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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] 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.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
United States of America 55-0773918
- ------------------------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 S. Washington Street, Berkeley Springs, WV 25411
- ------------------------------------------------------ ---------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, ( 304 ) 258 - 1520
----- ----- ----
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $1 par value, 458,048 shares outstanding as of November 1, 2002
CNB FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PAGE
PART 1: FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2002 (Unaudited)
and December 31, 2001................................................................ 3
Consolidated Statements of Income for the Three and Nine Months ended September 30,
2002 and 2001 (Unaudited)........................................................... 4
Consolidated Statements of Changes in Shareholders' Equity for the Nine
Months Ended September 30, 2002 (Unaudited) and the Year Ended December 31, 2001..... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001 (Unaudited)........................................ 6
Notes to Consolidated Financial Statements (Unaudited)................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Three and Nine Months ended September 30, 2002......... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................. 19
Item 4. Controls and Procedures................................................................ 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 21
Item 6. Exhibits and Reports on Form 8-K....................................................... 21
SIGNATURES............................................................................. 22
CERTIFICATIONS......................................................................... 23
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 indicates that the
disclosure of forward-looking information is desirable for investors and
encourages such disclosure by providing a safe harbor for forward-looking
statements that involve risk and uncertainty. All statements other than
statements of historical fact included in this Form 10-Q including statements in
Management's Discussion and Analysis of Financial Condition and Results of
Operations are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. In order to comply with the terms of the safe
harbor, CNB notes that a variety of factors could cause CNB's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in those forward-looking statements. These factors could
include the following possibilities: (1) competitive pressures among depository
and other financial institutions may increase significantly; (2) changes in the
interest rate environment may reduce margins; (3) general economic conditions
may become unfavorable resulting in reduced credit quality or demand for loans;
(4) legislative or regulatory changes; and (5) competitors may have greater
financial resources and develop products that enable them to compete more
successfully than CNB.
2
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
ASSETS 2002 2001
-------------- ---------------
(Unaudited)
Cash and due from banks $ $ 8,816,379 $ 4,229,810
Federal funds sold 4,973,533 -
Securities available for sale
(at approximate market value) 48,420,299 48,913,329
Federal Home Loan Bank stock, at cost 646,900 625,500
Federal Reserve Bank stock, at cost 129,650 129,650
Loans and lease receivable, net 119,941,586 110,536,744
Accrued interest receivable 989,192 1,052,620
Foreclosed real estate (held for sale), net 6,500 14,898
Premises and equipment, net 4,908,355 4,283,625
Deferred income taxes - 225,894
Cash surrender value of life insurance 963,452 883,533
Intangible assets 98,654 105,168
Other assets 391,287 540,672
----------------- -----------------
TOTAL ASSETS $ 190,285,787 $ 171,541,443
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 23,982,947 $ 19,174,111
Interest-bearing demand 31,566,758 24,878,709
Savings 20,756,445 17,851,684
Time, $100,000 and over 34,733,568 27,450,519
Other time 60,736,627 65,025,516
----------------- -----------------
$ 171,776,345 $ 154,380,539
Accrued interest payable 970,996 1,148,437
Accrued expenses and other liabilities 1,162,649 1,086,230
Deferred income taxes 128,367 -
----------------- -----------------
TOTAL LIABILITIES $ 174,038,357 $ 156,615,206
----------------- -----------------
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 11,198,829 10,426,618
Accumulated other comprehensive income 726,961 177,979
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY $ 16,247,430 $ 14,926,237
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 190,285,787 $ 171,541,443
================= =================
The Notes to Consolidated Financial Statements are an integral part of these
statements.
