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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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, 2002
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.
- ----------------------------------------------------------------------------------------------------
(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)
Registrant's telephone number, ( 304 ) 258 - 1520
Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $1.00 per share
- --------------------------------------------------------------------------------
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate value of the common stock of the Registrant that was held by
non-affiliates as of the most recently completed second fiscal quarter (June 30,
2002), was approximately $32.7 million. This amount was based on the last
closing sale price of a share of common stock of $85.00 as of the same date.
As of March 24, 2003, there were 458,048 shares of Common Stock, Par Value $1.00
per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business.................................................................................3
Item 2. Properties...............................................................................6
Item 3. Legal Proceedings........................................................................7
Item 4. Submission of Matters to a Vote of Security Holders......................................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..............................24
Item 8. Financial Statements and Supplementary Data.............................................25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures...52
PART III
Item 10. Directors and Executive Officers of the Registrant......................................52
Item 11. Executive Compensation..................................................................54
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................55
Item 13. Certain Relationships and Related Transactions..........................................55
Item 14. Controls and Procedures.................................................................56
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................58
SIGNATURES.........................................................................................59
FORWARD LOOKING STATEMENTS
In our Annual Report and Form 10-K, we include forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, technological developments, new products and similar
matters. You can identify these statements by forward-looking words such as
"may," "will," "expect," "anticipate," "believe," "estimate," "plans,"
"intends," or similar words or expressions. You should read statements that
contain these words carefully because they discuss our future expectations or
state other "forward-looking" information. We believe that it is important to
communicate our future expectations to our shareholders. However, there may be
events in the future that we are not able to predict accurately or control. 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 of 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:
- - Changes in market interest rates;
- - Local and national economic trends and conditions;
- - Competition for products and services among community, regional and national
financial institutions;
- - New services and product offerings by competitors;
- - Changes in customer preferences;
- - Changes in technology;
- - Legislative and regulatory changes;
- - Delinquency rates on loans;
- - 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 Form 10-K
or our Annual Report to reflect the impact of subsequent events.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATIONAL HISTORY AND SUBSIDIARIES
CNB Financial Services, Inc. (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 and its subsidiary 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. The merger was accounted for as a pooling of interests.
CNB became a 50% member of a limited liability corporation, Morgan
County Title Insurance Agency, LLC in February 2001, for the purpose of selling
title insurance.
Citizens National Bank of Berkeley Springs, (the Bank or Citizens
National 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.
EMPLOYEES
As of December 31, 2002 and 2001, CNB employed 81 and 80 full-time
equivalent employees, respectively.
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 four full-service offices and five
automated teller machines located in Morgan and Berkeley Counties, West
Virginia. The Bank opened a full-service branch in Martinsburg, Berkeley County,
West Virginia on March 18, 2002. The Bank 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.
3
COMPETITION
Citizens National Bank faces a high degree of competition for all its
services from local banks. Within its market area of Morgan and Berkeley
Counties in West Virginia and Washington County in Maryland, there exist
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 within the Bank's market.
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
4
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.
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, 2002, 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
5
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 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, 2002, 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 101 South Washington Street, Berkeley Springs, West Virginia.
Citizens National Bank
The principal executive office and main banking office is located at 101
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 a
full service branch located at 2646 Hedgesville Road, Martinsburg, West
Virginia. In March 2002, the
6
bank opened an additional full service branch located at 14994 Apple Harvest
Drive, Martinsburg, West Virginia. The main banking office and each location in
Berkeley County 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, 2002 is $4.8 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 2002.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The price of CNB's common stock ranged from $63.50 to $90.00 in 2002 and
from $66.75 to $135.00 in 2001. The prices listed below represent the high and
low market prices for stock trades reported during each quarter.
PER SHARE
HIGH LOW DIVIDEND
----------- ---------- ----------
2002
First quarter $ 90.00 $ 63.50
Second quarter $ 85.00 $ 85.00 $ 0.36
Third quarter $ 70.50 $ 73.50
Fourth quarter $ 70.00 $ 70.00 $ 0.66
2001
First quarter $ 135.00 $ 115.00
Second quarter $ 100.00 $ 100.00 $ 0.36
Third quarter $ 66.75 $ 66.75
Fourth quarter $ 100.00 $ 50.00 $ 0.66
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. As of March 5, 2003, the number of record
holders was 606.
