contains a variety of other provisions that may affect the
operation of CNB, including reporting requirements, regulatory standards for
real estate lending, "truth in savings" provisions, and the requirement that a
depository institution give 90 days' prior notice to customers and regulatory
authorities before closing any branch.
Capital Requirements
The risk-based capital guidelines for bank holding companies and banks
adopted by the Federal banking agencies were phased in at the end of 1992. The
minimum ratio of qualifying total capital to risk-weighted assets (including
certain off-balance sheet items, such as standby letters of credit) under the
fully phased-in guidelines is 8%. At least half of the total capital is to be
comprised of common stock, retained earnings, noncumulative perpetual preferred
stocks, minority interests and, for bank holding
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companies, a limited amount of qualifying cumulative perpetual preferred stock,
less goodwill and certain other intangibles ("Tier I capital"). The remainder
("Tier II capital") may consist of other preferred stock, certain other
instruments, and limited amounts of subordinated debt and the reserve for credit
losses.
In addition, the Federal Reserve Board has established minimum leverage
ratio (Tier I capital to total average assets less goodwill and certain other
intangibles) guidelines for bank holding companies and banks. These guidelines
provide for a minimum leverage ratio of 3.0% for bank holding companies and
banks that meet certain specified criteria, including that they have the highest
regulatory rating. All other banking organizations are required to maintain a
leverage ratio of 3.0% plus an additional cushion of at least 100 to 200 basis
points. The guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the Federal Reserve Board will continue to consider a "tangible Tier I
leverage ratio" in evaluating proposals for expansion or new activities. The
tangible Tier I leverage ratio is the ratio of Tier I capital, less intangibles
not deducted from Tier I capital, to total assets, less all intangibles.
As of December 31, 2000, the bank had capital in excess of all
applicable requirements. Additional information relating to risk-based capital
calculations is set forth under the heading "Note 22 Regulatory Matters" of the
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 2. PROPERTIES
CNB Financial Services, Inc.
CNB's headquarters are located at the main office of Citizens National
Bank located at 212 South Washington Street, Berkeley Springs, West Virginia.
Citizens National Bank
The principal executive office and main banking office is located at
212 South Washington Street, Berkeley Springs, West Virginia. In addition, the
bank has owned and operated a full service branch bank located at 2450 Valley
Road, Berkeley Springs, West Virginia since 1991. In October 1998, the bank
opened an additional full service branch located at 2646 Hedgesville Road,
Martinsburg, West Virginia. Each location provides ATM services, in addition to
traditional lobby and drive-in services. During 1998, the bank purchased two
cash machines and placed them at Cacapon State Park Lodge and the Woods Resort.
In November of 1998, the bank acquired CNB Insurance Services, Inc. which is
operated out of the main office in Berkeley Springs. The main office and
branches are owned free and clear of any indebtedness. The net book value of the
bank's premises and equipment as of December 31, 2000 is $3.2 million.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the company and its subsidiary are
involved in various legal proceedings.
In the opinion of the management of CNB, there are no proceedings
pending to which CNB is a party or to which its property is subject, which, if
determined adversely to CNB, would be material in relation to CNB's financial
condition. There are no proceedings pending other than ordinary routine
litigation incident to the business of CNB. In addition, no material proceedings
are pending or are known to be threatened or contemplated against CNB by
government authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2000.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and position of each executive officer of the company
are listed below along with the positions with Citizens National Bank held by
each of them during the last five years. Officers are appointed annually by the
Board of Directors at the meeting of directors immediately following the annual
meeting.
AGE AS OF
NAME MARCH 7, 2001 POSITION AND EXPERIENCE DURING THE PAST 5 YEARS
- ---- ------------- -----------------------------------------------
J. Philip Kesecker (1) 71 2000 to present - Chairman of the Board, CNB Financial Services, Inc.
1987 to present - Chairman of the Board, Citizens National Bank
Thomas F. Rokisky 54 2000 to present - President/CEO, CNB Financial Services, Inc.
1997 to present - President/CEO, Citizens National Bank
1996 to 1997 - Executive Vice President/COO, Citizens National Bank
Arnold K. Stotler 41 2000 to present - Vice President, Secretary and Treasurer,
CNB Financial Services, Inc.
1996 to present - Sr. Vice President of Lending, Citizens National Bank
Rebecca S. Brock 40 2000 to present - Vice President/CFO, CNB Financial Services, Inc.
1999 to present - Vice President/CFO, Citizens National Bank
1996 to 1999 - Vice President of Finance/Cashier, Citizens National Bank
Patricia L. Poland 60 2000 to present - Vice President, CNB Financial Services, Inc.
1996 to present - Vice President of Lending, Citizens National Bank
(1) Mr. Kesecker is not an employee of CNB.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The price of CNB's common stock ranged from $75.00 to $285.00 in 2000
and from $50.00 to $75.00 in 1999. The prices listed below represent the high
and low market prices for stock trades reported during each quarter. The per
share data for the first and second quarter of 2000 and for 1999 has been
restated to reflect the formation of CNB Financial Services, Inc. and the
acquisition of Citizens National Bank and subsidiary on August 31, 2000 and
accounted for as a pooling of interests.
PER SHARE
HIGH LOW DIVIDEND
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2000
First quarter $ 75.00 $ 75.00
Second quarter $ 75.00 $ 75.00 $ 0.36
Third quarter $150.00 $150.00
Fourth quarter $285.00 $ 85.00 $ 0.66
1999
First quarter $ 50.00 $ 50.00
Second quarter $ 50.00 $ 50.00 $ 0.35
Third quarter $ 75.00 $ 65.79
Fourth quarter $ 75.00 $ 75.00 $ 0.65
CNB's stock is not traded on an established exchange and there are no
known market makers, therefore there is no established public trading market for
CNB's stock. The prices listed above are based upon information available to
management through discussions with shareholders, and to the best of
management's knowledge, accurately represent the amount at which its stock was
traded during the periods indicated. Prices reflect amounts paid by purchasers
of the stock and, therefore, may include commissions or fees. The amounts of
such commissions or fees, if any, are not known to management. No attempt was
made by management to ascertain the prices for every sale made during these
periods.
The ability of CNB to pay dividends is subject to certain limitations
imposed by national banking laws.
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ITEM 6. SELECTED FINANCIAL DATA
TABLE 1. FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
In thousands except for per share data
AT YEAR-END
Total assets $149,982 $138,648 $129,600 $115,402 $108,943
Securities available for sale 35,374 31,187 33,594 28,944 23,861
Loans and lease, net of
unearned income 105,220 98,272 86,377 81,084 72,268
Deposits 133,996 124,510 115,320 102,250 97,076
Shareholders' equity 13,864 12,249 12,518 11,644 10,601
SIGNIFICANT RATIOS
Return on average assets 0.91% 0.90% 1.07% 1.16% 1.15%
Return on average
shareholders' equity 10.16 9.66 10.60 11.76 11.88
Average shareholders' equity
to average assets 9.00 9.35 10.13 9.89 9.70
Net interest margin 3.92 3.95 4.21 4.26 4.42
SUMMARY OF OPERATIONS
Interest income $ 11,035 $ 9,945 $ 9,243 $ 8,651 $ 7,985
Interest expense 5,365 4,597 4,171 3,820 3,405
Net interest income 5,670 5,348 5,072 4,831 4,580
Provision for loan losses 170 118 196 174 134
Net interest income after
provision for loan losses 5,500 5,230 4,876 4,657 4,446
Non-interest income 843 565 415 304 293
Non-interest expense 4,279 3,954 3,372 3,008 2,966
Income before income taxes 2,064 1,841 1,919 1,953 1,773
Income tax expense 758 621 618 636 558
Net income 1,306 1,220 1,301 1,317 1,215
PER SHARE DATA (1)(2)
Net income $ 2.85 $ 2.66 $ 2.84 $ 2.88 $ 2.66
Cash dividends 1.02 1.00 1.00 0.94 0.88
Net book value 30.27 26.74 27.33 25.42 23.15
(1) Adjusted to reflect 100% stock dividend on March 1, 1998
(2) Restated to reflect the formation of CNB Financial Services, Inc. and the
acquisition of Citizens National Bank and subsidiary on August 31, 2000 and
accounted for as a pooling of interests.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis presents the significant changes
in financial condition and results of operations of CNB, for the years ended
December 31, 2000 and 1999. This discussion and analysis should be read in
conjunction with the audited, consolidated financial statements and the
accompanying notes thereto. This discussion may include forward looking
statements based upon management's expectations; actual results may differ.
Amounts and percentages used in this discussion have been rounded. All average
balances are based on monthly averages.
EARNINGS SUMMARY
CNB had net income totaling $1.3 million or $2.85 per share, $1.2
million or $2.66 per share and $1.3 million or $2.84 per share for fiscal years
2000, 1999, and 1998, respectively. Annualized return on average assets and
average equity were .91% and 10.2%, respectively for 2000 compared to .90% and
9.7% for 1999 and 1.07% and 10.6% for 1998.
NET INTEREST INCOME
Net interest income represents the primary component of the bank's
earnings. It is the difference between interest and fee income related to
earning assets and interest expense incurred to carry interest-bearing
liabilities. Net interest income is impacted by changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, as well as by changing
interest rates. In order to manage these changes, their impact on net interest
income and the risk associated with them, the bank utilizes an ongoing
asset/liability management program. This program includes analysis of the
difference between rate sensitive assets and rate sensitive liabilities,
earnings sensitivity to rate changes, and source and use of funds. A discussion
of net interest income and the factors impacting it is presented below.
Net interest income in 2000 increased by $322,000 or 6.0% over 1999.
Interest income in 2000 increased by $1.1 million or 11.0% compared to 1999,
while interest expense increased by $767,000 or 16.7% during 2000 as compared to
1999. Interest income increased during 2000 compared to 1999 as a result of an
increase in the average balance of loans and an increase in the average rates
earned thereon. Interest expense increased during 2000 compared to 1999 as a
result of an increase in the average balance of time deposits and an increase in
the average rates paid thereon.
Net interest income in 1999 increased by $276,000 or 5.4% over 1998.
Interest income in 1999 increased by $702,000 or 7.6% compared to 1998, while
interest expense increased by $426,000 or 10.2% during 1999 as compared to 1998.
Interest income increased during 1999 compared to 1998 as a result of an
increase in the average balance of loans and investment securities, which more
than offset the decrease in the average rates earned thereon. Interest expense
increased during 1999 compared to 1998 as a result of an increase in the average
balance of time deposits.
During both 2000 and 1999, the bank used funds generated from deposit
account growth to fund loan commitments and to increase the average balance of
investment securities.
The net interest margin is impacted by the change in the spread between
yields on earning assets and rates paid on interest bearing liabilities. Net
interest margin declined slightly from 1998 to 2000. See Table 1 - Distribution
of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest
Differential.
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TABLE 2. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------- --------------------------------- --------------------------------
YTD YTD YIELD/ YTD YTD YIELD/ YTD YTD YIELD/
AVERAGE BALANCE INTEREST RATE AVERAGE BALANCE INTEREST RATE AVERAGE BALANCE INTEREST RATE
--------------- -------- ------ --------------- -------- ------ --------------- -------- ------
In thousands
Interest earning assets:
Federal funds sold $ 1,026 $ 95 6.12% $ 1,202 $ 61 5.07% $ 2,037 $ 131 6.43%
Securities:
Taxable 31,098 2,016 6.48 30,637 1,934 6.31 23,999 1,496 6.23
Tax-exempt (1) 825 45 8.26 3,337 171 7.76 5,051 275 8.25
Loans (net of unearned
interest) (2) (4) 102,096 8,504 8.33 91,717 7,437 8.11 83,439 7,091 8.50
======== ======= ==== ======== ====== ==== ======== ====== ====
Total interest
earning assets (1) $135,045 $10,660 7.89% $126,893 $9,603 7.57% $114,526 $8,993 7.85%
======== ======= ==== ======== ====== ==== ======== ====== ====
Nonearning assets:
Cash and due
from banks $ 3,457 $ 3,666 $ 3,038
Bank premises and
equipment, net 3,221 3,427 2,901
Other assets 2,226 2,117 1,812
Allowance for
loan losses (1,169) (1,155) (1,054)
-------- -------- --------
Total assets $142,780 $134,948 $121,223
======== ======== ========
Interest bearing
liabilities:
Savings deposits $ 16,080 $ 323 2.01% $ 17,272 $ 373 2.16% $ 17,413 $ 456 2.62%
Time deposits 73,522 4,360 5.93 65,607 3,638 5.55 54,894 3,093 5.63
NOW accounts 17,984 564 3.14 17,512 459 2.62 17,313 465 2.69
Money market
accounts 5,001 113 2.26 5,591 125 2.24 5,675 158 2.78
Borrowings 69 5 7.25 25 2 -- -- -- --
-------- ------- ---- -------- ------ ---- -------- ------ ----
Total interest
bearing liabilities $112,656 $ 5,365 4.76% $106,007 $4,597 4.34% $ 95,295 $4,172 4.38%
-------- ------- ---- -------- ------ ---- -------- ------ ----
Noninterest bearing
liabilities:
Demand deposits $ 16,004 $ 14,947 $ 12,175
Other liabilities 1,269 1,371 1,477
Shareholders' equity 12,851 12,623 12,276
-------- -------- --------
Total liabilities and
shareholders' equity $142,780 $134,948 $ 121,223
======== ======== ========
Net interest income (1) $ 5,295 $5,006 $4,821
======= ====== ======
Net interest spread (3) 3.13% 3.23% 3.47%
==== ==== ====
Net interest income to
average interest
earning assets (1) 3.92% 3.95% 4.21%
==== ==== ====
(1) Yields are expressed on a tax equivalent basis using a 34% tax rate.