3
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- -------------- -------------- --------------
INTEREST INCOME
Interest and fees on loans $2,253,727 $2,399,242 $6,731,977 $7,068,503
Interest and dividends on securities
United States Treasury securities - - - 274
U.S. Government agencies and
corporations 401,999 571,703 1,475,771 1,677,766
Mortgage backed securities 158,269 - 250,259 -
State and political subdivisions 13,113 7,363 29,946 22,088
Other 3,728 9,695 19,124 42,654
Interest on federal funds sold 30,124 41,190 66,178 130,560
------------- -------------- -------------- --------------
$2,860,960 $3,029,193 $8,573,255 $8,941,845
------------- -------------- -------------- --------------
INTEREST EXPENSE
Interest on interest bearing demand, $1,334,613 $1,489,436 $4,060,939 $4,478,741
savings and time deposits
Interest on federal funds purchased - - - 2,291
------------- -------------- -------------- --------------
$1,334,613 $1,489,436 $4,060,939 $4,481,032
------------- -------------- -------------- --------------
NET INTEREST INCOME $1,526,347 $1,539,757 $4,512,316 $4,460,813
PROVISION FOR LOAN LOSSES 40,500 57,000 152,000 169,000
------------- -------------- -------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $1,485,847 $1,482,757 $4,360,316 $4,291,813
------------- -------------- -------------- --------------
NONINTEREST INCOME
Service charges on deposit accounts $ 199,188 $ 159,370 $ 538,363 $ 377,998
Other service charges, commissions
and fees 82,333 66,547 255,195 190,938
Insurance commissions 27,331 34,940 78,715 93,720
Other operating income 19,435 25,664 100,851 64,505
Net gain on sale of securities - - 78,028 833
Gain on sale of other real estate owned - - 3,492 -
------------- -------------- -------------- --------------
$ 328,287 $ 286,521 $1,054,644 $ 727,994
------------- -------------- -------------- --------------
NONINTEREST EXPENSES
Salaries $ 588,030 $ 519,594 $1,683,422 $1,482,112
Employee benefits 183,844 149,898 554,321 455,079
Occupancy of premises 62,758 72,623 205,714 201,383
Furniture and equipment expense 90,260 55,653 271,088 171,726
Other operating expenses 432,084 424,885 1,257,836 1,194,354
------------- -------------- -------------- --------------
$1,356,976 $1,222,653 $3,972,381 $3,504,654
------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES $ 457,158 $ 546,625 $1,442,579 $1,515,153
PROVISION FOR INCOME TAXES 160,319 187,237 505,470 534,699
------------- -------------- -------------- --------------
NET INCOME $ 296,839 $ 359,388 $ 937,109 $ 980,454
============= ============== ============== ==============
BASIC EARNINGS PER SHARE $ 0.65 $ 0.78 $ 2.05 $ 2.14
============= ============== ============== ==============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
--------------- --------------- --------------- --------------- ---------------
BALANCE, DECEMBER 31, 2000 $ 458,048 $ 3,863,592 $ 9,657,422 $ (115,244) $13,863,818
---------------
Comprehensive income:
Net income for 2001 - - 1,236,405 - 1,236,405
Change in unrealized gains
(losses) on securities
available for sale (net of
tax of $179,718) - - - 293,223 293,223
---------------
Total Comprehensive Income - - - - 1,529,628
---------------
Cash dividends ($1.02 per share) (467,209) (467,209)
--------------- --------------- --------------- --------------- ---------------
BALANCE, DECEMBER 31, 2001 $ 458,048 $ 3,863,592 $10,426,618 $ 177,979 $14,926,237
---------------
Comprehensive income:
Net income for nine months
ended September 30, 2002 - - 937,109 - 937,109
Change in unrealized gains
(losses) on securities
available for sale (net of
tax of $354,261) - - - 548,982 548,982
---------------
---------------
Total Comprehensive Income - - - - 1,486,091
---------------
---------------
Cash dividends ($0.36 per share) (164,898) (164,898)
--------------- --------------- --------------- --------------- ---------------
BALANCE, SEPTEMBER 30, 2002 $ 458,048 $ 3,863,592 $11,198,829 $ 726,961 $16,247,430
=============== =============== =============== =============== ===============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
5
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2002 2001
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 937,109 $ 980,454
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 261,743 171,735
Provision for loan losses 152,000 169,000
Deferred income taxes - (60,000)
Net (gain) on sale of securities (78,028) (833)
(Gain) on sale of real estate owned (3,492) -
(Increase) decrease in accrued interest receivable 63,428 (156,580)
(Increase) decrease in other assets 274,046 (67,429)
Increase (decrease) in accrued interest payable (177,441) 12,140
(Increase) in cash surrender value on life insurance in excess
of premiums paid (3,408) (34,553)
Increase (decrease) in accrued expenses and other liabilities 76,419 (10,030)
Amortization of deferred loan (fees) cost 56,319 39,426
Amortization (accretion) of premium and discount on investments 15,244 (25,690)
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,573,939 $ 1,017,640
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans $ (9,649,661) $ (5,196,547)
Proceeds from sales of securities 7,075,471 901,406
Proceeds from maturities of securities 28,653,020 36,472,222
Purchases of securities (34,290,835) (41,535,163)
Purchases of premises and equipment (1,032,053) (1,014,023)
Proceeds from sales of other real estate owned, net 48,390 -
Net (increase) in federal funds sold (4,973,533) (4,446,210)
Premiums paid on life insurance (49,078) (49,843)
---------------- ----------------
NET CASH (USED IN) INVESTING ACTIVITIES $ (14,218,279) $ (14,868,158)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits $ 14,401,646 $ 4,318,693
Net increase in time deposits 2,994,160 10,207,078
Cash dividends paid (164,897) (164,897)
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 17,230,909 $ 14,360,874
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 4,586,569 $ 510,356
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,229,810 3,739,854
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,816,379 $ 4,250,210
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 4,238,380 $ 4,491,253
Income taxes $ 502,000 $ 539,500
Net transfer to foreclosed real estate, held for sale from loans
receivable $ 36,500 $ -
The Notes to Consolidated Financial Statements are an integral part of these
statements.