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ITEM 6. SELECTED FINANCIAL DATA
TABLE 1. FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
In thousands except for per share data
AT YEAR-END
Total assets $ 191,602 $ 171,541 $ 149,982 $ 138,648 $ 129,600
Securities available for sale 43,430 49,668 35,374 31,187 33,594
Loans and lease, net of
unearned income 129,815 111,874 105,220 98,272 86,377
Deposits 173,063 154,381 133,996 124,510 115,320
Shareholders' equity 16,270 14,926 13,864 12,249 12,518
SIGNIFICANT RATIOS
Return on average assets 0.71% 0.77% 0.91% 0.90% 1.07%
Return on average
shareholders' equity 8.38 8.49 10.16 9.66 10.60
Average shareholders' equity
to average assets 8.49 9.12 9.00 9.35 10.13
Net interest margin 3.35 3.73 4.03 4.01 4.21
SUMMARY OF OPERATIONS
Interest income $ 11,489 $ 11,868 $ 11,035 $ 9,945 $ 9,243
Interest expense 5,342 5,937 5,365 4,597 4,171
Net interest income 6,147 5,931 5,670 5,348 5,072
Provision for loan losses 261 226 170 118 196
Net interest income after
provision for loan losses 5,886 5,705 5,500 5,230 4,876
Non-interest income 1,403 1,025 843 565 415
Non-interest expense 5,300 4,794 4,279 3,954 3,372
Income before income taxes 1,989 1,936 2,064 1,841 1,919
Income tax expense 681 700 758 621 618
Net income 1,308 1,236 1,306 1,220 1,301
PER SHARE DATA (1)(2)
Net income $ 2.86 $ 2.70 $ 2.85 $ 2.66 $ 2.84
Cash dividends 1.02 1.02 1.02 1.00 1.00
Net book value 35.52 32.59 30.27 26.74 27.33
(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, 2002 and 2001. 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 $2.86 per share, $1.2
million or $2.70 per share and $1.3 million or $2.85 per share for fiscal years
2002, 2001 and 2000, respectively. Annualized return on average assets and
average equity were .7% and 8.4%, respectively for 2002 compared to .8% and 8.5%
for 2001 and .9% and 10.2% for 2000.
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 2002 increased by $217,000 or 3.7% over 2001.
Interest income in 2002 decreased by $379,000 or 3.2% compared to 2001, while
interest expense decreased by $596,000 or 10.0% during 2002 as compared to 2001.
Interest income decreased during 2002 compared to 2001 as a result of a decrease
in the average rates earned on loans, securities and federal funds sold offset
by an increase in the average balances of the earning assets. Interest expense
decreased during 2002 compared to 2001 as a result of a decrease in the average
rates paid on NOW, money market, savings and time deposits offset by an increase
in the average balances of the interest bearing liabilities.
Net interest income in 2001 increased by $260,000 or 4.6% over 2000.
Interest income in 2001 increased by $833,000 or 7.6% compared to 2000, while
interest expense increased by $573,000 or 10.7% during 2001 as compared to 2000.
Interest income increased during 2001 compared to 2000 as a result of an
increase in the average balance of loans, securities and federal funds sold
offset by a decrease in the average rates earned thereon. Interest expense
increased during 2001 compared to 2000 as a result of an increase in the average
balance of time deposits and the rates paid thereon and the average balance of
NOW accounts offset by lower rates paid on deposit products other than time
deposits.
During both 2002 and 2001, the Bank used funds generated from deposit
account growth to fund loan commitments and to increase the average balance of
investment securities, especially high quality U.S. government agency
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 2001 to 2002. See Table 2 -- 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, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------------ ------------------------------ ------------------------------
YTD YTD YIELD/ YTD YTD YIELD/ YTD YTD YIELD/
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- --------- --------- ---------- --------- --------- ---------- --------- ---------
In thousands
Interest earning assets:
Federal funds sold $ 4,720 $ 82 1.57 % $ 4,298 $ 160 3.79 % $ 1,026 $ 95 6.12 %
Securities:
Taxable 47,955 2,307 4.81 38,385 2,312 6.02 31,098 2,016 6.48
Tax-exempt (1) 695 28 6.10 302 14 7.02 825 45 8.26
Loans (net of unearned
interest) (2) (4) (5) 118,530 8,708 7.35 108,526 9,096 8.38 102,096 8,646 8.47
---------- --------- --------- ---------- --------- --------- ---------- --------- ---------
Total interest
earning assets (1) $ 171,900 $ 11,125 6.47 % $ 151,511 $ 11,582 7.64 % $ 135,045 $ 10,802 8.00 %
---------- --------- --------- ---------- --------- --------- ---------- --------- ---------
Nonearning assets:
Cash and due
from banks $ 6,592 $ 3,609 $ 3,457
Bank premises and
equipment, net 4,624 3,700 3,221
Other assets 2,240 2,202 2,226
Allowance for
loan losses (1,403) (1,277) (1,169)
---------- ---------- ----------
Total assets $ 183,953 $ 159,745 $ 142,780
========== ========== ==========
Interest bearing
liabilities:
Savings deposits $ 19,629 $ 117 0.60 % $ 16,614 $ 272 1.64 % $ 16,080 $ 323 2.01 %
Time deposits 94,889 4,854 5.12 84,987 5,094 5.99 73,522 4,360 5.93
NOW accounts 23,242 318 1.37 19,321 476 2.46 17,984 564 3.14
Money market
accounts 5,295 52 0.98 4,802 93 1.94 5,001 113 2.26
Borrowings - - 44 2 4.55 69 5 7.25
---------- --------- --------- ---------- --------- --------- ---------- --------- ---------
Total interest
bearing liabilities $ 143,055 $ 5,341 3.73 % $ 125,768 $ 5,937 4.72 % $ 112,656 $ 5,365 4.76 %
---------- --------- --------- ---------- --------- --------- ---------- --------- ---------
Noninterest bearing
liabilities:
Demand deposits $ 23,278 $ 17,469 $ 16,004
Other liabilities 2,009 1,944 1,269
Shareholders' equity 15,611 14,564 12,851
---------- ---------- ----------
Total liabilities and
shareholders' equity $ 183,953 $ 159,745 $ 142,780
========== ========== ==========
--------- --------- ---------
Net interest income (1) $ 5,784 $ 5,645 $ 5,437
========= ========= =========
Net interest spread (3) 2.74 % 2.92 % 3.24 %
========= ========= =========
Net interest income to
average interest earning
assets (1) 3.36 % 3.73 % 4.03 %
========= ========= =========
(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 $365,000 in 2002, $285,000 in
2001and $233,000 in 2000.