(2) For the purpose of these computations, nonaccruing loans are included in
the amounts of average loans outstanding.
(3) Net interest spread is the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(4) Interest income on loans excludes fees of $375,000 in 2000, $342,000 in
1999 and $272,000 in 1998.
- 11 -
12
Table 3 sets forth a summary of the changes in interest earned and
interest expense detailing the amounts attributable to (i) changes in volume
(change in average volume times the prior year's average rate) and (ii) changes
in rate (change in the average rate times the prior year's average volume). The
changes in rate/volume (change in the average volume times the change in the
average rate), had been allocated to the changes in volume and changes in rate
in proportion to the relationship of the absolute dollar amounts of the change
in each. During 2000, net interest income increased $296,000 due to changes in
volume and decreased $7,000 due to changes in interest rates. In 1999, net
interest income increased $327,000 due to changes in volume and decreased
$142,000 due to changes in interest rates.
TABLE 3. VOLUME AND RATE ANALYSIS OF CHANGES IN INTEREST INCOME
(Taxable equivalent basis) 2000 OVER 1999 1999 OVER 1998
--------------------------------- ----------------------------------
CHANGE DUE TO CHANGE DUE TO
------------------ TOTAL ----------------------- TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ---- ------ ------ ----- ------
In thousands
Interest earned on:
Federal funds sold $ 2 $ 32 $ 34 $ (65) $ (5) $ (70)
Taxable securities 47 35 82 422 16 438
Tax-exempt securities (128) 2 (126) (104) -- (104)
Loans 855 212 1,067 719 (373) 346
----- ---- ------ ----- ----- -----
Total interest earned $ 776 $281 $1,057 $ 972 $(362) $ 610
----- ---- ------ ----- ----- -----
Interest expense on:
Savings deposits $ (25) $(25) $ (50) $ (5) $ (78) $ (83)
Time deposits 474 248 722 623 (78) 545
NOW accounts 49 56 105 1 (7) (6)
Money market accounts (18) 6 (12) 26 (59) (33)
Other borrowing -- 3 3 -- 2 2
----- ---- ------ ----- ----- -----
Total interest expense $ 480 $288 $ 768 $ 645 $(220) $ 425
----- ---- ------ ----- ----- -----
Net interest income $ 296 $ (7) $ 289 $ 327 $(142) $ 185
===== ==== ====== ===== ===== =====
Another method of analyzing the change in net interest income is to
examine the changes between interest rate spread and the net interest margin on
earning assets. The interest rate spread as shown in Table 4 is the difference
between the average rate earned on earning assets and the average rate on
interest bearing liabilities. The net interest margin takes into account the
benefit derived from assets funded by interest free sources such as non-interest
bearing demand deposits and capital.
- 12 -
13
TABLE 4. INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS
(Taxable equivalent basis) 2000 1999 1998
---------------------- ---------------------- -----------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ---- -------- ---- -------- ----
In thousands
Earning assets $135,045 7.89% $126,893 7.57% $114,526 7.85%
======== ======== ========
Interest bearing liabilities $112,656 4.76% $106,007 4.34% $ 95,295 4.38%
---- ---- ----
Interest rate spread 3.13% 3.23% 3.47%
Interest free sources used
to fund earning assets(1) 22,389 0.79% 20,886 0.72% 19,231 0.74%
-------- ---- -------- ---- -------- ----
Total sources of funds $135,045 $126,893 $114,526
======== ======== ========
Net interest margin 3.92% 3.95% 4.21%
==== ==== ====
(1) Non-interest bearing liabilities and shareholders' equity less non-interest
earning assets.
The following discussion analyzes changes in the Bank's spreads and
margins in terms of basis points. A basis point is a unit of measure for
interest rates equal to .01%. One hundred basis points equals 1%.
Interest rate spread decreased 10 basis points in 2000 while the net
interest margin declined 3 basis points. Both the interest rate spread and
margin were negatively impacted by a 42 basis point increase in interest bearing
liability costs and offset by a 32 basis point increase in earning asset yields.
Although the prime rate increased 100 basis points in 2000, loan yields only
increased 22 basis points due to intense competition in our market area. The
increase in liability costs is primarily the result of higher rates on interest
bearing checking and time deposit accounts during the year.
Interest rate spread decreased 24 basis points in 1999 while the net
interest margin declined 26 basis points. Both the interest rate spread and
margin were negatively impacted by a 28 basis point decline in earning asset
yields and offset by a 4 basis point decline in interest bearing liability
costs. Loan yields declined 39 basis points despite three separate increases in
the prime rate during 1999. The competitive environment for higher quality loans
required us to make such loans with rates and related loan fees lower than those
realized in prior years. The yield on securities available for sale decline 12
basis points. The reduction in liability costs is primarily the result of lower
rates on interest bearing checking, savings and money market accounts during the
year.
PROVISION FOR LOAN LOSSES
The amount charged to provision for loan losses is based on
management's evaluation of the loan portfolio. Management determines the
adequacy of the allowance for loan losses based on past loan loss experience,
current economic conditions, composition of the loan portfolio. The allowance
for loan losses is the best estimate by management of the probable losses which
have been incurred as of the balance sheet date. See Nonperforming Loans and
Allowance for Loan Losses for a comprehensive analysis.
NONINTEREST INCOME
Noninterest income increased $278,000 or 49.0% during 2000 over the
prior comparable period. The increase in 2000 was primarily due to a gain
recognized on stock received from the demutualization of an insurance company of
$196,000. The bank received the stock in exchange for its previous membership
interest as a participating policyholder. Also, the bank continues to see
increased revenue associated with
- 13 -
14
debit card and automated teller machines (ATM) usage. Additional merchants
participating in the Business Manager program, commercial lines of credit
collateralized by accounts receivable, caused fee income to significantly grow
during 2000. In July 1999, the Bank increased the service charge assessed for
insufficient funds, which has provided additional revenue from service charges
on deposit accounts. Fees generated from trust assets under management increased
as the level of assets being managed reached $21.5 million at December 31, 2000,
a 5.9% increase from $20.3 million at December 31, 1999.
Noninterest income increased $149,000 or 36.0% during 1999 over 1998.
The increase was due primarily to increased service charges on deposit accounts,
insurance commissions, debit card fees and trust fees. These increases were
offset by decreases in gains on sale of other real estate owned and net gains on
sale of securities. Trust assets under management reached $20.3 million at
December 31, 1999, a 24.5% increase from $16.3 million at December 31, 1998.
NONINTEREST EXPENSES
Noninterest expenses increased $326,000 or 8.2% during 2000 over the
prior comparable period. The increase was primarily due to an increase in
salaries and employee benefits, occupancy of premises and other operating
expenses. Higher health insurance costs, normal employee merit increases and
increased employer contributions to retirement and profit sharing plans
accounted for the additional costs of salaries and benefits in 2000.
A loss associated with the abandonment of fixed assets, routine
building repairs and maintenance and the painting of the Main Office branch were
the primary reasons for higher occupancy of premises expense. In 1997, the
Bank's management began the process of developing plans for expansion of the
main office facility on the adjacent parking lot, incurring costs associated
with surveys and architect fees. In 2000, management decided to abandon the
original plans due to constraints on parking, and to consider enclosing the
office space between the original building and the drive-up facility. The Bank
wrote off the survey and architect fees since the original drawings were no
longer part of the plan the Bank intends to pursue.
Components of other operating expense, which significantly increased
during 2000, included professional fees, data processing fees, advertising and
public relations expenses, FDIC insurance premiums, ATM and debit card expenses
and business manager program expenses. A larger deposit account assessment base
and rate changes contributed to increased FDIC insurance premiums. A new
advertising program targeted at public awareness that began in the third quarter
of 2000, and the continuing promotion of the Hedgesville branch location caused
advertising and public relations costs to increase during 2000. Professional
fees increased due to the formation of the holding company. Maintenance expense
related to technology systems caused data processing expense to increase.
Increased usage by customers generated additional debit card and ATM expenses. A
growing number of merchants in the Business Manager program caused the expenses
related to this program to increase.
Noninterest expenses increased $581,000 or 17.2% during 1999 over the
prior comparable period. The increase was primarily due to an increase in
salaries and employee benefits and other operating expenses. Other operating
expenses, which increased, were data processing, postage expense, advertising
and professional fees. The opening of an additional branch in Hedgesville in
October 1998 and the start-up of the insurance subsidiary in November 1998
caused salaries and benefits and other operating expenses to increase in 1999
over 1998.
INCOME TAXES
The Bank's provision for income tax totaled $758,000 in 2000, $621,000
in 1999 and $618,000 in 1998. The effective tax rate was 36.7% in 2000 compared
to 33.7% and 32.2% in 1999 and 1998, respectively. Lower tax-exempt earnings on
investment securities and higher taxable income were the primary reasons for the
increase in the effective tax rate. The Bank's income tax expense differs from
the amount computed at statutory rates primarily due to the tax-exempt earnings
from certain investment securities. See Note 17 of the Notes to Consolidated
Financial Statements for a comprehensive analysis of income tax expense.
- 14 -
15
FINANCIAL CONDITION
Table 5 examines Citizens National Bank's financial condition in terms
of its sources and uses of funds. Average funding uses increased $8.2 million or
6.4% in 2000 compared with an increase of $12.4 million or 10.8% in 1999.
TABLE 5. SOURCES AND USES OF FUNDS
2000 1999 1998
-------------------------------- -------------------------------- --------
INCREASE (DECREASE) INCREASE (DECREASE)
AVERAGE ------------------- AVERAGE ------------------- AVERAGE
BALANCE AMOUNT % BALANCE AMOUNT % BALANCE
-------- ------- ----- -------- ------- ----- --------
In thousands
Funding uses:
Federal funds
sold $ 1,026 $ (176) (14.6)% $ 1,202 $ (835) (41.0)% $ 2,037
Securities available
for sale 31,923 (2,051) (6.0) 33,974 4,924 17.0 29,050
Loans 102,096 10,379 11.3 91,717 8,278 9.9 83,439
-------- ------- -------- ------- --------
Total uses $135,045 $ 8,152 6.4% $126,893 $12,367 10.8% $114,526
======== ======= ==== ======== ======= ==== ========
Funding sources:
Interest-bearing
demand deposits $ 22,985 $ (118) (0.5)% $ 23,103 $ 115 0.5% $ 22,988
Savings deposits 16,080 (1,192) (6.9) 17,272 (141) (0.8) 17,413
Time deposits 73,522 7,915 12.1 65,607 10,713 19.5 54,894
Short-term
borrowings 69 44 25 25 --
Noninterest bearing
funds, net(1) 22,389 1,503 7.2 20,886 1,655 8.6 19,231
-------- ------- -------- ------- --------
Total sources $135,045 $ 8,152 6.4% $126,893 $12,367 10.8% $114,526
======== ======= ==== ======== ======= ==== ========
(1) Noninterest bearing liabilities and shareholders' equity less noninterest
earning assets.
The Bank's total assets increased $11.3 million or 8.2% to $150.0
million from December 31, 1999 to December 31, 2000, due primarily to a $6.9
million increase in loans, a $4.2 million increase in securities available for
sale and a $1.2 million increase in federal funds sold, which were partially
offset by a $295,000 decrease in cash and cash equivalents.
The Bank's total liabilities increased $9.7 million or 7.7% to $136.1
million from December 31, 1999 to December 31, 2000 completely due to the
increase in deposits. Shareholders' equity increased $1.6 million to $13.9
million at December 31, 2000 primarily due to net income of $1.3 million and a
$776,000 increase in accumulated other comprehensive income, offset by cash
dividends of $467,000. The increase in accumulated other comprehensive income
was due to the unrealized market value appreciation of the available for sale
investment security portfolio. The only component of accumulated other
comprehensive income at December 31, 2000 was unrealized losses on available for
sale securities net of deferred income taxes. The unrealized losses are
primarily a function of available market interest rates relative to the yield
being generated on the available for sale portfolio. No earnings impact results,
however, unless the securities are actually sold.
- 15 -
16
LOAN PORTFOLIO
At December 31,2000, total loans increased $6.9 million or 7.1% to
$104.0 million from $97.1 million at December 31, 1999. The loan mix did not
change in any material respect compared with December 31, 1999. The loan
portfolio increase is the result of developing new real estate loan programs and
efforts to develop new commercial and indirect lending relationships. Also, the
Bank's semi-annual auto loan sales generated an increase in consumer loans. The
Bank's management believes additional growth in all lending areas is possible
into year 2001. Management's intent is to control the loan volume in a manner
which would produce a loan to deposit ratio between 75% and 80% and maintain
credit quality. Such efforts were successful as the loan to deposit ratio was
77.6% at December 31, 2000 and 78.0% at December 31, 1999. The ratio of net
charge-offs to average loans outstanding was .10% in 2000 and 1999.