6
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Formation of Holding Company
In March 2000, Citizens National Bank's Board of Directors
approved the formation of CNB Financial Services, Inc., (CNB) a
financial services holding company. On August 4, 2000, the shareholders
of Citizens National Bank approved an agreement and plan of merger
whereby the Bank became a wholly-owned subsidiary of CNB Financial
Services, Inc., a newly-formed financial services holding company. On
the effective date of this reorganization, each bank shareholder
received two shares of CNB stock for each share of the Bank's common
stock. The Bank expensed all costs of start-up activities of CNB, and
the merger was accounted for as a pooling of interest.
Note 2. Basis of Presentation
In the opinion of CNB, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of CNB financial
condition as of September 30, 2002 and the results of operations for
the three and nine months ended September 30, 2002 and 2001 and cash
flows for the nine months ended September 30, 2002 and 2001.
The accompanying unaudited financial statements have been
prepared in accordance with the instructions for Form 10-Q. These
financial statements should be read in conjunction with the
consolidated financial statements and the notes included in the CNB's
Annual Report for the year ended December 31, 2001.
7
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Securities Available for Sale
The amortized cost and estimated market value of debt
securities at September 30, 2002 and December 31, 2001 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:
SEPTEMBER 30, 2002 WEIGHTED
-------------------------------------------------------------------- AVERAGE
GROSS GROSS ESTIMATED TAX
AMORTIZED UNREALIZED UNREALIZED FAIR EQUIVALENT
COST GAINS LOSSES VALUE YIELD
--------------- --------------- --------------- --------------- ------------
Available for sale:
U.S. Government agencies
and corporations
Within one year $ 5,744,338 $ 13,472 $ - $ 5,757,810 4.65 %
After 1 but within 5 years 14,484,080 479,508 - 14,963,588 4.60
After 5 but within 10 years 12,324,569 435,436 7,975 12,752,030 5.66
--------------- --------------- --------------- ---------------
$32,552,987 $ 928,416 $ 7,975 $33,473,428 4.79
--------------- --------------- --------------- ---------------
States and political subdivisions
Within one year $ 100,000 $ 85 $ - 100,085 6.97
After 1 but within 5 years 250,000 - - 250,000 6.00
After 5 but within 10 years 775,000 39,366 - 814,366 6.42
--------------- --------------- --------------- ---------------
$ 1,125,000 $ 39,451 $ - $ 1,164,451 6.37
--------------- --------------- --------------- ---------------
Mortgage backed securities $13,552,006 $ 241,947 $ 11,533 $13,782,420 5.29
--------------- --------------- --------------- ---------------
Total securities available for sale $47,229,993 $ 1,209,814 $ 19,508 $48,420,299 4.97 %
=============== =============== =============== ===============
8
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Securities Available for Sale (continued)
DECEMBER 31, 2001 WEIGHTED
-------------------------------------------------------------------- AVERAGE
GROSS GROSS ESTIMATED TAX
AMORTIZED UNREALIZED UNREALIZED FAIR EQUIVALENT
COST GAINS LOSSES VALUE YIELD
--------------- --------------- --------------- ---------------- ----------
Available for sale:
U.S. Government agencies
and corporations
Within one year $ 1,250,000 $ 1,328 $ - $ 1,251,328 6.63 %
After 1 but within 5 years 29,007,880 116,337 151,186 28,973,031 4.67
After 5 but within 10 years 17,818,385 327,707 3,568 18,142,524 6.28
--------------- --------------- --------------- ---------------
$48,076,265 $ 445,372 $ 154,754 $48,366,883 5.27
--------------- --------------- --------------- ---------------
States and political subdivisions
After 1 but within 5 years $ 350,000 $ 1,020 $ - $ 351,020 6.75
After 5 but within 10 years 200,000 - 4,574 195,426 8.02
--------------- --------------- --------------- ---------------
$ 550,000 $ 1,020 $ 4,574 $ 546,446 7.21
--------------- --------------- --------------- ---------------
Total securities available for sale $48,626,265 $ 446,392 $ 159,328 $48,913,329 5.30 %
=============== =============== =============== ===============
The carrying value of securities pledged to secure public
deposits and for other purposes as required or permitted by law totaled
$12,082,406 at September 30, 2002 and $12,099,922 at December 31, 2001.
Proceeds from sales of securities available for sale
(excluding maturities) during the nine months ended September 30, 2002
and the year ended December 31, 2001 were $7,075,471 and $901,406,
respectively. Gross gains (losses) of $78,028 and $(-0-) during the
nine months ended September 30, 2002 and $7,071 and $(6,238) for the
year ended December 31, 2001 were realized on the respective sales.