(5) Interest income on loans includes fees of $158,085 in 2002, $200,039 in
2001and $141,729 in 2000 from the Business Manager Program, student loans
and lease receivables.
11
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), (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 2002, net interest income increased $648,000 due to changes in
volume and decreased $509,000 due to changes in interest rates. Also, net
interest income was affected by a $80,000 increase in loan fees. In 2001, net
interest income increased $380,000 due to changes in volume and increased
$172,000 due to changes in interest rates. Also, net interest income was
affected by a $52,000 decrease in loan fees.
TABLE 3. VOLUME AND RATE ANALYSIS OF CHANGES IN INTEREST INCOME
------------------------------------ ------------------------------------
(Taxable equivalent basis) 2002 OVER 2001 2001 OVER 2000
------------------------------------ ------------------------------------
CHANGE DUE TO TOTAL CHANGE DUE TO TOTAL
----------------------- -----------------------
VOLUME RATE CHANGE VOLUME RATE CHANGE
----------- ---------- ---------- ---------- ---------- -----------
In thousands
Interest earned on:
Federal funds sold $ 15 $ (94) $ (79) $ 150 $ (85) $ 65
Taxable securities 512 (516) (4) 446 (150) 296
Tax-exempt securities 16 (2) 14 (25) (6) (31)
Loans 794 (1,182) (388) 540 (90) 450
----------- ---------- ---------- ---------- ---------- -----------
Total interest earned $ 1,337 $ (1,794) $ (457) $ 1,111 $ (331) $ 780
----------- ---------- ---------- ---------- ---------- -----------
Interest expense on:
Savings deposits $ 43 $ (198) $ (155) $ 10 $ (61) $ (51)
Time deposits 555 (795) (240) 686 48 734
NOW accounts 83 (241) (158) 40 (128) (88)
Money market accounts 9 (50) (41) (4) (16) (20)
Other borrowing (1) (1) (2) (1) (2) (3)
----------- ---------- ---------- ---------- ---------- -----------
Total interest expense $ 689 $ (1,285) $ (596) $ 731 $ (159) $ 572
----------- ---------- ---------- ---------- ---------- -----------
Net interest income $ 648 $ (509) $ 139 $ 380 $ (172) $ 208
=========== ========== ========== ========== ========== ===========
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
TABLE 4. INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS
(Taxable equivalent basis) 2002 2001 2000
---------------------- ---------------------- ---------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ---------- ---------- ---------- ---------- ----------
In thousands
Earning assets $171,900 6.47 % $151,511 7.64 % $135,045 8.00 %
========== ========== ==========
Interest bearing liabilities $143,055 3.73 % $125,768 4.72 % $112,656 4.76 %
------------ ------------ ------------
Interest rate spread 2.74 % 2.92 % 3.24 %
Interest free sources used
to fund earning assets(1) 28,845 0.62 % 25,743 0.81 % 22,389 0.79 %
---------- ------------ ---------- ------------ ---------- ------------
Total sources of funds $171,900 $151,511 $135,045
========== ========== ==========
Net interest margin 3.36 % 3.73 % 4.03 %
============ ============ ============
(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 18 basis points in 2002 while the net
interest margin declined 37 basis points. Both the interest rate spread and
margin were negatively impacted by a 117 basis point decrease in earning asset
yields offset by a 99 basis point decrease in interest bearing liability costs.
Although the prime rate only decreased 50 basis points in 2002, loan yields
decreased 103 basis points because a significant portion of the loan portfolio
repriced at lower rates through refinancing or variable rate loans. The decrease
in liability costs is primarily the result of the lower cost of funds on
savings, NOW, money market and time deposit accounts during the year.
Interest rate spread decreased 32 basis points in 2001 while the net
interest margin decreased 30 basis points. Both the interest rate spread and
margin were negatively impacted by a 36 basis point decrease in earning asset
yields and offset by a 4 basis point decrease in interest bearing liability
costs. Although the prime rate decreased 475 basis points in 2001, loan yields
only decreased 9 basis points due to a significant portion of the loan portfolio
are variable rate loans that only reprice on a one, three or five year basis.