The loan portfolio classifications of installment and commercial real
estate did not change significantly in 2000 and 1999. Growth recorded in the
commercial loan area resulted in increases of 16.4% to $6.0 million outstanding
at December 31, 2000 and 34.6% to $5.2 million outstanding December 31, 1999.
These increases in commercial lending are primarily the result of efforts to
develop new relationships with commercial entities in the area. Also, the Bank
participates in the Business Manager program, commercial lines of credit
collateralized by accounts receivable, which has generated an increase in
commercial loans during 2000. The Bank's market area was expanded to Berkeley
County, West Virginia in 1999 which provides a much larger area for commercial
lending. The Bank's management feels additional growth in the commercial area is
possible in 2001.
Real estate mortgage loans comprised mainly of one to four family
residences continued to be the Bank's dominant loan category. Mortgage lending
comprises approximately 62% or $65.3 million of the total loan portfolio at
December 31, 2000 compared to 63% or $61.6 million at December 31, 1999.
Demand for the Bank's primary mortgage products, variable rate loans
carrying annual interest rate adjustments based on one, three and five year
Treasury rates, continues to increase. The Bank continues to see an increase in
the demand for fixed rate mortgage products, and for all loan products, as the
bank penetrates the Berkeley County, West Virginia real estate market. As of
December 31, 2000, 64.4% of the Bank's mortgage loans were adjustable rate loans
and 35.6% were fixed rate loans. Currently, the Bank has approximately $1.6
million in fixed rate loans in the portfolio which were originated under terms
that would allow them to be sold on the secondary market.
Additional information on the composition of the loan portfolio may be
found in Note 5 of the Notes to the Consolidated Financial Statements.
Bank policy requires those loans which are past due 90 days or more be
placed on nonaccrual status unless they are both well secured and in the process
of collection. As of December 31, 2000 and 1999, nonaccrual loans approximated
.02% of total loans (net) in each year.
- 16 -
17
TABLE 6. LOANS AND LEASE RECEIVABLE
DECEMBER 31,
----------------------------------------
2000 1999 1998
-------- ------- -------
In thousands
Real estate $ 65,278 $61,625 $55,412
Commercial real estate 9,944 9,569 8,541
Consumer 23,708 21,778 18,408
Commercial 6,017 5,185 3,853
Overdrafts 20 28 83
-------- ------- -------
$104,967 $98,185 $86,297
Net deferred loan fees,
premiums and discounts 90 88 80
Allowance for loan losses (1,216) (1,148) (1,122)
-------- ------- -------
$103,841 $97,125 $85,255
======== ======= =======
TABLE 7. LOAN MATURITIES AND INTEREST SENSITIVITY (1)
DECEMBER 31, 2000
-----------------------------------------------------
ONE YEAR ONE THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- -------
In thousands
Commercial, financial and agricultural $6,264 $1,008 $8,709 $15,981
Real estate - construction 1,357 -- -- 1,357
------- ------- ------- -------
Total $7,621 $1,008 $8,709 $17,338
======= ======= ======= =======
Loans with predetermined interest rate $4,212 $1,008 $2,126 $7,346
Loans with variable interest rate 3,409 -- 6,583 9,992
------- ------- ------- -------
Total $7,621 $1,008 $8,709 $17,338
======= ======= ======= =======
(1) Excludes residential mortgages and consumer loans.
NONPERFORMING LOANS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming loans consist of loans in nonaccrual status, loans which
are past due 90 days or more and still accruing interest and restructured loans.
As of December 31, 2000, management is not aware of any potential problem loans
other than those which are on nonaccrual status or past due ninety days or more
and still accruing interest.
- 17 -
18
TABLE 8. NON-PERFORMING ASSETS
DECEMBER 31,
------------------------------
2000 1999 1998
---- ---- ----
In thousands
Nonaccrual loans $ 22 $ 22 $275
Loans past due 90 days or more
still accruing interest 360 79 7
Restructured loans -- -- 1
---- ---- ----
Total nonperforming loans $382 $101 $283
---- ---- ----
Other real estate owned $ -- $67 $122
---- ---- ----
Total nonperforming assets $382 $168 $405
==== ==== ====
Ratios:
Nonperforming loans/Total loans 0.37% 0.10% 0.33%
Nonperforming assets/Total assets 0.25% 0.12% 0.31%
Allowance for loan losses/Total loans 1.17% 1.18% 1.32%
The allowance for loan losses is the best estimate by management of the
probable losses which have been incurred as of the respective balance sheet
date. Management makes a determination quarterly by analyzing overall loan
quality, changes in the mix and size of the loan portfolio, previous loss
experience, general economic conditions, information about specific borrowers
and other factors. The Bank's methodology for determining the allowance for loan
losses establishes both an allocated and an unallocated component. The allocated
portion of the allowance represents the results of analyses of individual loans
that are being monitored for potential credit problems and pools of loans within
the portfolio. The allocated portion of the allowance for loans is based
principally on current loan risk ratings, historical loan loss rates adjusted to
reflect current conditions, as well as analyses of other factors that may have
affected the collectibility of loans in the portfolio. The Bank analyzes all
commercial loans that are being monitored as potential credit problems to
determine whether such loans are impaired, with impairment measured by reference
to the borrowers' collateral values and cash flows. The unallocated portion of
the allowance for loan losses represents the results of analyses that measure
probable losses inherent in the portfolio that are not adequately captured in
the allocated allowance analyses. These analyses include consideration of
unidentified losses inherent in the portfolio resulting from changing
underwriting criteria, changes in the types and mix of loans originated,
industry concentrations and evaluations, allowance levels relative to selected
overall credit criteria and other economic indicators used to estimate probable
incurred losses. The Bank has no loans which are considered to be impaired as of
December 31, 2000 and 1999. At December 31, 2000 and 1999, the allowance for
loan losses totaled $1.2 million and $1.1 million, respectively. The allowance
for loan losses as a percentage of loans was 1.16% and 1.17% as of December 31,
2000 and 1999. The provision for loan losses exceeded net charge-offs by $68,000
and $26,000 in 2000 and 1999. An analysis of the allowance for loan losses for
the years ended December 31, 2000 and 1999 may be found in Note 5 of the Notes
to the Consolidated Financial Statements.
The provision for loan losses is a charge to earnings which is made to
maintain the allowance for loan losses at a sufficient level. In 2000, 1999 and
1998, the provision totaled $170,000, $118,000 and $196,000, respectively. While
loan quality remains good and, as noted previously, past due and nonaccrual
loans are minimal, management increased the provision for loan losses in 2000
based on the declining general economic conditions as evidenced by the slowdown
in the economy as cited in various financial publications. Having thus increased
the provision for loan losses, management believes the allowance for loan losses
to be adequate and is not aware of any information relating to the loan
portfolio which it expects
- 18 -
19
will materially impact future operating results, liquidity or capital resources.
In addition, federal regulators may require additional reserves as a result of
their examination of the Bank. The allowance for loan losses reflects what
management currently believes is an adequate level of allowance, although there
can be no assurance that future losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations.
TABLE 9. ALLOWANCE FOR LOAN LOSSES
2000 1999 1998
------ ------ ------
In thousands
Balance, beginning of year $1,148 $1,122 $1,019
------ ------ ------
Provision charged to expense $ 170 $ 118 $ 195
------ ------ ------
Loans charged off:
Commercial, financial and agricultural $ 6 $ 7 $ 5
Consumer 115 97 107
Mortgage -- 14 16
------ ------ ------
Total loans charged off $ (121) $ (118) $ (128)
------ ------ ------
Recoveries:
Commercial, financial and agricultural $ 1 $ 5 $ 4
Consumer 18 21 32
------ ------ ------
Total recoveries $ 19 $ 26 $ 36
------ ------ ------
Net charge-offs $ (102) $ (92) $ (92)
------ ------ ------
Balance, end of year $1,216 $1,148 $1,122
====== ====== ======
TABLE 10. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31
-------------------------------------------------------------------------------
2000 1999 1998
----------------------- ---------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------- ------ ------------- ------- -------------
In thousands
Commercial, financial $ 206 6% $ 89 5% $ 41 5%
and agriculture
Real estate - mortgage 257 72 284 73 531 74
Installment and other 351 22 558 22 265 21
Uallocated 402 N/A 217 N/A 285 N/A
------ --- ------ --- ------- ---
Total $1,216 100% $1,148 100% $ 1,122 100%
====== === ====== === ======= ===
SECURITIES PORTFOLIO AND FEDERAL FUNDS SOLD
The Bank's securities portfolio consists of only available for sale
securities. Classifying the securities portfolio as available for sale provides
management with increased ability to manage the balance sheet structure and
address asset/liability management issues when needed. The fair value of the
investment portfolio has increased $4.2 million to $35.4 million at December 31,
2000 from 1999.
The composition of the portfolio continues to reflect the Bank's
conservative philosophy which places greater importance on safety and liquidity
than on yield. At December 31, 2000, approximately 96.4% of the portfolio is
comprised of US Treasury and Agency securities and 1.6% in State and Political
- 19 -
20
Subdivision securities. The term to maturity is limited to seven years for
Treasury and Agency bonds and 10 years for Municipal bonds. Typically,
investments in Agency bonds contain a call feature. These bonds generally have a
somewhat higher yield. The average term to maturity of the portfolio as of
December 31, 2000 was 4.9 years.
The Bank generally participates in the overnight federal funds sold
market. Depending upon specific investing or funding strategies and/or normal
fluctuations in loan and deposit balances, the bank may need, on occasion, to
purchase funds on an overnight basis. At December 31, 2000, the Bank had $1.2
million in federal funds sold. In 2000 and 1999, the average balance in federal
funds sold was $1.0 million and $1.2 million, respectively.
DEPOSITS AND OTHER FUNDING SOURCES
Total deposits were $134.0 million at December 31, 2000, an increase of
$9.5 million or 7.6% over deposits at December 31, 1999. Average deposits,
however, showed a $7.7 million, or 6.3% growth, to $128.7 million in 2000. The
growth is partially due to the Bank's public awareness advertising campaign
targeted about your local community bank, attractive interest rates, and the
continued market expansion at the Hedgesville location in Berkeley County.
Deposits at the Hedgesville branch totaled $14.0 million at December 31, 2000,
an increase of $1.2 million over December 31, 1999. However, the Bank has
experienced a change in the deposit account mix during 2000.
Noninterest-bearing deposits also grew by $511,000 or 3.3%, during
2000, from $15.7 million at December 31, 1999, to $16.2 million at December 31,
2000. At December 31, 2000, noninterest-bearing deposits represented 12.1% of
total deposits, compared to 12.6% for 1999. Average noninterest-bearing deposits
increased 7.1% from $14.9 million in 1999 to $16.0 million in 2000. The Bank's
noninterest-bearing deposit account with no minimum balance and check truncation
continues to grow since its introduction in 1999. The local community bank
public awareness campaign has generated an influx of new noninterest-bearing
deposit accounts.
Interest bearing deposits increased by $9.0 million or 8.2% to $117.8
million at December 31, 2000. Interest-bearing checking increased by $1.1
million in 2000. Included in this category are NOW accounts and Money Market
accounts. Savings accounts decreased $875,000 in 2000 from the previous year to
$15.6 million, while the average savings deposits fell $1.2 million or 6.9% to
$16.1 million at December 31, 2000. The community bank awareness campaign,
especially at the Hedgesville branch location, has generated an increase in the
number and dollar amount of interest-bearing deposit accounts. Savings deposits
earning lower interest rates are being transferred into more flexible, higher
earning certificates of deposit. The Bank's largest source of interest-bearing
funds is certificates of deposit. These accounts totaled $78.2 million at
December 31, 2000, an increase of $8.8 million or 12.6%. While total
certificates of deposit increased, jumbo certificates of deposit decreased. The
Bank offered a promotional certificate of deposit, the 36-month Ultimate
Certificate of Deposit, with the grand opening of the Hedgesville branch
location in 1998. During 2000, the Bank has been experiencing a shift between
the two categories due to the maturity and withdrawal of 36-month Ultimate
Certificate of Deposit accounts. A significant amount of these withdrawals and
maturities are being transferred into the Bank's 14, 16 and 26 month
certificates which have attractive interest rates compared to the competition.
The marketing campaigns targeted at attracting new certificate of deposit
customers to the Bank, especially the Hedgesville office, has been extremely
successful.
- 20 -
21
Table 11 is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 2000.
TABLE 11. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
AMOUNT PERCENT
------- -------
In thousands
Three months or less $ 403 2.27%
Three through six months 1,170 6.59
Six through twelve months 3,941 22.18
Over twelve months 12,251 68.96
------- -----
Total $17,765 100%
======= =====
CAPITAL RESOURCES
The Bank remains well capitalized. Total shareholders' equity at
December 31, 2000 of $13.9 million represents 9.2% of total assets. This
compares to $12.2 million or 8.8%, at December 31, 1999. Included in capital at
December 31, 2000 are $115,000 of unrealized losses on available for sale
securities, net of deferred income taxes. At December 31, 1999, the Bank had
unrealized losses on available for sale securities, net of deferred income taxes
of $892,000. Such unrealized losses are recorded net of related deferred taxes
and are primarily a function of available market interest rates relative to the
yield being generated on the available for sale portfolio. No earnings impact
will result, however, unless the securities are actually sold.