9
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. Loans and Lease Receivable
Major classifications of loans at September 30, 2002 and
December 31, 2001, were as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------------- -----------------
Loans:
Real estate $ 75,749,842 $ 67,859,963
Commercial real estate 14,280,096 12,458,880
Consumer 22,839,244 24,197,964
Commercial 7,952,635 6,977,624
Overdrafts 240,213 86,694
----------------- -----------------
$ 121,062,030 $ 111,581,125
Lease: 136,351 139,608
----------------- -----------------
$ 121,198,381 $ 111,720,733
Net deferred loan fees, costs,
premiums and discounts 165,458 152,971
Allowance for loan losses (1,422,253) (1,336,960)
----------------- -----------------
$ 119,941,586 $ 110,536,744
================= =================
An analysis of the allowance for possible loan losses is as
follows:
SEPTEMBER 30, DECEMBER 31,
--------------------------------- ------------
2002 2001 2001
-------------- -------------- ------------
Balance, Beginning $ 1,336,960 $ 1,216,333 $ 1,216,333
Provision charged to
operations 152,000 169,000 226,000
Recoveries 31,346 24,090 29,729
Loans charged off (98,053) (91,885) (135,102)
-------------- -------------- --------------
Balance, Ending $ 1,422,253 $ 1,317,538 $ 1,336,960
============== ============== ==============
Loans are placed in 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:
SEPTEMBER 30, DECEMBER 31,
--------------------------------- ------------
2002 2001 2001
-------------- -------------- ------------
Loans:
Consumer $ 9,338 $ 7,315 $ 25,173
============= ============== ==============
10
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. Loans and Lease Receivable (continued)
Proceeds from sale of loans during the nine months ended
September 30, 2002 and the year ended December 31, 2001 were $0. There
were no gains or losses on sale of loans.
Note 5. Time Deposits
At September 30, 2002, the scheduled maturities of time
deposits are as follows:
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
------------------ ---------------
Within 3 months $ 3,011,633 $ 13,380,812
3 months thru 6 months 8,029,906 17,352,227
6 months thru 12 months 10,156,376 21,231,280
Over 12 months 13,535,653 43,505,876
------------------ ---------------
$ 34,733,568 $ 95,470,195
================== ================
Note 6. Shareholders' Equity
On August 31, 2000, CNB became a one-bank holding company by
merger with the Bank, and the 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.
Basic earnings and dividends per share have been computed
based on 458,048 weighted average number of shares outstanding in 2002
and 2001.
Note 7. New Branch
On April 20, 2001, the Bank purchased a parcel of land in
Berkeley County, West Virginia for $450,000 to construct a new branch
facility. The Bank leased a parcel of land adjacent to the purchased
land and rented a temporary facility in which to conduct business while
the permanent bank building was under construction. The temporary
facility opened for business in August 2001. Construction on the
permanent facility began in September 2001 and was completed in March
2002. On March 18, 2002, the temporary facility was closed and the new
branch building was occupied.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
CNB Financial Services, Inc. ("CNB" or the "Company") was
organized under the laws of West Virginia in March 2000 at the
direction of the Board of Directors of Citizens National Bank (the
"Bank") for the purpose of becoming a financial services holding
company. The Company's primary function is to direct, plan and
coordinate the business activities for the Bank and its subsidiary. We
refer to the Company and its subsidiary as "CNB".
On August 31, 2000, the Bank, via merger, became a
wholly-owned subsidiary of the Company and the shareholders of the Bank
became shareholders of the Company. Each Bank shareholder received two
shares of the Company stock for each share of the Bank's common stock.
The merger was accounted for 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 is a full-service
commercial bank conducting general banking and trust activities through
four full-service offices and four automated teller machines located in
Morgan and Berkeley Counties, West Virginia. 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.
The Bank purchased a parcel of land in Berkeley County, West
Virginia on April 20, 2001 for $450,000 to construct a new branch
facility. The Bank leased a parcel of land adjacent to the purchased
land and rented a temporary facility in which to conduct business while
the permanent bank building was under construction. The temporary
facility opened for business in August 2001. Construction on the
permanent facility began in September 2001 and was completed in March
2002. On March 18, 2002, the temporary facility was closed, and the new
branch building opened.
The following discussion and analysis presents the significant
changes in financial condition and results of operations of CNB for the
three and nine months ended September 30, 2002 and 2001. This
discussion may include forward-looking statements based upon
management's expectations. Actual results may differ. We have rounded
amounts and percentages used in this discussion and have based all
average balances on monthly averages.
EARNINGS SUMMARY
Net income for the three months ended September 30, 2002 was
$297,000, or $0.65 per share compared to $359,000 or $0.78 per share
for the same period in 2001. Annualized return on average assets and
average equity were .63% and 7.48% respectively, for the three months
ended September 30, 2002, compared with .90% and 9.94%, respectively,
for the three months ended September 30, 2001.
Net income for the nine months ended September 30, 2002 was
$937,000, or $2.05 per share compared to $980,000 or $2.14 per share
for the same period in 2001. Annualized return on average assets and
average equity were .69% and 8.15% respectively, for the nine months
ended September 30, 2002, compared with .83% and 9.10%, respectively
for the nine months ended September 30, 2001.
NET INTEREST INCOME
Net interest income represents the primary component of CNB's
earnings. It is the difference between interest and fee income related
to earning assets and interest expense incurred to carry
interest-bearing liabilities. Changes in the volume and mix of interest
earning assets and interest bearing liabilities, as well as changing
interest rates impact net interest income. To manage these changes,
their impact on net interest income and the risk associated with them,
CNB 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
12
changes, and source and use of funds. A discussion of net interest
income and the factors impacting it is presented below.