The decrease in liability costs is primarily the result of lower cost of funds
on savings, NOW, money market and time deposit 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 $377,000 or 36.8% during 2002 over the
prior comparable period. The increase in 2002 was attributable to fees generated
from the Bounce Protection program, which is a new service the Bank began to
offer to checking deposit account holders in April 2001, overdraft fees, debit
cards, gain on sale of securities and trust fees. Income from CNB's insurance
operations decreased. Bounce Protection is a form of overdraft protection which
enables the customer to have insufficient funds checks paid
13
instead of returned. The customer is charged a fee for each check paid. Bounce
Protection, overdraft fees and debit card fees increased due to the Bank's
increased number of checking accounts and volume of activity on these accounts.
There was also an increase in other fees, which included trust fees.
Fees generated from trust assets under management increased even though the
level of assets being managed decreased from $24.1 million at December 31, 2001
to $22.7 million at December 31, 2002. The trust fees increased due to a large
estate being settled in 2002. Another factor contributing to the increase in
noninterest income was 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 income increased $183,000 or 21.7% during 2001 over the
prior comparable period. The increase in 2001 was attributable to insurance
operations, a new service the Bank began to offer to checking deposit account
holders in April 2001, debit cards and trust fees. Income from CNB's insurance
operations increased, including the investment in the title company.
Fees generated from the Bounce Protection program and debit card income
offset by the decrease in gain on stock received from the demutualization of an
insurance company in the first quarter of 2000 accounted for the increase in
noninterest income. There were also an increase in other fees, which included
trust fees. Fees generated from trust assets under management increased as the
level of assets being managed reached $24.1 million at December 31, 2001, a
12.1% increase from $21.5 million at December 31, 2000.
NONINTEREST EXPENSES
Noninterest expenses increased $507,000 or 10.6% during 2002 over the
prior comparable period. The increase was primarily due to an increase in
occupancy expense, furniture and equipment expense, salaries and employee
benefits and other operating expenses. Higher health insurance costs, normal
recurring merit increases and additional staffing at the south Martinsburg
branch facility accounted for the additional costs of salaries and benefits in
2002. Additional depreciation related to the Bank's new technology systems and
south Martinsburg branch facility caused occupancy expense and furniture and
equipment expense to increase.
Components of other operating expense, which significantly increased
during 2002, included telephone, advertising, conventions and meetings, and NSF
check and other losses. These increases were offset by decreases to stationary,
supplies and printing, Bounce Protection expenses, Business Manager expenses,
other outside service fees and miscellaneous other operating expenses. Expenses
related to the first full year of operation of the new branch facility in south
Martinsburg, Berkeley County West Virginia attributed to the increase in other
operating expenses. Expenses related to the Bounce Protection Program decreased
due to a contract revision reducing the percentage of income shared with the
vendor. Advertising expense increased due to the bank contracting a third party
vendor for additional advertising services. A decrease in the volume of the
Business Manager program caused the expenses related to this program to
decrease.
Noninterest expenses increased $515,000 or 12.0% during 2001 over the
prior comparable period. The increase was primarily due to an increase in
occupancy expense, salaries and employee benefits and other operating expenses.
Higher health insurance costs, normal recurring merit increases and additional
hiring for the south Martinsburg branch facility accounted for the additional
costs of salaries and benefits in 2001.
Components of other operating expense, which significantly increased
during 2001, included stationary, supplies and printing, data processing fees,
postage, professional fees and business manager program expenses. Expenses
related to the opening and operation of the temporary banking facility in south
Martinsburg, Berkeley County West Virginia beginning in August 2001 attributed
to the increase in occupancy expense and stationery, supplies and printing
expense. Also, contributing to the slight increase in occupancy expense was the
main Bank renovations, offset by the 2000 write-off of the fixed asset
abandonment related to the Bank not pursing main office expansion plans.
Maintenance expense related to technology systems caused data processing expense
to increase. Professional fees increased due to holding company regulatory
financial reporting expenses. An increase in the volume of the Business Manager
program caused the expenses related to this program to increase.
14
INCOME TAXES
Provision for income tax totaled $681,000 in 2002, $700,000 in 2001 and
$758,000 in 2000. The effective tax rate was 34.2% in 2002 compared to 36.1% and
36.7% in 2001 and 2000, respectively. 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 18 of the Notes to Consolidated
Financial Statements for a comprehensive analysis of income tax expense.
FINANCIAL CONDITION
Table 5 examines Citizens National Bank's financial condition in terms
of its sources and uses of funds. Average funding sources and uses increased
$20.4 million or 13.5% in 2002 compared with an increase of $16.5 million or
12.2% in 2001.