The stock of CNB Financial Services, Inc., and prior to the formation
of CNB, the Bank, are not listed on an exchange and are not heavily traded. The
trades that have occurred are those that, to management's knowledge, have been
individually arranged. Based on information that management is aware of, the
majority of shares sold during 2000 were at a price that ranged from $75 to $105
per share. During 1999, information available to management indicates that stock
trades ranged from $50 to $75 per share. Book value per share increased from
$26.74 at December 31, 1999 to $30.27 at December 31, 2000.
Dividends which have been declared by the Board of Directors
semiannually, increased from $1.00 per share in 1999 to $1.02 in 2000. All stock
prices and per share amounts have been restated to reflect the formation of CNB
Financial Services, Inc. and the acquisition of Citizens National Bank and
subsidiary on August 31, 2000 and accounted for as a pooling of interests.
The Federal Reserve's risk-based capital guidelines provide for the
relative weighting of both on-balance-sheet and off-balance-sheet items based on
their degree of risk. The Bank continues to exceed all regulatory capital
requirements, and is unaware of any trends or uncertainties, nor do any plans
exist, which may materially impair or alter its capital position.
RETURN ON EQUITY AND ASSETS
Table 12 shows consolidated operating and capital ratios for the
periods indicated.
TABLE 12. OPERATING AND CAPITAL RATIOS
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999
---- ----
Return on average assets .91% .90%
Return on average equity 10.16 9.66
Dividend payout ratio 35.78 37.54
Average equity to average assets ratio 9.00 9.35
- 21 -
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of the Bank's liquidity management program is to ensure
the continuous availability of funds to meet the withdrawal demands of
depositors and the credit needs of borrowers. The basis of the Bank's liquidity
comes from the stability of its core deposits. Liquidity is also available
through the available for sale securities portfolio and short-term funds such as
federal funds sold. At December 31, 2000, these sources totaled $36.6 million,
or 24.4% of total assets. In addition, liquidity may be generated through loan
repayments and over $7.0 million of available borrowing arrangements with
correspondent banks. At December 31, 2000, management considered the Bank's
ability to satisfy its anticipated liquidity needs over the next twelve months.
Management believes that the Bank is well positioned and has ample liquidity to
satisfy these needs. The Bank generated $1.8 million of cash from operations in
2000, which compares to $1.8 million in 1999 and $1.7 million in 1998.
Additional cash of $9.0 million, $8.7 million and $12.6 million was generated
through net financing activities in 2000, 1999 and 1998. These proceeds along
with proceeds from the sales and maturities of investment securities were used
to fund loans and purchase securities during each year. Net cash used in
investing activities totaled $11.1 million in 2000 compared to $9.4 million in
1999 and $13.4 million in 1998. Details on both the sources and uses of cash are
presented in the Consolidated Statements of Cash Flows contained in the
financial statements.
The objective of the Bank's interest rate sensitivity management
program, also known as asset/liability management, is to maximize net interest
income while minimizing the risk of adverse effects from changing interest
rates. This is done by controlling the mix and maturities of interest-sensitive
assets and liabilities. The Bank has established an asset/liability committee
for this purpose. Daily management of the Bank's sensitivity of earnings to
changes in interest rates within the Bank's policy guidelines are monitored by
using a combination of off-balance sheet and on-balance sheet financial
instruments. The Bank's Chief Executive Officer, Senior Lending Officer and the
Chief Financial Officer monitor day to day deposit flows, lending requirements
and the competitive environment. Rate changes occur within policy guidelines if
necessary to minimize adverse effects. Also, the Bank's policy is intended to
ensure that the Bank measures a range of rate scenarios and patterns of rate
movements that are reasonably possible. The Bank measures the impact that 200
basis point changes in rates would have on earnings over the next twelve months.
In analyzing interest rate sensitivity for policy measurement, the Bank
compares its forecasted earnings in both a "high rate" and "low rate" scenario
to a base-line scenario. The Bank's base-line scenario is that short-term
interest rates over the next 12 months remain at the current rate. The "high
rate" and "low rate" scenarios assume a 200 basis point increase or decrease in
the prime rate from beginning point of the base-line scenario over the most
current 12-month period. The Bank's policy limit for the maximum negative impact
on earnings resulting from "high rate" or "low rate" scenarios is 10 percent.
The policy measurement period is 12 months in length, beginning with the first
month of the forecast.
The Bank's base-line scenario holds the prime rate constant at 9.50
percent through December 2001. Based on the January 2001 outlook, the model
indicates that earnings during the policy measurement period would be affected
by less 10 percent, in both an increasing or decreasing interest rate scenario.
One common interest rate risk measure is the gap, or the difference
between rate sensitive assets and rate sensitive liabilities. A positive gap
occurs when rate-sensitive assets exceed rate-sensitive liabilities. This tends
to be beneficial in rising interest rate environments. A negative gap refers to
the opposite situation and tends to be beneficial in declining interest rate
environments. However, the gap does not consider future changes in the volume of
rate sensitive assets or liabilities or the possibility that interest rates of
various products may not change by the same amount or at the same time. In
addition, certain assumptions must be made in constructing the gap. For example,
the Bank considers administered rate deposits, such as savings accounts, to be
immediately rate sensitive although their actual rate sensitivity could differ
from this assumption. The Bank monitors its gap on a quarterly basis. Table 13
presents an interest sensitivity analysis of the Bank's assets and liabilities
at December 31, 2000.
- 22 -
23
TABLE 13. INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 2000
----------------------------------------------------------------
INTEREST SENSITIVITY PERIOD
----------------------------------------------------------------
2001 2002 2003 2004
---- ---- ---- ----
In thousands
Rate sensitive assets
Loans, net of unearned interest $ 29,709 $ 10,843 $ 14,101 $ 13,582
Average interest rate 8.73 % 9.08 % 8.99 % 8.76 %
Securities 2,250 1,400 2,750 2,250
Average interest rate 7.50 % 7.53 % 6.70 % 6.00 %
-------- -------- -------- --------
Total interest sensitive assets $ 31,959 $ 12,243 % $ 16,851 % $ 15,832 %
======== ======== ======== ========
Interest sensitive liabilities
Non-interest-bearing deposits $ 1,617 $ 1,617 $ 1,617 $ 1,617
Average interest rate -- -- -- --
Savings and interest-bearing checking 3,958 3,958 3,958 3,958
Average interest rate 2.00 % 2.00 % 2.00 %
Time deposits 31,961 22,505 21,724 336
Average interest rate 5.91 % 6.62 % 6.23 % 5.16 %
-------- -------- -------- --------
Total interest sensitive liabilities $ 37,536 $ 28,080 $ 27,299 $ 5,911
======== ======== ======== ========
GAP $ (5,577) $(15,838) $(10,449) $ 9,921
Cumulative GAP $ (5,577) $(21,415) $(26,286) $(16,365)
GAP to sensitive assets ratio (4.05)% (11.50)% (7.59)% 7.20 %
Cumulative GAP to sensitive
assets ratio (4.05)% (15.55)% (23.14)% (15.93)%
GAP to total assets ratio (3.72)% (10.56)% (6.97)% 6.61 %
Cumulative GAP to total assets ratio (3.72)% (14.28)% (17.53)% (10.91)%
DECEMBER 31, 2000
----------------------------------------------------------------
INTEREST SENSITIVITY PERIOD
----------------------------------------------------------------
2005 THEREAFTER TOTAL FAIR VALUE
---- ---------- ----- ----------
In thousands
Rate sensitive assets
Loans, net of unearned interest $ 11,617 $ 25,369 $105,220 $103,766
Average interest rate 8.97 % 8.39 % 8.75 %
Securities 13,450 12,650 32,500 35,374
Average interest rate 6.39 % 6.91 % 7.16 %
-------- -------- --------
Total interest sensitive assets $ 25,067 $ 38,019 $137,720
======== ======== ========
Interest sensitive liabilities
Non-interest-bearing deposits $ 1,617 $ 8,080 $ 16,165 $ 16,165
Average interest rate -- -- --
Savings and interest-bearing checking 3,958 19,793 39,583 39,583
Average interest rate 2.00 % 2.00 % 2.00 % 2.00 %
Time deposits 1,722 -- 78,248 83,199
Average interest rate 6.48 % -- 6.21 %
-------- -------- --------
Total interest sensitive liabilities $ 7,297 $ 27,873 $ 16,165
======== ======== ========
GAP $ 17,770 $ 10,146
Cumulative GAP $ 1,405 $ 11,551
GAP to sensitive assets ratio 12.90 % 7.37 %
Cumulative GAP to sensitive
assets ratio (3.03)% 4.34 %
GAP to total assets ratio 11.85 % 6.76 %
Cumulative GAP to total assets ratio 0.94 % 7.70 %
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, Statement of Financial Accounting Standards No. 140
("SFAS 140"), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued. It replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," but carries over most of the provisions of SFAS 125 without
change. SFAS No. 140 elaborates on the qualifications necessary for a
special-purpose entity, clarifies sales accounting criteria in certain
circumstances, refines accounting for collateral, and adds disclosures for
collateral, securitizations, and retained interests in securitized assets. This
statement is to be applied prospectively and is effective for transactions
occurring after March 31, 2001. Disclosure requirements of this statement and
any changes in accounting for collateral are effective for fiscal years ending
after December 15, 2000 for CNB. CNB is evaluating the impact, if any, this
statement may have on its future Consolidated Financial Statements.
IMPACT OF INFLATION
The results of operations and financial position of the Bank have been
presented based on historical cost, unadjusted for the effects of inflation,
except for the recording of unrealized gains and losses on securities available
for sale. Inflation could significantly impact the value of the Bank's interest
rate-sensitive assets and liabilities and the cost of noninterest expenses, such
as salaries, benefits and other
- 23 -
24
operating expenses. Management of the money supply by the Federal
Reserve to control the rate of inflation may have an impact on the earnings of
the Bank. Further, changes in interest rates to control inflation may have a
corresponding impact on the ability of certain borrowers to repay loans granted
by the Bank.
As a financial intermediary, the Bank holds a high percentage of
interest rate-sensitive assets and liabilities. Consequently, the estimated fair
value of a significant portion of the Bank's assets and liabilities change more
frequently than those of non-banking entities. The Bank's policies attempt to
structure its mix of financial instruments and manage its interest rate
sensitivity in order to minimize the potential adverse effects of market forces
on its net interest income, earnings and capital.
A comparison of the carrying value of the Bank's financial instruments
to their estimated fair value as of December 31, 2000 and December 31, 1999 is
disclosed in Note 23 of the Notes to the Consolidated Financial Statements.
- 24 -
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements are set forth
in this Annual Report of Form 10-K on the following pages:
CNB Financial Services, Inc. and Subsidiary
Independent Auditors' Report .............................. 26
Consolidated Balance Sheets ................................ 27
Consolidated Statements of Income.............................. 28
Consolidated Statements of Stockholders' Equity................ 29
Consolidated Statements of Cash Flows.......................... 30
Notes to Consolidated Financial Statements..................... 31
- 25 -
26
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors
CNB Financial Services, Inc.