Net interest income for the three months ended September 30,
2002 decreased by $13,000 or 0.9% over the same period in 2001.
Interest income for the three months ended September 30, 2002 decreased
by $168,000 or 5.6% compared to the same period in 2001, while interest
expense decreased by $155,000 or 10.4% during the three months ended
September 30, 2002, as compared to the same period in the prior year.
During the third quarter of 2002 compared to the same period
in 2001, average net interest earning assets increased $24.5 million or
16.3% and average net interest bearing liabilities increased $21.1
million or 16.9% resulting in decreased net interest income. However,
CNB experienced a 58 basis point decrease in the net interest margin.
The 169 basis point decrease in rates earned on average interest
earning assets offset by a 111 basis point decrease in rates paid on
average interest bearing liabilities contributed to the decrease in the
net interest margin. See Table 1 and Table 2 - Distribution of Assets,
Liabilities, and Shareholders' Equity; Interest Rates and Interest
Differential.
Net interest income for the nine months ended September 30,
2002 increased by $52,000 or 1.2% over the same period in 2001.
Interest income for the nine months ended September 30, 2002 decreased
by $369,000 or 4.1% compared to the same period in 2001, while interest
expense decreased by $420,000 or 9.4% during the three months ended
September 30, 2002, as compared to the same period in the prior year.
During the nine months ended September 30, 2002 compared to
the same period in 2001, average net interest earning assets increased
$20.7 million or 13.9% and average net interest bearing liabilities
increased $18.7 million or 15.1%. However, CNB experienced a 23 basis
point decrease in the net interest margin, resulting in decreased net
interest income. The 126 basis point decrease in rates earned on
average interest earning assets offset by a 103 basis point decrease in
rates paid on average interest bearing liabilities resulted in the
decrease in the net interest margin. See Table 1 and Table 2 -
Distribution of Assets, Liabilities, and Shareholders' Equity; Interest
Rates and Interest Differential.
There was a significantly higher level of net earning assets
offset by a decrease in the net interest margin during these periods.
During 2001 and into the second quarter of 2002, the Bank enjoyed
substantial deposit growth but slower loan growth resulting in a lower
loan to deposit ratio. In the third quarter of 2002, loan growth began
to show a slight increase due to increased activity in Berkeley County,
refinancing, the new loan programs the Bank began offering and the
hiring of a lending specialist in Berkeley County. Management continued
to fund the loan growth with deposits and the excess deposit growth was
invested in high quality US government agency securities, mortgage
backed securities or overnight federal funds. Due to the slower loan
demand, the Bank has experienced a shift in the asset mix from higher
yielding loans to a greater emphasis in lower yielding overnight
federal funds and investment securities. Although the average balance
on investment securities and loans increased, total interest earned
decreased due to a decrease in the average rates earned on interest
earning assets. Although the average balance on all interest bearing
liabilities increased, total interest expense decreased due to a
decrease in the average rates paid on all interest bearing liabilities.
The net interest margin is impacted by the change in the
spread between yields on earning assets and rates paid on interest
bearing liabilities.
13
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
--------------------------------------- ----------------------------------------
QTR QTR
AVERAGE QTR YIELD/ AVERAGE QTR YIELD/
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
--------------------------------------- -----------------------------------------
(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold $ 7,167 $ 30 1.65 % $ 4,408 $ 41 3.40 %
Securities:
Taxable 46,862 567 4.84 38,159 585 6.13
Tax-exempt (1) 889 10 6.82 295 4 8.22
Loans (net of unearned interest) (2)(5)(6) 120,081 2,176 7.25 107,647 2,399 8.91
------------------------------------- ----------------------------------
Total interest earning assets (1) $ 174,999 $ 2,783 6.36 % $ 150,509 $ 3,029 8.05 %
------------------------------------- ----------------------------------
Nonearning assets:
Cash and due from banks $ 7,056 $ 3,567
Bank premises and equipment, net 4,759 3,872
Other assets 2,523 2,166
Allowance for loan losses (1,417) (1,274)
----------- -----------
Total assets $ 187,920 $ 158,840
=========== ===========
Interest bearing liabilities:
Savings deposits $ 20,470 $ 25 0.49 % $ 16,781 $ 68 1.62 %
Time deposits 95,625 1,217 5.09 84,778 1,289 6.08
NOW accounts 24,767 81 1.31 18,630 109 2.34
Money market accounts 5,014 12 0.96 4,595 23 2.00
Borrowings - - - - -
------------------------------------- ----------------------------------
Total interest bearing liabilities $ 145,876 $ 1,335 3.66 % $ 124,784 $ 1,489 4.77 %
------------------------------------- ----------------------------------
Noninterest bearing liabilities:
Demand deposits $ 24,092 $ 17,715
Other liabilities 2,062 1,899
Shareholders' equity 15,890 14,442
----------- -----------
Total liabilities and
shareholders' equity $ 187,920 $ 158,840
=========== ===========
----------- -----------
Net interest income (1) $ 1,448 $ 1,540
=========== ===========
Net interest spread (3) 2.70 % 3.28 %
========= =======
Net interest income to average
interest earning assets (1) 3.31 % 4.09 %
========= =======
(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) Yields/Rates are expressed on annualized basis.