TABLE 5. SOURCES AND USES OF FUNDS
2002 2001 2000
------------------------------------- ------------------------------------ -----------
AVERAGE INCREASE (DECREASE) AVERAGE INCREASE (DECREASE) AVERAGE
------------------------ -----------------------
BALANCE AMOUNT % BALANCE AMOUNT % BALANCE
---------- ----------- ---------- ---------- ---------- ---------- -----------
In thousands
Funding uses:
Federal funds
sold $ 4,720 $ 422 9.8 % $ 4,298 $ 3,272 318.9 % $ 1,026
Securities available
for sale 48,650 9,963 25.8 38,687 6,764 21.2 31,923
Loans 118,530 10,004 9.2 108,526 6,430 6.3 102,096
---------- ----------- ---------- ---------- -----------
Total uses $171,900 $ 20,389 13.5 % $151,511 $ 16,466 12.2 % $135,045
========== =========== ========== ========== ========== ========== ===========
Funding sources:
Interest-bearing
demand deposits $ 28,537 $ 4,414 18.3 % $ 24,123 $ 1,138 5.0 % $ 22,985
Savings deposits 19,629 3,015 18.1 16,614 534 3.3 16,080
Time deposits 94,889 9,902 11.7 84,987 11,465 15.6 73,522
Short-term
borrowings - (44) (100.0) 44 (25) (36.2) 69
Noninterest bearing
funds, net(1) 28,845 3,102 12.0 25,743 3,354 15.0 22,389
---------- ----------- ---------- ---------- -----------
Total sources $171,900 $ 20,389 13.5 % $151,511 $ 16,466 12.2 % $135,045
========== =========== ========== ========== ========== ========== ===========
(1) Noninterest bearing liabilities and shareholders' equity less noninterest
earning assets.
Total assets increased $20.1 million or 11.7% to $191.6 million from
December 31, 2001 to December 31, 2002, due primarily to a $17.8 million
increase in loans, a $4.1 million increase in federal funds sold, a $3.6 million
increase in cash and cash equivalents and a $517,000 increase in premises and
equipment, net, which were partially offset by a $5.5 million decrease in
securities available for sale.
Total liabilities increased $18.7 million or 11.9% to $175.3 million
from December 31, 2001 to December 31, 2002 substantially due to the increase in
deposits. Shareholders' equity increased $1.4 million to $16.3 million at
December 31, 2002 primarily due to net income of $1.3 million and a $503,000
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, 2002 was unrealized gains and losses on available for sale
15
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 December 31, 2002, total loans increased $17.8 million or 16.1% to
$128.3 million from $110.5 million at December 31, 2001. The loan mix changed
slightly compared with December 31, 2001. The Bank's real estate loans grew as a
direct result of the increased debt consolidation and refinancing of existing
loans at lower rates. The Bank's new programs targeting purchases and home
construction loans generated additional growth. The Bank's commercial real
estate and business loans grew as a direct result of the Bank's continued
efforts to develop new commercial lending relationships especially in the
Berkeley County, West Virginia market. The Bank's management believes additional
growth in all lending areas is possible into year 2003. 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. The loan to deposit ratio
was 74.2% at December 31, 2002 and 71.6% at December 31, 2001. The ratio of net
charge-offs to average loans outstanding was .08% in 2002 and .10% in 2001.
Growth recorded in the commercial loan area resulted in increases of
38.8% to $9.7 million outstanding at December 31, 2002 and 15.6% to $7.0 million
outstanding at December 31, 2001. The Bank's market area was expanded to
Berkeley County, West Virginia in 1999 which provides a much larger area for
commercial lending. Additional growth in both commercial business and commercial
real estate is possible in 2003.
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 64% or $83.2 million of the total loan portfolio at
December 31, 2002 compared to 61% or $67.9 million at December 31, 2001.
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 and have become more attractive to the
Bank's customers because these loans usually have lower rates, lower closing
costs and quicker settlement. The Bank continues to see 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, 2002,
60.1% of the Bank's mortgage loans were adjustable rate loans and 39.9% were
fixed rate loans. Currently, the Bank has approximately $3.8 million in fixed
rate loans in the portfolio which were originated under terms that would allow
them to be sold on the secondary market, although there is no present intent to
sell these loans.
The consumer loan portfolio showed a decrease. The primary factor
causing the decrease was new automobile loans were considerably affected by the
dealer incentive programs offered by the competition. In the third quarter of
2002, the Bank adopted a managed risk pricing structure for its consumer loans
which significantly reduced loan rates for borrowers with excellent credit.
Indirect loan contracts from automobile dealers did show a marked increase when
the new pricing structure took effect, however, the new managed risk pricing
structure rates have not been advertised to the Bank's market area. Due to this
new pricing structure, the Bank opted not to have a formal loan sale.
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, 2002 and 2001, nonaccrual loans approximated
..01% and .02% of total loans (net), respectively.