Berkeley Springs, West Virginia
We have audited the accompanying consolidated statements of
financial condition of CNB Financial Services, Inc. as of December 31, 2000 and
1999, 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, 2000. These financial statements are the responsibility of
CNB Financial Services, Inc.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of CNB
Financial Services, Inc. as of December 31, 2000 and 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Smith Elliott Kearns & Co., LLC
- ---------------------------------------------
Hagerstown, Maryland
January 23, 2001
- 26 -
27
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2000 AND 1999
ASSETS 2000 1999
------------ ------------
Cash and due from banks $ 3,739,854 $ 4,035,293
Federal funds sold 1,207,684 --
Securities available for sale
(at approximate market value) 35,374,293 31,186,678
Loans and lease receivable, net 104,003,931 97,124,993
Loans held for sale -- 65,300
Accrued interest receivable 1,004,257 871,671
Foreclosed real estate (held for sale), net -- 66,938
Premises and equipment, net 3,167,302 3,360,924
Deferred income taxes 375,509 849,721
Cash surrender value of life insurance 790,807 670,734
Intangible assets 113,853 108,267
Other assets 204,877 307,220
------------ ------------
TOTAL ASSETS $149,982,367 $138,647,739
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 16,164,702 $ 15,653,259
Interest-bearing demand 24,012,083 22,942,904
Savings 15,571,297 16,446,507
Time, $100,000 and over 17,764,825 18,042,001
Other time 60,482,943 51,425,277
------------ ------------
$133,995,850 $124,509,948
Accrued interest payable 1,038,122 816,619
Accrued expenses and other liabilities 1,084,577 1,072,451
------------ ------------
TOTAL LIABILITIES $136,118,549 $126,399,018
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $1 par value; 5,000,000 shares
authorized; 458,048 shares outstanding $ 458,048 $ 458,048
Capital surplus 3,863,592 3,863,592
Retained earnings 9,657,422 8,818,791
Accumulated other comprehensive income (115,244) (891,710)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 13,863,818 $ 12,248,721
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $149,982,367 $138,647,739
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 27 -
28
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $ 8,887,114 $7,779,359 $7,342,065
Interest and dividends on securities:
United States Treasury securities 25,232 55,516 114,631
U.S. Government agencies and
corporations 1,960,198 1,855,665 1,374,600
State and political subdivisions 60,002 185,680 274,453
Other 7,779 8,206 6,926
Interest on federal funds sold 94,914 60,968 130,863
----------- ---------- ----------
$11,035,239 $9,945,394 $9,243,538
----------- ---------- ----------
INTEREST EXPENSE
Interest on interest bearing demand,
savings and time deposits $ 5,359,871 $4,594,966 $4,171,379
Interest on federal funds purchased 5,051 2,607 359
----------- ---------- ----------
$ 5,364,922 $4,597,573 $4,171,738
----------- ---------- ----------
NET INTEREST INCOME $ 5,670,317 $5,347,821 $5,071,800
PROVISION FOR LOAN LOSSES 170,000 117,999 195,600
----------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 5,500,317 $5,229,822 $4,876,200
----------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts $ 282,866 $ 247,159 $ 191,406
Other service charges, commissions
and fees 211,982 176,951 139,071
Insurance income 94,691 92,650 3,501
Other operating income 59,148 55,139 50,538
Gain on demutualization of insurance company 195,889 -- --
Net gain (loss) on sale of securities (13,991) (4,262) 17,570
Gain (loss) on sale of other real estate owned 12,177 (2,890) 13,329
----------- ---------- ----------
$ 842,762 $ 564,747 $ 415,415
----------- ---------- ----------
NONINTEREST EXPENSES
Salaries $ 1,760,226 $1,713,298 $1,550,588
Employee benefits 562,625 532,762 456,735
Occupancy of premises 249,738 203,442 168,411
Furniture and equipment expense 248,053 262,794 247,317
Other operating expenses 1,458,762 1,241,226 949,081
----------- ---------- ----------
$ 4,279,404 $3,953,522 $3,372,132
----------- ---------- ----------
INCOME BEFORE INCOME TAXES $ 2,063,675 $1,841,047 $1,919,483
PROVISION FOR INCOME TAXES 757,835 620,818 618,249
----------- ---------- ----------
NET INCOME $ 1,305,840 $1,220,229 $1,301,234
=========== ========== ==========
BASIC EARNINGS PER SHARE $ 2.85 $ 2.66 $ 2.84
=========== ========== ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 28 -
29
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK (1) SURPLUS (1) EARNINGS (1) INCOME EQUITY
--------- ----------- ------------ ------ ------
BALANCE, DECEMBER 31, 1997 $ 229,024 $3,863,592 $7,442,448 $ 108,652 $11,643,716
Comprehensive income:
Net income for 1998 -- -- 1,301,234 -- --
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $19,223) -- -- -- 31,363 --
Total Comprehensive Income -- -- -- -- 1,332,597
Cash dividends ($1.00 per share) -- -- (458,048) -- (458,048)
Stock split effected in the form
of a 100% dividend 229,024 -- (229,024) -- --
--------- ---------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $ 458,048 $3,863,592 $8,056,610 $ 140,015 $12,518,265
Comprehensive income:
Net income for 1999 -- -- 1,220,229 -- --
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $632,348) -- -- -- (1,031,725) --
Total Comprehensive Income -- -- -- -- 188,504
Cash dividends ($1.00 per share) (458,048) (458,048)
--------- ---------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $ 458,048 $3,863,592 $8,818,791 $ (891,710) $12,248,721
Comprehensive income:
Issuance of common stock 12,000 -- -- -- --
Cancellation of stock (12,000) -- -- -- --
Net income for 2000 -- -- 1,305,840 -- --
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $475,898) -- -- -- 776,466 --
Total Comprehensive Income -- -- -- -- 2,082,306
Cash dividends ($1.02 per share) (467,209) (467,209)
--------- ---------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 2000 $ 458,048 $3,863,592 $9,657,422 $ (115,244) $13,863,818
========= ========== ========== =========== ===========
(1) Restated to reflect the formation of CNB Financial Services, Inc. and
the acquisition of Citizens National Bank and subsidiary on August 31,
2000 and accounted for as a pooling of interests.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 29 -
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,305,840 $ 1,220,229 $ 1,301,234
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 238,162 256,642 219,325
Provision for loan losses 170,000 117,999 195,600
Deferred income taxes (1,686) 33,468 (34,543)
Net (gain) loss on sale of securities 13,991 4,262 (17,570)
(Gain) loss on sale of real estate owned (12,177) 2,890 (13,329)
(Gain) on demutualization of insurance company (195,889) -- --
Loss on disposal and abandonment of fixed assets 55,254 407 --
(Increase) decrease in loans held for sale 65,300 (65,300) --
(Increase) decrease in accrued interest receivable (132,586) (24,927) 39,580
(Increase) decrease in other assets 95,169 131,082 (261,635)
Increase in accrued interest payable 221,503 84,740 115,653
(Increase) in cash surrender value on life insurance in excess
of premiums paid (70,180) (16,059) (19,575)
Increase in accrued expenses and other liabilities 12,126 42,647 137,665
Amortization of deferred loan (fees) cost 42,633 44,375 51,806
Amortization (accretion) of premium and discount on investments (1,709) (1,030) (6,315)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,805,751 $ 1,831,425 $ 1,707,896
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) in loans $ (8,118,916) $(12,094,817) $ (5,561,460)
Proceeds from loan sales 1,027,345 -- --
Proceeds from sales of securities 2,659,593 7,290,995 8,648,700
Proceeds from maturities of securities 1,570,000 8,495,000 11,815,000
Purchases of securities (6,981,238) (15,046,019) (25,044,350)
Purchases of premises and equipment (83,935) (100,377) (1,235,577)
Proceeds from sale of other real estate owned, net 79,115 119,489 152,054
Net (increase) in real estate owned, net -- (4,438) --
Net (increase) decrease in federal funds sold (1,207,684) 2,000,000 (2,000,000)
Premiums paid on life insurance (49,893) (49,944) (49,944)
Purchase of intangibles (14,270) -- (116,000)
------------ ------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES $(11,119,883) $ (9,390,111) $(13,391,577)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits $ 705,412 $ 845,246 $ 3,507,977
Net increase in time deposits 8,780,490 8,344,481 9,562,669
Cash dividends paid (467,209) (458,048) (458,048)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 9,018,693 $ 8,731,679 $ 12,612,598
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ (295,439) $ 1,172,993 $ 928,917
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,035,293 2,862,300 1,933,383
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,739,854 $ 4,035,293 $ 2,862,300
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year:
Interest $ 5,143,419 $ 4,512,832 $ 4,056,085
Income taxes $ 716,000 $ 639,000 $ 612,604
Net transfer to foreclosed real estate, held for sale
from loans receivable $ -- $ 62,500 $ 124,613
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 30 -
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting
policies of CNB Financial Services, Inc. and its subsidiary.
NATURE OF OPERATIONS:
CNB Financial Services, Inc. ("CNB" or the "Company") is a financial
services holding company incorporated under the laws of West Virginia
in March 2000. It became a bank holding company when it acquired all of
the common stock of Citizens National Bank of Berkeley Springs on
August 31, 2000.
Citizens National Bank of Berkeley Springs (the "Bank"), a wholly owned
subsidiary of CNB, provides a variety of banking services to
individuals and businesses through its two locations in Berkeley
Springs, West Virginia and its branch in Hedgesville, West Virginia
which opened in October 1998. Its primary deposit products are demand
deposits and certificates of deposit, and its primary lending products
are commercial business, real estate mortgage and installment loans.
CNB Insurance Services, Inc., a wholly owned subsidiary of Citizens
National Bank, is a property and casualty insurance agency selling
primarily personal lines of insurance in Morgan and Berkeley Counties.
The accounting policies of the Company and its subsidiary conform to
accounting principles generally accepted in the United States of
America and to general practices within the banking industry.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of CNB Financial Services, Inc.,
include the accounts of the Company and its subsidiary. All significant
intercompany transactions and balances have been eliminated.
USE OF ESTIMATES:
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SECURITIES AND MORTGAGE-BACKED SECURITIES:
Investments in equity securities that have readily determinable fair
values and for all investments in debt securities are classified and
accounted for as follows:
a. Debt securities that management has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost.
b. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term
are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings.
c. Debt and equity securities not classified as either
held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at
fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of shareholders'
equity as accumulated other comprehensive income.
-31-
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CNB classifies all investments as available for sale.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
Gain or loss on sale of securities is based on specific identification
method.
IMPAIRED LOANS:
Impaired loans are defined as those loans for which it is probable that
contractual amounts due will not be received. Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, requires that the
measurement of impaired loans is based on the present value of expected
future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. Larger groups of
small-balance loans such as residential mortgage and installment loans
that are considered to be part of homogeneous loan pools are aggregated
for the purpose of measuring impairment, and therefore, are not subject
to these statements. Management has established a dollar-value
threshold for commercial loans. The larger commercial loans are
evaluated in accordance with the statements. No loans are considered to
be impaired at December 31, 2000 and 1999.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans and economic
conditions.
Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. The
allowance is increased by a provision for loan losses, which is charged
to expense and reduced by charge-offs, net of recoveries. Changes in
the allowance relating to impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties inherent in the
estimation process, management's estimate of credit losses inherent in
the loan portfolio and the related allowance may change in the near
term.
LOANS HELD FOR SALE:
Mortgage loans held for sale are recorded at the lower of cost or
market value. Gains and losses realized from the sale of loans and
adjustments to market value are included in non-interest income.
Mortgage loans are sometimes sold to the Federal Home Loan Mortgage
Corporation (Freddie Mac) and other commercial banks.
INTANGIBLE ASSETS:
Intangible assets represent the acquisition of customer lists,
contracts and records in the amount of $130,270 in November 1998 and
January 2000 by CNB Insurance Services, Inc. The intangible assets are
being amortized over fifteen years on a straight line basis.
LOAN SERVICING:
The cost of mortgage servicing rights is amortized in proportion to,
and over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on
a current market interest rate. For purposes of measuring impairment,
the rights are stratified based on the predominant risk characteristics
of the underlying loans: product type, investor type, interest rate,
term and geographic location. An analysis of the risk
-32-
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
characteristics of CNB's loan servicing portfolio allows for all loans
to be defined by one risk category.
INTEREST INCOME ON LOANS:
Interest on loans is accrued and credited to income based on the
principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an indication
that the borrower may be unable to meet payments as they become due.
Upon such discontinuance, all unpaid accrued interest is reversed.
NONPERFORMING/NONACCRUAL ASSETS:
Nonperforming/nonaccrual assets consist of loans on which interest is
no longer accrued, loans which have been restructured in order to allow
the borrower the ability to maintain control of the collateral, real
estate acquired by foreclosure and real estate upon which deeds in lieu
of foreclosure have been accepted. Interest previously accrued but not
collected on nonaccrual loans is reversed against current income when a
loan is placed on a nonaccrual basis.
LOANS AND LEASE RECEIVABLE:
Loans and lease receivable that management has the intent and ability
to hold for the foreseeable future or until maturity or payoff are
reported at their outstanding unpaid principal balances reduced by any
charge-offs or specific valuation accounts and net of any deferred fees
or costs on originated loans, or unamortized premiums or discounts on
purchased loans.
LOAN ORIGINATION FEES AND COSTS:
Certain direct costs of originating loans are being capitalized and
amortized over the contractual life of the loan as an adjustment of the
yield on the related loan.
PREMISES AND EQUIPMENT:
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated on both straight-line and
accelerated methods over the estimated useful lives of 15 to 50 years
for buildings and 3 to 20 years for equipment. Maintenance and repairs
are charged to operating expenses as incurred.
INCOME TAXES:
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax
expenses or credits are based on the changes in the asset or liability
from period to period.
PENSION PLAN:
Pension plan costs are funded by annual contributions as required by
applicable regulations.
CASH AND CASH EQUIVALENTS:
For purposes of the Consolidated Statements of Cash Flows, cash and
cash equivalents include all highly liquid debt instruments purchased
with a maturity of three months or less except for federal funds sold.
Those amounts are included in the balance sheet captions "Cash and Due
From Banks."
EARNINGS AND DIVIDENDS PER SHARE:
Basic earnings and dividends per share are computed on the basis of the
weighted average number of 458,048 shares of common stock outstanding
during each year.
-33-
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
In the ordinary course of business, CNB has entered into
off-balance-sheet financial instruments consisting of commitments to
extend credit, commercial lines of credit and letters of credit. Such
financial instruments are recorded in the financial statements when
they become payable.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS:
Postretirement insurance benefits are provided to selected officers and
employees. During the years that the employee renders the necessary
service, the Bank accrues the cost of providing postretirement health
and life insurance benefits to the employee.
FORECLOSED REAL ESTATE:
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure, establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and
the real estate is carried at the lower of carrying amount or fair
value less estimated cost to sell. Revenue and expenses from operations
and changes in the valuation allowance are included in loss on
foreclosed real estate. The historical average holding period for such
properties is twelve to eighteen months.