(5) Interest income on loans excludes fees of $78,000 in 2002 and $101,000 in
2001.
(6) Interest income on loans includes fees of $28,031 in 2002 and $49,574 in
2001 from the Business Manager Program, student loans and lease
receivables.
14
TABLE 2. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
--------------------------------------- ----------------------------------------
YTD YTD
AVERAGE YTD YIELD/ AVERAGE YTD YIELD/
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
--------------------------------------- -----------------------------------------
(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold $ 4,850 $ 66 1.64 % $ 3,974 $ 131 4.38 %
Securities:
Taxable 48,039 1,756 4.87 36,812 1,732 6.27
Tax-exempt (1) 622 19 6.17 302 11 7.36
Loans (net of unearned interest) (2)(5) 115,760 6,481 7.46 107,533 6,842 8.48
--------------------------------------- ------------------------------------
Total interest earning assets (1) $ 169,271 $ 8,322 6.56 % $ 148,621 $ 8,716 7.82 %
--------------------------------------- ------------------------------------
Nonearning assets:
Cash and due from banks $ 6,580 $ 3,613
Bank premises and equipment, net 4,549 3,559
Other assets 2,441 2,153
Allowance for loan losses (1,394) (1,259)
----------- ------------
Total assets $ 181,447 $ 156,687
=========== ============
Interest bearing liabilities:
Savings deposits $ 19,278 $ 91 0.63 % $ 16,513 $ 225 1.82 %
Time deposits 94,978 3,694 5.19 83,111 3,800 6.10
NOW accounts 22,671 236 1.39 18,794 377 2.67
Money market accounts 5,076 40 1.05 4,847 77 2.12
Borrowings - - 59 2 4.52
--------------------------------------- ------------------------------------
Total interest bearing liabilities $ 142,003 $ 4,061 3.81 % $ 123,324 $ 4,481 4.84 %
--------------------------------------- ------------------------------------
Noninterest bearing liabilities:
Demand deposits $ 22,178 $ 17,082
Other liabilities 1,938 1,923
Shareholders' equity 15,328 14,358
-------------- ------------
Total liabilities and
shareholders' equity $ 181,447 $ 156,687
============== ============
---------- ----------
Net interest income (1) $ 4,261 $ 4,235
========== ==========
Net interest spread (3) 2.75 % 2.98 %
========= =======
Net interest income to average
interest earning assets (1) 3.36 % 3.80 %
========= ======
(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) Yields/Rates are expressed on annualized basis.
(5) Interest income on loans excludes fees of $251,000 in 2002 and $227,000 in
2001.
(6) Interest income on loans includes fees of $128,309 in 2002 and $149,875 in
2001 from the Business Manager Program, student loans and lease receivables.
15
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 and composition of the loan
portfolio. The allowance for loan losses is the best estimate of
management of the probable losses which have been incurred as of a
balance sheet date.
The provision for loan losses is a charge to earnings which is
made to maintain the allowance for loan losses at a sufficient level.
The provision for loan losses for the three months ended September 30,
2002, and September 30, 2001, amounted to $41,000 and $57,000,
respectively. The provision for loan losses for the nine months ended
September 30, 2002, and September 30, 2001, amounted to $152,000 and
$169,000, respectively. Loan quality remains stable and past due and
nonaccruals are minimal. Management believes the allowance for loan
losses is adequate and is not aware of any information relating to the
loan portfolio which it expects 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. See "Nonperforming Assets and Allowance for
Loan Losses" for further discussion.
NONINTEREST INCOME
Noninterest income for the three months ended September 30,
2002 increased $41,000 or 14.6% to $328,000 from $287,000 in the third
quarter of 2001. The Bank began offering a new service to checking
deposit account holders in April 2001. Bounce Protection is a form of
overdraft protection which enables the customer to have their
insufficient funds checks paid instead of returned. The customer is
charged a fee for each check paid. Fees generated from the Bounce
Protection program, overdraft fees and debit cards offset by a decrease
in insurance commissions and title insurance commissions were the
primary reasons for the increase in noninterest income.
Noninterest income for the nine months ended September 30,
2002 increased $327,000 or 44.9% to $1.1 million from $728,000 for the
same period in 2001. The increase in noninterest income was
attributable to fees generated from the Bounce Protection program,
debit card income, title insurance commissions, gain on sale of
securities and gain on sale of other real estate owned. Other factors
contributing to the increase in noninterest income are the increase in
trust fees due to continued growth of trust assets managed by the Bank
and in March 2002, one of the Bank's Board of Directors passed away and
the Bank was the beneficiary of a life insurance policy on the
director. The Bank received $43,379 in a death benefit, $21,645 of
which was recorded in assets as cash surrender value. The difference of
$21,734 is reflected in other operating income.