16
TABLE 6. LOANS AND LEASE RECEIVABLE
DECEMBER 31,
---------------------------------------
2002 2001 2000
---------- ---------- -----------
In thousands
Real estate $ 83,239 $ 67,860 $ 65,278
Commercial real estate 13,935 12,459 9,944
Consumer 22,575 24,198 23,708
Commercial 9,685 6,978 6,037
Overdrafts 73 87 20
---------- ---------- -----------
$129,507 $111,582 $104,987
Lease: 135 139 143
---------- ---------- -----------
129,642 111,721 105,130
Net deferred loan fees,
premiums and discounts 172 153 90
Allowance for loan losses (1,484) (1,337) (1,216)
---------- ---------- -----------
$128,330 $110,537 $104,004
========== ========== ===========
TABLE 7. LOAN MATURITIES AND INTEREST SENSITIVITY (1)
DECEMBER 31, 2002
---------------------------------------------------
ONE YEAR ONE THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
----------- ------------ ----------- -----------
In thousands
Commercial, financial and agricultural $ 10,057 $ 1,074 $ 12,489 $ 23,620
Real estate - construction 1,841 - - $ 1,841
----------- ------------ ----------- -----------
Total $ 11,898 $ 1,074 $ 12,489 $ 25,461
=========== ============ =========== ===========
Loans with predetermined interest rate $ 11,898 $ 869 $ 1,502 $ 14,269
Loans with variable interest rate - 205 10,987 $ 11,192
----------- ------------ ----------- -----------
Total $ 11,898 $ 1,074 $ 12,489 $ 25,461
=========== ============ =========== ===========
(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.
The Bank has no loans which are considered to be impaired as of December 31,
2002 and 2001. As of December 31, 2002, management is aware of three borrowers
who have exhibited weaknesses. Their loans have aggregate uninsured balances of
$862,190 and are primarily secured by real estate. A specific allowance of
$100,000 related to these loans has been established as part of the allowance
for loan losses. Management believes that any additional potential loss would be
minimal.
17
TABLE 8. NON-PERFORMING ASSETS
DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
In thousands
Nonaccrual loans $ 13 $ 25 $ 22
Loans past due 90 days or more
still accruing interest 553 450 360
---------- ---------- ----------
Total nonperforming loans $ 566 $ 475 $ 382
Other real estate owned $ 2 $ 15 $ -
---------- ---------- ----------
Total nonperforming assets $ 568 $ 490 $ 382
========== ========== ==========
Ratios:
Nonperforming loans/Total loans 0.44% 0.43% 0.37%
Nonperforming assets/Total assets 0.30% 0.29% 0.25%
Allowance for loan losses/Total loans 1.16% 1.21% 1.17%
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. At December 31, 2002 and 2001, the allowance for loan losses
totaled $1.5 million and $1.3 million, respectively. The allowance for loan
losses as a percentage of loans was 1.2% and 1.2% as of December 31, 2002 and
2001. The provision for loan losses exceeded net charge-offs by $147,000 and
$121,000 in 2002 and 2001. An analysis of the allowance for loan losses for the
years ended December 31, 2002 and 2001 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 2002, 2001 and
2000, the provision totaled $261,000, $226,000 and $170,000, respectively. While
loan quality remains good and past due and nonaccrual loans are minimal,
management increased the provision for loan losses in 2002 based on the
declining general economic conditions as evidenced by the slowdown in the
economy as cited in various financial publications. Having 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 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.
18
TABLE 9. ALLOWANCE FOR LOAN LOSSES
2002 2001 2000
----------- ---------- ----------
In thousands
Balance, beginning of year $ 1,337 $ 1,216 $ 1,148
----------- ---------- ----------
Provision charged to expense $ 261 $ 226 $ 170
----------- ---------- ----------
Loans charged off:
Commercial, financial and agricultural $ 1 $ 3 $ 6
Consumer 145 133 115
Mortgage 5 - -
----------- ---------- ----------
Total loans charged off $ (151) $ (136) $ (121)
----------- ---------- ----------
Recoveries:
Commercial, financial and agricultural $ 2 $ 2 $ 1
Consumer 35 29 18
----------- ---------- ----------
Total recoveries $ 37 $ 31 $ 19
----------- ---------- ----------
Net charge-offs $ (114) $ (105) $ (102)
----------- ---------- ----------
Balance, end of year $ 1,484 $ 1,337 $ 1,216
=========== ========== ==========
TABLE 10. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31
------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- ------------------------------ ------------------------------
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 $ 330 8 % $ 363 6 % $ 206 6 %
and agriculture
Real estate - mortgage 391 75 294 72 257 72
Installment and other 364 17 370 22 351 22
Unallocated 399 N/A 310 N/A 402 N/A
------------- --------------- ------------- --------------- ------------- ---------------
Total $ 1,484 100 % $ 1,337 100 % $ 1,216 100 %
============= =============== ============= =============== ============= ===============
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 decreased $5.5 million to $43.4 million at December 31,
2002 from 2001.
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, 2002, approximately 64.8% of the portfolio is
comprised of US Treasury and Agency securities, 32.5% in Mortgage Backed
securities and 2.7% in State and Political 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, 2002 was 4.0 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. In 2002 and 2001, the average balance in
federal funds sold was $4.7 million and $4.3 million, respectively.
19
DEPOSITS AND OTHER FUNDING SOURCES
Total deposits were $173.1 million at December 31, 2002, an increase of
$18.7 million or 12.1% over deposits at December 31, 2001. Average deposits,
however, showed a $23.1 million, or 16.2% growth, to $166.3 million in 2002.