TRUST ASSETS:
Assets held by CNB in a fiduciary or agency capacity are not included
in the consolidated financial statements since such assets are not
assets of CNB. In accordance with banking industry practice, income
from fiduciary activities is generally recognized on a cash basis which
is not significantly different from amounts that would have been
recognized accrual basis.
ADVERTISING COSTS:
The Company expenses advertising costs in the period in which they are
incurred. Advertising cost amounted to $112,642, $82,459 and $55,220
for the years ended December 31, 2000, 1999 and 1998, respectively.
COMPREHENSIVE INCOME:
Comprehensive income is defined as the change in equity from
transactions and other events from nonowner sources. It includes all
changes in equity except those resulting from investments by
shareholders and distributions to shareholders. Comprehensive income
includes net income and certain elements of "other comprehensive
income" such as foreign currency translations; accounting for futures
contracts; employers accounting for pensions; and accounting for
certain investments in debt and equity securities.
CNB has elected to report its comprehensive income in the
Consolidated Statements of Changes in Shareholders' Equity. The only
element of "other comprehensive income" that CNB has is the unrealized
gain or losses on available for sale securities.
-34-
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The components of the change in net unrealized gains (losses) on
securities were as follows:
2000 1999 1998
---- ---- ----
Unrealized holding gains (losses) arising during
the year $1,238,373 $(1,668,335) $ 68,156
Reclassification adjustment for (gains) losses
realized in net income 13,991 4,262 (17,570)
---------- ----------- --------
Net unrealized holding gains
(losses) before taxes $1,252,364 $(1,664,073) $ 50,586
Tax effect (475,898) 632,348 (19,223)
---------- ----------- --------
Net change $ 776,466 $(1,031,725) $ 31,363
========== =========== ========
NOTE 2. FORMATION OF HOLDING COMPANY
In March 2000, the Bank's Board of Directors approved the formation of
CNB, a financial services holding company. A special meeting of the
Bank's shareholders was held on August 4, 2000 and the shareholders
approved the Agreement and Plan of Merger between the Bank and CNB,
whereby the Bank became a wholly-owned subsidiary of CNB and the
shareholders of the Bank became shareholders of CNB. The merger became
effective on August 31, 2000. Each Bank shareholder received two shares
of CNB stock for each share of the Bank's common stock. The Bank
received approval for the reorganization from the Comptroller of the
Currency and the Federal Reserve Bank of Richmond. Also, the Securities
and Exchange Commission (SEC) declared the registration statement on
Form S-4 related to the Agreement and Plan of Merger between the Bank
and CNB effective on July 12, 2000. The Bank incurred and expensed all
costs of start-up activities including activities related to organizing
the new entity and filings with the SEC and Bank regulators. On August
31, 2000, CNB consummated its merger with the Bank and subsidiary, in a
tax-free exchange of stock. Shareholders of the Bank received two
shares of CNB Financial Services, Inc. common stock for each of the
229,024 shares of the Bank's common stock. The merger was accounted for
as a pooling of interest.
NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average daily reserve balances with
the Federal Reserve Bank. The amount of these required reserves,
calculated based on percentages of certain deposit balances was
$1,080,000 at December 31, 2000.
-35-
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of debt securities at
December 31, 2000 and December 31, 1999 by contractual maturity are
shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Securities available for sale are summarized as follows:
2000 WEIGHTED
------------------------------------------------------------- AVERAGE
GROSS GROSS ESTIMATED TAX
AMORTIZED UNREALIZED UNREALIZED FAIR EQUIVALENT
COST GAINS LOSSES VALUE YIELD
---- ----- ------ ----- -----
Available for sale:
U.S. Treasury securities
After 1 but within 5 years $ 400,432 $ 6,443 $ -- $ 406,875 6.78%
----------- ------- -------- ----------- ----
U.S. Government agencies
and corporations
After 1 but within 5 years $18,597,039 $15,689 $179,645 $18,433,083 6.40
After 5 but within 10 years 15,276,363 43,845 76,654 15,243,554 7.01
----------- ------- -------- ----------- ----
$33,873,402 $59,534 $256,299 $33,676,637 6.68
----------- ------- -------- ----------- ----
States and political subdivision
After 1 but within 5 years $ 350,000 $ 810 $ -- $ 350,810 6.75
After 5 but within 10 years 100,000 907 -- 100,907 7.33
After 10 years 100,000 2,714 -- 102,714 8.72
----------- ------- -------- ----------- ----
$ 550,000 $ 4,431 $ -- $ 554,431 7.21
----------- ------- -------- ----------- ----
Federal Reserve Bank stock $ 129,650 $ -- $ -- $ 129,650 6.00
Federal Home Loan Bank stock 606,700 -- -- 606,700 7.25
----------- ------- -------- ----------- ----
$ 736,350 $ -- $ -- $ 736,350 7.03
----------- ------- -------- ----------- ----
Total securities available for sale $35,560,184 $70,408 $256,299 $35,374,293 6.70%
=========== ======= ======== =========== ----
-36-
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SECURITIES AVAILABLE FOR SALE (CONTINUED)
1999 WEIGHTED
------------------------------------------------------------- AVERAGE
GROSS GROSS ESTIMATED TAX
AMORTIZED UNREALIZED UNREALIZED FAIR EQUIVALENT
COST GAINS LOSSES VALUE YIELD
---- ----- ------ ----- -----
Available for sale:
U.S. Treasury securities
After 1 but within 5 years $ 400,699 $ 51 $ -- $ 400,750 6.77%
----------- ------ ---------- ----------- ----
U.S. Government agencies
and corporations
Within 1 year $ 250,000 $ -- $ 1,094 $ 248,906 5.00
After 1 but within 5 years 4,499,367 -- 181,006 4,318,361 6.25
After 5 but within 10 years 25,230,736 -- 1,250,698 23,980,038 6.60
----------- ------ ---------- ----------- ----
$29,980,103 $ -- $1,432,798 $28,547,305 6.53
----------- ------ ---------- ----------- ----
States and political subdivision
Within 1 year $ 620,637 $6,466 $ -- $ 627,103 9.68
After 1 but within 5 years 1,030,759 2,742 2,237 1,031,264 7.41
After 5 but within 10 years 363,085 -- 8,694 354,391 7.86
After 10 years 100,000 -- 3,785 96,215 8.72
----------- ------ ---------- ----------- ----
$ 2,114,481 $9,208 $ 14,716 $ 2,108,973 8.22
----------- ------ ---------- ----------- ----
Federal Reserve Bank stock $ 129,650 $ -- $ -- $ 129,650 6.00
----------- ------ ---------- ----------- ----
Total securities available for sale $32,624,933 $9,259 $1,447,514 $31,186,678 6.64%
=========== ====== ========== =========== ----
The carrying value of securities pledged to secure public deposits and
for other purposes as required or permitted by law totaled $10,591,329
at December 31, 2000 and $9,467,490 at December 31, 1999.
Proceeds from sales of securities available for sale (excluding
maturities) for the years ended December 31, 2000, 1999 and 1998 were
$2,659,593, $7,290,995 and $8,648,700, respectively. Gross gains and
(losses) of $7,115 and $(21,106) in 2000, $15,829 and $(20,091) in
1999, and $33,483 and $(15,913) in 1998 were realized on the respective
sales.
-37-
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND LEASE RECEIVABLE
Major classifications of loans at December 31, 2000 and 1999, were as
follows:
2000 1999
---- ----
Loans:
Real estate $ 65,278,200 $61,624,632
Commercial real estate 9,944,333 9,568,985
Consumer 23,707,840 21,778,574
Commercial 6,036,583 5,184,988
Overdrafts 20,441 28,121
------------ -----------
$104,987,397 $98,185,300
Lease: 143,000 --
------------ -----------
$105,130,397 $98,185,300
Net deferred loan fees,
premiums and discounts 89,867 87,539
Allowance for loan losses (1,216,333) (1,147,846)
------------ -----------
$104,003,931 $97,124,993
============ ===========
At December 31, 2000, approximately $26,853,000 or 35.6% of the real
estate loans had fixed rates of interest and $48,512,000 or 64.4% had
adjustable rates of interest.
The net investment in the direct financing lease was $143,000 at
December 31, 2000.
An analysis of the allowance for loan losses were as follows:
2000 1999 1998
---- ---- ----
Balance, Beginning $1,147,846 $1,122,155 $1,018,818
Provision charged to
operations 170,000 117,999 195,600
Recoveries 19,494 26,270 35,634
Loans charged off (121,007) (118,578) (127,897)
---------- ---------- ----------
Balance, Ending $1,216,333 $1,147,846 $1,122,155
========== ========== ==========
Loans are placed on nonaccrual status when, in the judgement
of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. A summary of nonaccrual
loans is as follows:
DECEMBER 31,
----------------------
2000 1999
---- ----
Consumer loans $22,125 $22,157
======= =======
-38-
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND LEASE RECEIVABLE (CONTINUED)
The contractual amount of interest that would have been recorded on
nonaccrual loans during 2000 and 1999 was $6,532 and $29,292,
respectively. The amount of interest income that was recorded on
nonaccrual loans during 2000 and 1999 was $427 and $23,025,
respectively.
The Bank is not committed to lend additional funds to debtors whose
loans are nonperforming or on nonaccrual status.
NOTE 6. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
financial statements. The unpaid principal balances of mortgage loans
serviced for others were $6,383,029 and $6,189,932 at December 31, 2000
and 1999, respectively.
Custodial balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were $79,558 and $143,486
at December 31, 2000 and 1999, respectively.
Mortgage servicing rights of $12,253 were capitalized in 1998. The Bank
did not capitalize any mortgage servicing rights in 1999 or 2000. An
analysis of the predominant risk characteristics indicates that there
is not more than a normal amount of prepayment risk and thus no write
down is necessary. Amortization of mortgage servicing rights was
$2,264, $2,258 and $2,439 in 2000, 1999 and 1998, respectively.
Mortgage servicing rights at December 31, 2000 and 1999 were $33,961
and $36,370, respectively.
NOTE 7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 were as
follows:
2000 1999
---- ----
Land and land improvements $ 985,050 $ 981,150
Banking house - main 1,299,557 1,282,560
Banking house - Valley Road branch 521,431 521,431
Banking house - Hedgesville branch 765,137 765,137
Furniture, fixtures and equipment 1,722,487 1,680,757
---------- ----------
$5,293,662 $5,231,035
Less accumulated depreciation 2,126,360 1,925,365
---------- ----------
$3,167,302 $3,305,670
Construction in progress - addition -- 55,254
---------- ----------
$3,167,302 $3,360,924
========== ==========
Depreciation and amortization expense amounted to $238,162, $256,642
and $219,325 in 2000, 1999 and 1998, respectively.
-39-
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. TIME DEPOSITS
At December 31, 2000, the scheduled maturities of time deposits are as
follows:
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- --------
2001 $ 5,513,522 $31,960,794
2002 6,142,055 22,504,983
2003 6,109,248 21,724,003
2004 -- 336,224
2005 -- 1,721,764
----------- -----------
$17,764,825 $78,247,768
=========== ===========
NOTE 9. MEMBERSHIP IN FEDERAL HOME LOAN BANK
Effective October 4, 2000, Citizens National Bank became a member of
the Federal Home Loan Bank (FHLB) of Pittsburgh. By virtue of its
membership, the Bank has the ability to obtain borrowings from the
FHLB. Access to borrowing is dependent upon submission of advance
applications and adequate collateral. The Bank has no outstanding
advances from the FHLB at December 31, 2000 and 1999, respectively.
NOTE 10. UNUSED LINES OF CREDIT
The Bank entered into an open-ended unsecured line of credit with Bank
of America for $5,000,000 for federal fund purchases. Funds issued
under this agreement are at the Bank of America federal funds rate
effective at the time of borrowing. The line matures September 30,
2001. The Bank had not drawn on these funds at December 31, 2000 and
1999.
The Bank also entered into an open-ended unsecured line of credit with
Wachovia Bank of N.C. for $2,000,000 for federal fund purchases. Funds
issued under this agreement are at the Wachovia Bank of N.C. federal
funds rate effective at the time of borrowing. This line matures July
31, 2001. The Bank had not drawn any of these funds at December 31,
2000 and 1999.
NOTE 11. OPERATING LEASES
The Bank had two lease agreements which were terminated in 2000. A
lease for additional parking which required an annual payment of $2,500
was not renewed by the Bank in March 2000.
The lease for equipment was terminated by the Bank in February 2000.
Both leases were classified as operating leases.
Lease expense under operating leases for the periods ending December
31, 2000, 1999 and 1998 amounted to $1,205, $11,752 and $11,752,
respectively.
-40-
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. PENSION PLAN
The Bank is a member of The West Virginia Bankers Association
Retirement Plan, a multi-employer, defined benefit pension plan. All
employees participate in the plan after completing one year of service
and attaining the age of 21. The benefits are based on years of service
and the highest average earnings during any five consecutive calendar
years. Plan assets are invested primarily in corporate bonds, common
stocks and U.S. Government and Agency Securities.