NONINTEREST EXPENSES
Noninterest expenses for the three months ended September 30,
2002, increased $134,000 or 11.0% primarily due to increases in
salaries and benefits, furniture, fixtures and equipment expenses and
other operating expenses offset by a decrease in occupancy expenses.
Salaries and employee benefits increased due to normal recurring merit
increases, increased health insurance costs and additional hiring for
the south Martinsburg branch facility and in the normal course of
business. The increase in furniture and equipment expense was due to an
increase in depreciation expense related to furniture and equipment
acquired for the new south Martinsburg branch and the new computer
equipment and peripherals associated with the upgrade of the Bank's
technology systems. The increase in other operating expenses was due to
an increase in audit fees and check losses offset by decreases in
bounce protection expenses and promotional expenses.
Noninterest expenses for the nine months ended September 30,
2002, increased $468,000 or 13.4% to $4.0 million from $3.5 million for
the first nine months of 2001. The increases were primarily due to
higher costs associated with salaries and benefits, furniture, fixture
and equipment expense and other operating expenses. Salaries and
employee benefits increases were the result of normal recurring merit
increases, increased health insurance costs and additional hiring for
the south Martinsburg branch facility and in the normal course of
business. Higher advertising, telephone expenses, ATM expenses, audit
fees and check losses offset by decreases in stationary,
16
supplies and printing, outside service fees and business manager
expense accounted for the increase in other operating expenses.
INCOME TAXES
The Bank's provision for income taxes decreased $27,000 or
14.4% to $160,000 for the three months ended September 30, 2002 and
decreased $29,000 or 5.5% to $505,000 for the nine months ended
September 30, 2002. The effective tax rates for the third quarter of
2002 and 2001 were 35.1% and 34.3%, respectively and for the first nine
months of 2002 and 2001 were 35.0% and 35.3%, respectively. The Bank's
lower effective tax rate for the first nine months of 2002 compared to
the first nine months of 2001, is due to an increase in nontaxable
income, principally life insurance proceeds. The decrease in the income
tax provision in 2002 is attributable to lower taxable income. 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.
FINANCIAL CONDITION
The Bank's total assets at September 30, 2002 increased $18.7
million or 10.9% to $190.3 million from December 31, 2001 due primarily
to a $5.0 million increase in federal funds sold, a $9.4 million
increase in loans and a $4.6 million increase in cash and due from
banks offset by a $493,000 decrease in investment securities. The
Bank's total liabilities increased $17.4 million or 11.1% to $174.0
million at September 30, 2002, consisting entirely of deposit growth,
which increased to $171.8 million. Shareholders' equity increased $1.3
million to $16.2 million at September 30, 2002, primarily due to net
income of $937,000 and a $549,000 increase in accumulated other
comprehensive income offset by the semi-annual cash dividend of
$165,000. The only component of accumulated other comprehensive income
at September 30, 2002, was unrealized gains and losses on available for
sale securities, net of deferred income taxes. The unrealized gains and
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.
LOAN PORTFOLIO
At September 30, 2002, total loans increased $9.4 million or
8.5% to $119.9 million from $110.5 million at December 31, 2001. The
loan mix did not change in any material respect compared with December
31, 2001. The loan portfolio increase is the result of new mortgage
loans. The Bank believes additional growth in all lending areas is
possible during the remainder of 2002.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of nonaccrual loans, loans which
are past due 90 days or more and still accruing interest, restructured
loans and other real estate owned. The following table summarized the
Bank's nonperforming assets as of the periods shown:
SEPTEMBER 30, DECEMBER 31,
------------------------ -----------
2002 2001 2001
---------- ----------- -----------
Nonaccrual loans $ 9,338 $ 7,315 $ 25,173
Loans past due 90 days or more
still accruing interest 116,145 207,335 449,675
---------- ----------- -----------
Total nonperforming loans $ 125,483 $ 214,650 $ 474,848
---------- ----------- -----------
Other real estate owned $ 6,500 $ 12,599 $ 14,899
---------- ----------- -----------
Total nonperforming assets $ 131,983 $ 227,249 $ 489,747
========== =========== ===========
Nonperforming loans/Total loans 0.10% 0.20% 0.43%
Nonperforming assets/Total assets 0.07% 0.14% 0.29%
Allowance for loan losses/Total loans 1.19% 1.19% 1.21%
17
As of September 30, 2002, the Bank has no loans which
management considers to be impaired. Management is aware of two
mortgage loans with aggregate uninsured balances of $275,817 which the
borrowers have exhibited weaknesses. A specific allowance of $50,000
related to these loans has been established as part of the allowance
for loan losses. The loans are collateralized and management
anticipates any additional potential loss would be minimal.