Deposits at the Hedgesville branch totaled $21.2 million at December 31, 2002,
an increase of $600,000 over December 31, 2001. Deposits at the Martinsburg
branch totaled $5.6 million at December 31, 2002, an increase of $4.3 million
over December 31, 2001. The Bank has experienced a change in the deposit account
mix during 2002. A shift from time deposits to jumbo certificates of deposit is
a direct result of customers making deposits to the 36-month Ultimate
Certificate of Deposit throughout the year. The increase in jumbo certificates
of deposit and other certificates of deposit are 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.
Noninterest-bearing deposits also grew by $7.5 million or 39.1%, during
2002, from $19.2 million at December 31, 2001, to $26.7 million at December 31,
2002. At December 31, 2002, noninterest-bearing deposits represented 15.4% of
total deposits, compared to 12.4% for 2001. Average noninterest-bearing deposits
increased 33.1% from $17.5 million in 2001 to $23.3 million in 2002. The Bank's
noninterest-bearing deposit account with no minimum balance and check truncation
continues to grow since its introduction in 1999.
Interest-bearing deposits increased by $11.2 million or 8.3% to $146.4
million at December 31, 2002. Interest-bearing checking increased by $5.2
million in 2002. Included in this category are NOW accounts and Money Market
accounts. Savings accounts increased $3.6 million in 2002 from the previous year
to $21.5 million, while the average savings deposits increased only $3.0 million
or 18.2% to $19.6 million at December 31, 2002. The Bank's largest source of
interest-bearing funds is certificates of deposit. These accounts totaled $94.8
million at December 31, 2002, an increase of $2.3 million or 2.5%. The increase
is primarily due to the continue growth in the 36-month Ultimate Certificate of
Deposit which was first offered as a promotional certificate of deposit with the
grand opening of the Hedgesville branch location in 1998.
The Bank's institutional advertising campaign which began in 2000 has
generated an influx of new noninterest-bearing and interest-bearing deposit
accounts especially at the Hedgesville and south Martinsburg branches.
Table 11 is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 2002:
TABLE 11. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
AMOUNT PERCENT
------------ ---------------
In thousands
Three months or less $ 8,885 23.74 %
Three through six months 7,236 19.33
Six through twelve months 9,653 25.79
Over twelve months 11,660 31.15
------------ ---------------
Total $ 37,434 100 %
============ ===============
CAPITAL RESOURCES
The Bank remains well capitalized. Total shareholders' equity at
December 31, 2002 of $16.3 million represents 8.5% of total assets. This
compares to $14.9 million or 8.7%, at December 31, 2001. Included in capital at
December 31, 2002 are $681,000 of unrealized gains on available for sale
securities, net of deferred income taxes. At December 31, 2001, the Bank had
unrealized gains on available for sale securities, net of deferred income taxes
of $178,000. Such unrealized gains and losses are recorded net of related
deferred taxes and are primarily a function of available market interest rates
relative to the yield being
20
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 2002 were at a price that ranged from $64 to $90
per share. During 2001, information available to management indicates that stock
trades ranged from $67 to $135 per share. Book value per share increased from
$32.59 at December 31, 2001 to $35.52 at December 31, 2002.
Dividends which have been declared by the Board of Directors
semiannually, remained the same in 2002 and 2001 at $1.02 per share. 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,
------------------------
2002 2001
---- ----
Return on average assets .71% .77%
Return on average equity 8.38 8.49
Dividend payout ratio 35.72 37.79
Average equity to average assets ratio 8.49 9.12
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, 2002, these sources totaled $47.6 million,
or 24.8% 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, 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 $2.2 million of cash from operations in
2002, which compares to $1.5 million in 2001 and $1.8 million in 2000.
Additional cash of $18.2 million, $19.9 million and $9.0 million was generated
through net financing activities in 2002, 2001 and 2000, respectively. 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 $16.8 million in 2002 compared to
$20.9 million in 2001 and $11.1 million in 2000. 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, Chief
Financial Officer and the Chief Operations 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.