The following table sets forth information about the Bank's plan as of
October 31:
2000 1999 1998
---- ---- ----
Change in benefit obligation:
Benefit obligation at
beginning of year $ 2,265,218 $ 2,451,242 $ 2,008,099
Service cost 115,427 116,483 100,431
Interest cost 179,194 167,701 156,741
Actuarial gain (loss) (93,277) (5,239) 200,476
Change due to amendment 3,069 (350,612) 89,231
Benefits paid (113,612) (114,357) (103,736)
----------- ----------- -----------
Benefit obligation at end of
year $ 2,356,019 $ 2,265,218 $ 2,451,242
----------- ----------- -----------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 2,112,741 $ 2,008,519 $ 1,936,710
Actual return on plan assets 116,729 98,484 113,192
Employer contribution 178,376 120,095 62,353
Benefits paid (113,612) (114,357) (103,736)
----------- ----------- -----------
Fair value of plan assets
at end of year $ 2,294,234 $ 2,112,741 $ 2,008,519
----------- ----------- -----------
Funded status $ (61,785) $ (152,477) $ (442,723)
Unrecognized net actuarial
(gain) loss (188,435) (155,193) 131,366
Unrecognized prior service
cost 68,514 76,376 112,980
Unrecognized net transition
(asset) (26,511) (36,081) (45,651)
----------- ----------- -----------
Prepaid (accrued) benefit cost $ (208,217) $ (267,375) $ (244,028)
=========== =========== ===========
-41-
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. PENSION PLAN (CONTINUED)
2000 1999 1998
---- ---- ----
Weighted average assumptions
as of October 31:
Discount rate 8.0% 8.0% 7.0%
Expected return on plan
assets 8.5% 8.5% 8.5%
Rate of compensation increase 5.0% 5.0% 5.0%
Components of net periodic cost:
Service cost $ 115,427 $ 116,483 $ 100,431
Interest cost 179,194 167,701 156,741
Expected return on plan assets (176,764) (167,776) (171,093)
Net amortization 11,446 11,446 11,446
--------- --------- ---------
Net Periodic Plan Cost $ 129,303 $ 127,854 $ 97,525
========= ========= =========
NOTE 13. 401(k) PROFIT SHARING PLAN
All employees are eligible to participate in the Citizens National Bank
of Berkeley Springs 401(k) Profit Sharing Plan after completing one
year of service. Employees may defer up to 15% of their salary in 2000,
1999 and 1998. The Bank may, at the discretion of the Board of
Directors, match all or part of the employee deferrals. For 2000, 1999
and 1998, the Bank matched 50% of employee deferrals up to 5% of
salary. The percentage of match varies based on the Bank's profit
level.
The Bank's contribution charged to income during 2000, 1999 and 1998
was $25,200, $19,800 and $15,534, respectively.
NOTE 14. DEFERRED COMPENSATION PLAN
The Bank has a plan pursuant to which a director may elect to waive
receipt of all or a portion of his fees for Board of Directors'
meetings or committee meetings in exchange for a retirement benefit to
be received during a ten-year period after attaining a certain age. The
Bank has acquired life insurance on the lives of participating
directors to fund its obligation under the plan. The cash surrender
value of these life insurance policies has been recorded as an asset.
The present value of payments to be paid to directors or their
beneficiaries for services rendered to date has been recorded as a
liability. The expense for these benefits was $(18,941), $33,727 and
$26,464 for 2000, 1999 and 1998, respectively.
-42-
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. SHAREHOLDERS' EQUITY
On August 31, 2000, CNB consummated its merger with the Bank, and
shareholders received two shares of CNB stock with a $1 par value for
each share of Bank stock with a $10 par value. Common stock, capital
surplus and retained earnings have been restated to reflect the change
in par value and the shares issued due to the formation of CNB.
CNB initially issued 12,000 shares of common stock, which were redeemed
and canceled on August 31, 2000, concurrent with the closing of the
merger with the Bank.
On March 1, 1998, the Bank distributed 229,024 shares of common stock
to shareholders in connection with a stock split effected in the form
of a 100% stock dividend. As a result of the stock dividend, common
stock was increased by $229,024 and retained income was decreased by
$229,024. The amount of this stock dividend was restated due to the
formation of CNB.
All references in the accompanying consolidated financial statements
and notes to per share amounts have been restated to reflect the above
stock split and shares issued in the acquisition of the Bank by CNB.
Basic earnings and dividends per share have been computed based on
458,048 weighted average number of shares outstanding in 2000, 1999 and
1998.
NOTE 16. GAIN ON DEMUTUALIZATION OF INSURANCE COMPANY
The Bank owns several life insurance policies which were issued by a
mutual insurance company. In January 2000, the insurance company
demutualized and converted to a stock company. The Bank received stock
from the insurance company as part of the demutualization. There was no
direct effect on the Bank's interest as a policyholder. The receipt of
the stock was accounted for at fair value with a gain recognized in
income from continuing operations. The stock was sold during 2000 at an
additional gain of $4,401, included in gain (loss) on sale of
securities.
NOTE 17. INCOME TAXES
Income taxes reflected in the statements of income are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
---- ---- ----
Federal:
Current $ 677,117 $ 526,454 $ 573,908
Deferred 1,932 30,090 (26,467)
State:
Current 82,404 60,896 78,884
Deferred (3,618) 3,378 (8,076)
--------- --------- ---------
Provision for Income Taxes $ 757,835 $ 620,818 $ 618,249
========= ========= =========
Deferred income taxes reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations.
-43-
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. INCOME TAXES (CONTINUED)
The following is a reconciliation of the statutory federal income tax
rate applied to pre-tax accounting income, with the income tax
provisions in the statements of income.
YEARS ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
---- ---- ----
Income tax expense at the
statutory rate (34%) $ 701,650 $ 625,956 $ 652,624
Increases (decreases) resulting
from:
Nontaxable interest income,
net of non-deductible interest
expense (26,139) (66,084) (90,371)
State income taxes, net of
federal income tax benefit 78,786 64,274 70,808
Other 3,538 (3,328) (14,812)
--------- --------- ---------
Provision for Income Taxes $ 757,835 $ 620,818 $ 618,249
========= ========= =========
Federal and state income taxes receivable included in the balance sheet
as other assets were $41,513 and $83,543 at December 31, 2000 and 1999,
respectively.
The components of deferred taxes included in the balance sheet as of
December 31 are as follows:
2000 1999
---- ----
Deferred tax assets:
Provision for loan losses $ 373,518 $ 348,863
Deferred compensation plan 197,515 190,043
Postretirement benefits 38,845 33,069
Defined benefit plan 89,874 96,255
Organizational costs 3,994 --
Net unrealized loss on securities
available for sale 70,634 546,531
----------- -----------
$ 774,380 $ 1,214,761
----------- -----------
Deferred tax liabilities:
Deferred compensation plan $ (158,161) $ (134,147)
Mortgage servicing rights (12,226) (13,201)
Depreciation (228,484) (217,692)
----------- -----------
$ (398,871) $ (365,040)
----------- -----------
Net Deferred Tax Asset $ 375,509 $ 849,721
=========== ===========
-44-
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. INCOME TAXES (CONTINUED)
Generally accepted accounting principles require a valuation allowance
against deferred tax assets if, based on the weight of available
evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Bank believes that the deferred
tax assets will be realized and therefore no valuation allowance was
established.
NOTE 18. OTHER OPERATING EXPENSES
2000 1999 1998
---- ---- ----
Stationery, supplies and printing $ 122,410 $ 117,146 $117,879
Data processing 163,125 131,213 110,679
Director's fees 133,875 137,002 119,275
Postage 75,516 77,043 62,722
Telephone 58,709 57,823 45,476
Professional fees 161,632 123,981 81,422
ATM fees 101,149 84,676 96,133
Advertising and public relations 141,843 96,133 75,476
Other 500,503 416,209 240,019
---------- ---------- --------
Total Other Operating Expenses $1,458,762 $1,241,226 $949,081
========== ========== ========
NOTE 19. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
CNB is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing need of its
customers. These financial instruments include commitments to extend
credit, and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk which are
not reflected in the statements of financial condition. The contractual
amounts of those instruments reflect the extent of involvement CNB has
in particular classes of financial instruments.
CNB's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend
credit and standby letters of credit written is represented by the
contractual amount of those instruments. CNB uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend funds as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Commercial line of credit arrangements usually require payment
of a fee.
CNB evaluates each customer's creditworthiness and related collateral
on a case-by-case basis. The amount of collateral obtained if deemed
necessary by CNB upon extension of credit is based on management's
credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, real estate, equipment, and
income-producing commercial properties.
-45-
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
Standby letters of credit written are conditional commitments issued by
CNB to guarantee the performance of a customer to a third party. Those
guarantees are issued to support public and private borrowing
arrangements, bond financing, and similar transactions. The credit risk
involved in issuing a letter of credit is essentially the same as that
involved in extending loan facilities to customers.
A summary of off-balance sheet instruments as of December 31 is as
follows:
2000 1999
---- ----
Commitments:
To originate:
Fixed rate loans $ 316,530 $ 547,205
Adjustable rate loans 362,127 197,250
---------- ----------
$ 678,657 $ 744,455
Letters of credit 700,783 874,299
Undisbursed portion of construction
loans 1,225,775 967,784
Available credit granted on commercial
loans 2,917,707 2,390,204
Available credit on personal lines
of credit 420,833 505,997
Undisbursed portion of home equity loans 1,340,053 1,013,380
---------- ----------
$7,283,808 $6,496,119
========== ==========
NOTE 20. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
CNB's primary business is mortgage loans, which consists of originating
residential, construction, multi-family, and commercial real estate
loans and consumer and commercial loans. CNB's primary lending area is
Morgan and Berkeley Counties, West Virginia. Loans are occasionally
made in surrounding counties in West Virginia, Maryland, Virginia and
Pennsylvania.
CNB evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by CNB upon the
extension of credit is based on management's credit evaluation of the
customer. Collateral held varies but generally includes vehicles,
equipment and real estate.
-46-
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal Banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 2000, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 2000 and 1999, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as
well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well-capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios. There are no conditions or events since that notification that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table. There were no deductions from capital for interest-rate risk in
2000 and 1999.
-47-
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. REGULATORY MATTERS (CONTINUED)
RATIO
-------------------------------------------------------
ACTUAL TO BE WELL
AMOUNT CAPITALIZED UNDER
IN FOR CAPITAL PROMPT CORRECTIVE
THOUSANDS ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------- ------ ----------------- -----------------
As of December 31, 2000:
Total Capital
(to Risk Weighted
Assets) $15,103 16.94% 8.0% 10.0%
Tier I Capital
(to Risk Weighted
Assets) $13,987 15.69% 4.0% 6.0%
Tier I Capital
(to Average Assets) $13,987 9.33% 4.0% 5.0%
As of December 31, 1999:
Total Capital
(to Risk Weighted
Assets) $14,176 17.13% 8.0% 10.0%
Tier I Capital
(to Risk Weighted
Assets) $13,140 15.87% 4.0% 6.0%
Tier I Capital
(to Average Assets) $13,140 9.52% 4.0% 5.0%
NOTE 22. REGULATORY RESTRICTIONS
Certain restrictions exist regarding the ability of the Bank subsidiary
to transfer funds to CNB in the form of cash dividends, which in turn
impact the ability of CNB to declare dividends to its shareholders. The
approval of the Comptroller of the Currency is required if the total
dividends declared by a national bank in any calendar year exceed the
bank's net profits (as defined) for that year combined with its
retained net profits for the preceding two calendar years.
Section 23A of the Federal Reserve Act (the "Act") prohibits affiliates
from transferring funds to CNB in the form of loans or advances
exceeding 10% of its capital stock and surplus, as defined in the Act.
In addition, all loans or advances to nonbank affiliates must be
secured by specific collateral. Based on this limitation, there was
approximately $1,390,000 available for loans or advances to CNB as of
December 31, 2000, at which time there were no material loans or
advances outstanding.
-48-
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
asset or obligation could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. Fair value
estimates are made at a specific point in time based on relevant market
information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the entire holdings of a particular
financial instrument. Because no market value exists for a significant
portion of the financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature, involve
uncertainties and matters of judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on financial instruments both on and off
the balance sheet without attempting to estimate the value of
anticipated future business, and the value of assets and liabilities
that are not considered financial instruments. Additionally, tax
consequences related to the realization of the unrealized gains and
losses can have a potential effect on fair value estimates and have not
been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair
value of significant financial instruments:
Financial Assets:
The carrying amounts of cash, due from Banks and federal funds sold
are considered to approximate fair value. The fair value of
investment securities, including available for sale, are generally
based on quoted market prices. The fair value of loans is estimated
using a combination of techniques, including discounting estimated
future cash flows and quoted market prices of similar instruments
where available.
Financial Liabilities:
The carrying amounts of deposit liabilities payable on demand are
considered to approximate fair value. For fixed maturity (time)
deposits, fair value is estimated by discounting estimated future
cash flows using currently offered rates for deposits of similar
remaining maturities.
Off-Balance-Sheet-Financial Instruments:
The fair value of commitments to extend credit and standby letters of
credit is estimated using the fees currently charged to enter into
similar agreements.