The allowance for loan losses is the best estimate by
management of the probable losses which have been incurred as of a
balance sheet date. Management makes this determination quarterly by
its analysis of 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
established both an allocated and an unallocated component. The
allocated portion of the allowance represents the results of analyses
of individual loans that the Bank monitors for potential credit
problems and pools of loans within the portfolio. Management bases the
allocated portion of the allowance for loans 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 it is monitoring as potential credit
problems to determine whether those 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. At September 30,
2002, and December 31, 2001, the allowance for loans losses totaled
$1.4 million and $1.3 million, respectively. The allowance for loans
losses as a percentage of loans was 1.19% and 1.21% as of September 30,
2002 and December 31, 2001.
An analysis of the allowance for loan losses is summarized
below:
In thousands SEPTEMBER 30, DECEMBER 31,
----------------------------- ------------------------------
2002 2001
----------------------------- ------------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ------------- ---------- --------------
Commercial, financial $ 301 7 % $ 363 6 %
and agriculture
Real estate - mortgage 364 74 294 72
Installment and other 372 19 370 22
Unallocated 385 N/A 310 N/A
---------- ------------- ---------- --------------
Total $ 1,422 100 % $ 1,337 100 %
========== ============= ========== ==============
18
DEPOSITS
The Bank's deposits increased $17.4 million or 11.3% during
the nine months ended September 30, 2002. The Bank has experienced a
slight change in the deposit account mix during the first nine months
of 2002. Steady growth continues in noninterest-bearing and
interest-bearing demand and savings deposits. The Bank has experienced
a slight shift from other time deposits to rate sensitive jumbo
certificate of deposits during the first nine months of 2002. The
increase in noninterest-bearing and interest-bearing deposits is
primarily due to the influx of accounts at the south Martinsburg
Branch. The increase in jumbo certificates of deposit is primarily due
to the continued growth in the 36-month Ultimate Certificate of
Deposit. The Bank's 36-month Ultimate Certificate of Deposit allows the
customer to withdraw all or a portion of the CD on the first or second
year anniversary date without penalty. Deposits may also be made to
this CD at any time.
CAPITAL RESOURCES
Shareholders' equity increased $1.3 million or 8.9% during the
first nine months of 2002 due to $937,000 in net income and a $549,000
increase in accumulated other comprehensive income partially offset by
the semi-annual cash dividend of $165,000. The Bank is subject to
regulations of the Office of the Comptroller of the Currency that
impose certain minimum regulatory capital requirements. Under each
measure, the Bank was substantially in excess of the minimum regulatory
requirements, and, by definition was "well capitalized" at September
30, 2002. The following table summarized, as of September 30, 2002, the
Bank's capital ratios.
Components Actual Required
of Capital Ratio Ratio
---------- ------ --------
Tier 1 Capital $15,510 8.3% 4.0%
Total Risk Based Capital $16,866 15.6% 8.0%
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to economic loss that arises from
changes in the values of certain financial instruments. The types of
market risk exposures generally faced by banking entities include
interest rate risk, equity market price risk, foreign currency risk and
commodity price risk. Due to the nature of its operations, only equity
market price risk and interest rate risk are significant to the Bank.
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 September
30, 2002, these totaled $53.4 million, or 28.1% 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 September 30, 2002, 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 $1.6 million of
cash from operations in the first nine months of 2002, which compares
to $1.0 million during the same time period in 2001. Additional cash of
$17.2 million was generated through net financing activities through
September 30, 2002, which compares to $14.4 million for the first nine
months of 2001. 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 $14.2 million during the first nine months of 2002
compared to $14.9 million during the same time period in 2001. 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
19
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, Vice President of Mortgage Loans 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 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 its estimated most likely path for future short-term
interest rates over the next 12 months. The "high rate" and "low rate"
scenarios assumes a 100 and 200 basis point increases or decreases in
the prime rate from the 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
4.75 percent through September 2003. Based on the October 2002 outlook,
if interest rates increased or decreased by 200 basis points, the model
indicates that net interest income during the policy measurement period
would be affected by less than 10 percent, in both an increasing or
decreasing interest rate scenario.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's CEO
and CFO, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the CEO and CFO concluded that
the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in
the Company's periodic SEC filings.
20
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
None; however, CNB is involved in various legal proceedings
occurring in the ordinary course of business. There are no
material legal proceedings to which CNB or its subsidiary is a
part, or to which any of their property is subject.
Item 6: Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
21
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CNB FINANCIAL SERVICES, INC.
(Registrant)
Date NOVEMBER 12, 2002 /s/ Rebecca S. Stotler, Vice President/CFO
----------------- ------------------------------------------
Date NOVEMBER 12, 2002 /s/ Thomas F. Rokisky, President/CEO
------------------ ------------------------------------------
22
CERTIFICATIONS
I, Thomas F. Rokisky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNB Financial Services,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: NOVEMBER 12, 2002
/s/ Thomas F. Rokisky, President/CEO
------------------------------------------
Thomas F. Rokisky
Chief Executive Officer
November 12, 2002
23
CERTIFICATIONS
I, Rebecca S. Stotler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNB Financial Services,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: NOVEMBER 12, 2002
/s Rebecca S. Stotler, VP/CFO
----------------------------------
Rebecca S. Stotler
Chief Financial Officer
November 12, 2002
24