-49-
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of financial instruments at December 31, is
summarized as follows:
2000 1999
-------------------------------- ------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
Financial Assets:
Cash, due from banks and
federal funds sold $ 4,947,538 $ 4,947,538 $ 4,035,293 $ 4,035,293
Securities available for
sale 35,374,293 35,374,293 31,186,678 31,186,678
Loans 104,003,931 103,766,162 97,190,293 97,060,268
Accrued interest receivable 1,004,257 1,004,257 871,671 871,671
Mortgage servicing rights 33,961 33,961 36,370 36,370
Financial Liabilities:
Demand deposits $ 55,748,082 $ 55,748,082 $55,042,670 $55,042,670
Time deposits 78,247,768 83,199,316 69,467,278 70,575,049
Accrued interest payable 1,038,122 1,038,122 816,619 816,619
Off Balance - Sheet
Financial Instruments:
Letters of credit $ -- $ 2,706 $ -- $ 3,055
NOTE 24. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to
officers, directors, and their affiliates amounting to $1,390,281 and
$1,463,356 at December 31, 2000 and 1999, respectively. During 2000,
$426,553 of new loans were made, or became reportable, and repayments
and other decreases totaled $499,628. Deposits from related parties
held by the Bank at December 31, 2000 and 1999 amounted to $2,513,952
and $2,257,550, respectively.
-50-
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 25. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following represents parent company only financial information:
STATEMENT OF FINANCIAL CONDITION (PARENT ONLY)
DECEMBER 31, 2000
ASSETS
Investment in Citizens National Bank $ 13,871,712
Deferred income taxes 3,994
------------
TOTAL ASSETS $ 13,875,706
============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities $ 11,888
------------
TOTAL LIABILITIES $ 11,888
------------
SHAREHOLDERS' EQUITY
Common stock, $1 par value; 5,000,000 shares
authorized; 458,048 shares outstanding $ 458,048
Capital surplus 3,863,592
Retained earnings 9,657,422
Accumulated other comprehensive income (115,244)
------------
TOTAL SHAREHOLDERS' EQUITY $ 13,863,818
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,875,706
============
-51-
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 25. PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
STATEMENT OF INCOME (PARENT ONLY)
YEAR ENDED DECEMBER 31, 2000
Dividend income $ 302,311
Noninterest expense (11,888)
-----------
Gain before income taxes and equity in earnings of subsidiary 290,423
Income tax credit (expense) 3,994
-----------
Gain before equity in earnings of subsidiary 294,417
Equity in earnings of Citizens National Bank 1,011,423
-----------
Net income $ 1,305,840
===========
STATEMENT OF CASH FLOWS (PARENT ONLY)
YEAR ENDED DECEMBER 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,305,840
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in deferred income taxes (3,994)
Increase in accrued expenses and other liabilities 11,888
Equity in undistributed earnings of subsidiary (1,011,423)
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 302,311
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid $ (302,311)(1)
-----------
NET CASH (USED IN) FINANCING ACTIVITIES $ (302,311)
-----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ --
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ --
===========
(1) Represents dividends paid by CNB Financial Services, Inc. subsequent to
its acquisition of the Bank.
-52-
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 26. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2000
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
In thousands
Interest income $2,631 $2,692 $2,795 $2,917
Interest expense 1,238 1,277 1,382 1,468
------ ------ ------ ------
Net interest income 1,393 1,415 1,413 1,449
Provision for loan losses 30 30 30 80
Noninterest income 365 153 161 164
Noninterest expense 1,124 1,047 1,024 1,084
------ ------ ------ ------
Income before income taxes 604 491 520 449
Provision for income taxes 205 197 186 170
------ ------ ------ ------
Net income $ 399 $ 294 $ 334 $ 279
====== ====== ====== ======
Basic earnings per share $ 0.87 $ 0.64 $ 0.73 $ 0.61
====== ====== ====== ======
1999
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
In thousands
Interest income $2,379 $2,462 $2,529 $2,575
Interest expense 1,116 1,135 1,155 1,191
------ ------ ------ ------
Net interest income 1,263 1,327 1,374 1,384
Provision for loan losses 42 16 30 30
Noninterest income 138 119 157 151
Noninterest expense 893 1,015 932 1,114
------ ------ ------ ------
Income before income taxes 466 415 569 391
Provision for income taxes 153 138 197 133
------ ------ ------ ------
Net income $ 313 $ 277 $ 372 $ 258
====== ====== ====== ======
Basic earnings per share $ 0.68 $ 0.60 $ 0.81 $ 0.56
====== ====== ====== ======
-53-
54
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There were no changes in or disagreements with accountants in
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table contains certain information, as of March 7, 2001,
with respect to current directors, nominees for directors and certain
officers of CNB.
DIRECTOR PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
NAME AGE SINCE AND POSITION HELD WITH CNB
---- --- ----- --------------------------
J. Robert Ayers 71 1974 Retired - President, Citizens National Bank
John E. Barker 72 1972 Auto Sales - Service
Jay E. Dick 48 1983 Retired - Manager-Hunters' Hardware, Inc.
Herbert L. Eppinger 68 1979 Retired - Agriculture
Robert L. Hawvermale 71 1967 Retired - Professional Engineer
J. Philip Kesecker 71 1965 Real Estate Development
Raymond H. Lawyer 66 1979 Retired - President, Citizens National Bank
Jerry McGraw 54 1988 Insurance
Martha H. Quarantillo 41 1999 Pharmacist
Thomas F. Rokisky 54 1993 President and Chief Executive Officer, CNB and
Citizens National Bank
Charles S. Trump IV 40 1986 Attorney at Law
Arlie R. Yost 53 1988 Licensed Residential Appraiser
Arnold K. Stotler 41 1996 Vice President, Secretary, Treasurer
Rebecca S. Brock 40 1999 Vice President/CFO
Patricia L. Poland 60 1996 Vice President
Section 16 (a) of the Securities Exchange Act of 1934 requires CNB's directors
and executive officers, and persons who own more than 10% of the registered
class of CNB's equity securities, to make stock ownership and transaction
filings with the Securities and Exchange Commission and to provide copies to
CNB. Based solely on a review of the reports furnished to CNB and written
statements that no other reports were required, all Section 16(a) filing
requirements applicable to its officers and directors were met except for J.
Robert Ayers, John E. Barker, Jay E. Dick, Herbert L. Eppinger, J. Philip
Kesecker, Thomas F. Rokisky and Charles S. Trump, IV, who each filed one report
late. CNB is required to report late filings.
-54-
55
ITEM 11. EXECUTIVE COMPENSATION
The table below reflects information concerning the annual compensation
for services in all capacities to the corporation for the fiscal years
ended December 31, 2000, 1999 and 1998, of those persons who were, as
of December 31, 2000, (a) the chief executive officer, and (b) the four
other most highly compensated executive officers to the extent that
such persons, total annual salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- ------ ----- ------------
Thomas F. Rokisky, President/CEO 2000 $93,358 $ -0- $12,436 (1)(2)
1999 $89,095 $ -0- $11,403 (1)(2)
1998 $84,829 $ -0- $10,609 (1)(2)
(1) CNB's group life and health insurance program, which is paid for by
CNB, is made available to all full-time employees. In accordance with
IRS Code Section 79, the cost of group life insurance coverage for an
individual in excess of $50,000 is added to the individual's earnings
and is included in salary. Also included in this figure are board fees
earned and the corporation's contributions to the individual's 401(k)
retirement savings program to which the individual has a vested
interest.
(2) CNB's contributions to the pension plan, a defined benefit plan,
are not and cannot be calculated separately for specific participants.
Contributions of $178,376, $120,095 and $62,353 were made by CNB in
2000, 1999 and 1998, respectively
CNB does not maintain any form of stock option, stock appreciation
rights, or other long-term compensation plans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 22, 2001,
relating to the beneficial ownership of the common stock by (a) each
person or group known by CNB to own beneficially more than 5% of the
outstanding common stock; (b) each of CNB's directors; and (c) all
directors and executive officers of CNB as a group. Unless otherwise
noted below, the persons named in the table have sole investment powers
with respect to each of the shares reported as beneficially owned by
such person.
-55-
56
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS (1)
---------------- ---------------- --------------------
J. Robert Ayers (2) 1,840 *
John E. Barker (3) 17,264 3.77
Jay E. Dick (4) 15,574 3.40
Herbert L. Eppinger (5) 2,870 *
Robert L. Hawvermale (6) 3,730 *
J. Philip Kesecker (7) 14,152 3.09
Raymond H. Lawyer (8) 1,376 *
Jerald McGraw (9) 1,464 *
Martha H. Quarantillo 200 *
Thomas F. Rokisky (10) 1,225 *
Charles S. Trump IV (11) 11,260 2.46
Arlie R. Yost (12) 1,710 *
All directors and executive officers as a group (15 persons) 72,913 15.92
D. Louise Stotler and Deborah Dhayer 47,488 10.37
RR 6 Box 12460, Berkeley Springs, WV 25411
Mary Lou Trump 53,470 11.67
RR 7 Box 12840, Berkeley Springs, WV 25411
* Indicates holdings of less than 1%.
(1) Includes shares of common stock held by the named individual as of
February 22, 2001.
(2) Includes 1,740 shares held jointly with spouse.
(3) Includes 14,164 shares held jointly with spouse and 3,000 shares held
jointly with children.
(4) Includes 15,474 shares held jointly with spouse.
(5) Includes 2,770 shares held jointly with spouse.
(6) Includes 1,200 shares held by spouse, 100 shares held jointly with
spouse and 30 shares held jointly with son.
(7) Includes 3,098 shares held by spouse and 1,860 shares held jointly with
spouse.
(8) Includes 848 shares held jointly with spouse.
(9) Includes 110 shares held by spouse and 914 shares held jointly with
spouse.
(10) Includes 1,225 shares held in an Individual Retirement Account.
(11) Includes 842 shares held by spouse and 150 shares held as custodian for
children.
(12) Includes 1,270 shares held jointly with spouse.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CNB has had and intends to continue to have banking and financial
transactions in the ordinary course of business with directors and
executive officers of CNB and their associates. Total loans outstanding
from CNB at December 31, 2000, to CNB's officers and directors as a
group and members of their immediate families and companies in which
they had an ownership interest of 10% or more was $1,103,464, or
approximately 8.0% of total equity capital. These loans do not involve
more than the normal risk of collectibility or present other
unfavorable features.
Trump and Trump in which director Charles S. Trump, IV is a partner
performed legal services for CNB and the bank. Fees paid by CNB and the
bank to that law firm were $34,623 during 2000.
-56-
57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements listed on the index to Item 8 of
this Annual Report on Form 10-K are filed as a part of this Annual
Report.
2. Financial Statement Schedules
All schedules applicable to the Registrant are shown in the respective
financial statements or in the notes thereto included in this Annual
Report.
3. Exhibits
2.1 Agreement and Plan of Merger, dated as of April 5, 2000, by and
among CNB Financial Services, Inc. and Citizens National Bank of
Berkeley Springs filed as exhibit 2.1 to the Registration
Statement on Form S-4 (File #333-36186) and incorporated herein
by reference.
2.2 Articles of Incorporation of CNB Financial Services, Inc. filed
as exhibit 3.1 to the Registration Statement on Form S-4.
2.3 Bylaws of CNB Financial Services, Inc. filed as exhibit 3.2 to
the Registration Statement on Form S-4.
21 Subsidiary of CNB Financial Services, Inc. filed as an exhibit
hereto and incorporated herein by reference.
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed in the fourth quarter of 2000.
-57-
58
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.
CNB Financial Services, Inc.
---------------------------------------------
(Registrant)
Date March 28, 2001 /s/ Rebecca S. Brock
- ---------------------------- --------------------------------------------
Rebecca S. Brock, Vice President/CFO
(Principal Financial and Accounting Officer)
Date March 28, 2001 /s/ Thomas F. Rokisky
- ---------------------------- --------------------------------------------
Thomas F. Rokisky, President/CEO
-58-
59
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 in
the capacities indicated on the 28th March 2001.
Signatures Title
---------- -----
/s/ J. Philip Kesecker Chairman and Director
- -------------------------------
J. PHILIP KESECKER
/s/ Thomas F. Rokisky President/CEO and Director
- -------------------------------
THOMAS F. ROKISKY
/s/ J. Robert Ayers Director
- -------------------------------
J. ROBERT AYERS
/s/ John E. Barker Director
- -------------------------------
JOHN E. BARKER
/s/ Jay E. Dick Director
- -------------------------------
JAY E. DICK
/s/ Herbert L. Eppinger Director
- -------------------------------
HERBERT L. EPPINGER
/s/ Robert L. Hawvermale Director
- -------------------------------
ROBERT L. HAWVERMALE
/s/ Raymond H. Lawyer Director
- -------------------------------
RAYMOND H. LAWYER
/s/ Jerald McGraw Director
- -------------------------------
JERALD McGRAW
/s/ Martha H. Quarantillo Director
- -------------------------------
MARTHA H. QUARANTILLO
/s/ Charles S. Trump IV Director
- -------------------------------
CHARLES S. TRUMP IV
/s/ Arlie R. Yost Director
- -------------------------------
ARLIE R. YOST
-59-