21
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 4.25
percent through December 2003. Based on the January 2003 outlook, the model
indicates that earnings during the policy measurement period would be affected
by less than 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. INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
INTEREST SENSITIVITY PERIOD
--------------------------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---------- --------- ---------- ---------- --------- ---------- ----------
In thousands
Rate sensitive assets
Loans, net of unearned interest $ 36,205 $ 12,434 $ 13,530 $ 15,340 $ 16,181 $ 34,640 $ 128,330
Average interest rate 4.68 % 4.94 % 5.23 % 5.51 % 5.77 % 6.50 % 5.59 %
Securities 5,327 - 2,100 4,226 5,359 26,418 43,430
Average interest rate 4.75 % - % 4.15 % 4.63 % 4.69 % 4.88 % 4.89 %
---------- --------- ---------- ---------- --------- ---------- ----------
Total interest sensitive assets $ 41,532 $ 12,434 % $ 15,630 % $ 19,566 % $ 21,540 % $ 61,058 % $ 171,760
========== ========= ========== ========== ========= ========== ==========
Interest sensitive liabilities
Non-interest-bearing deposits $ 2,666 $ 2,666 $ 2,666 $ 2,666 $ 2,666 $ 13,333 26,663
Average interest rate - % - % - % - % - % - % - %
Savings and interest-bearing checking 5,158 5,158 5,158 5,158 5,158 25,788 51,578
Average interest rate 0.50 % 0.50 % 0.50 % 0.50 % 0.50 % 0.50 % 0.50 %
Time deposits 54,700 19,296 13,988 1,971 4,866 - 94,821
Average interest rate 1.35 % 1.68 % 2.00 % 2.00 % 2.98 % - % 1.84 %
---------- --------- ---------- ---------- --------- ---------- ----------
Total interest sensitive liabilities $ 62,524 $ 27,120 $ 21,812 % $ 9,795 % $ 12,690 % $ 39,121 $ 173,062
========== ========= ========== ========== ========= ========== ==========
GAP $(20,992) $ (14,686) $ (6,182) $ 9,771 $ 8,850 $ 21,937
Cumulative GAP $(20,992) $ (35,678) $(41,860) $(32,089) $ (23,239) $ (1,302)
GAP to sensitive assets ratio (12.22)% (8.55)% (3.60)% 5.69 % 5.15 % 12.77 %
Cumulative GAP to sensitive
assets ratio (12.22)% (20.77)% (24.37)% (18.68)% (13.53)% (0.76)%
GAP to total assets ratio (10.96)% (7.66)% (3.23)% 5.10 % 4.62 % 11.45 %
Cumulative GAP to total assets ratio (10.96)% (18.62)% (21.85)% (16.75)% (12.13)% (0.68)%
22
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, FASB Statement 145 was issued. This Statement rescinds
FASB Statement 4, Reporting Gains and Losses from Extinguishment of Debt, and
it's subsequent amendment in FASB Statement 64, Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement
44, Accounting for Intangible Assets of Motor Carriers. Finally, this statement
amends FASB statement number 13, Accounting for Leases. The amendment to FASB 13
modifies the required accounting treatment for leases that have similar economic
effects of the sale-leaseback transactions to follow the same requirements as a
true sale-leaseback transaction.
FASB Statement 146, Accounting for Cost Associated with Exit of Disposal
Activities, was issued in June of 2002. Statement 146 nullifies Emerging Issues
Task Force Issue number 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructure)." Under EITF Issue 94-3, companies were
required to recognize the liability of costs associated with disposal activities
at a plan date. This statement now requires that the costs associated with a
disposal activity be measured at fair value and recognized only when the
liability is incurred. FASB Statement 146 is effective for exit or disposal
activities that occur after December 31, 2002.
In October 2002, FASB Statement 147, Acquisitions of Certain Financial
Institutions was issued. This Statement was an amendment of FASB Statements 72
and 144 and Interpretation 9. The provisions of this Statement relate to the
application of the purchase method of accounting which applies to all
acquisitions of financial institutions, except for transactions between mutual
enterprises. Following the issuance of FASB Statements 141, Business
Combinations, and 142, Goodwill and Other Intangible Assets, in 2001, the
Financial Account Standards Board concluded that certain guidance provided in
Statement 72 and Interpretation 9 was no longer necessary. Statement 147 is
effective for acquisitions on or after October 1, 2002.
In November 2002, FASB Interpretation 45 was issued. The interpretation
was titled Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. This Statement rescinds
FASB Interpretation 34 and provides an interpretation of FASB Statements 5, 57,
and 107. This Interpretation elaborates on the disclosures to be made by
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. These new disclosure requirements
are effective for financial statement periods ending after December 15, 2002.
In December 2002, FASB Statement 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, was issued. This statement was an
amendment for FASB Statement 123, and provided alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
financial results.
Adoption of Statements 145, 146, 147 and 148 and Interpretation 45 are
not expected to have a material impact on CNB Financial Services, Inc.'s
financial condition or results of operations.
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 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.
23
A comparison of the carrying value of the Bank's financial instruments
to their estimated fair value as of December 31, 2002 and December 31, 2001 is
disclosed in Note 24 of the Notes to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Interest Rate Sensitivity" in Item 7
hereof.
24
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
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. and subsidiary as of
December 31, 2002 and 2001, 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, 2002. 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 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of CNB
Financial Services, Inc. and subsidiary as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ SMITH ELLIOTT KEARNS & COMPANY, LLC
Hagerstown, Maryland
February 12, 2003
26
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2002 AND 2001
ASSETS 2002 2001
--------------- ----------------
Cash and due from banks $ 7,832,735 $ 4,229,810
Federal funds sold 4,127,299 -
Securities available for sale
(at approximate market value) 43,429,902 48,913,329
Federal Home Loan Bank stock, at cost 429,000 625,500
Federal Reserve Bank stock, at cost 129,650 129,650
Loans and lease receivable, net 128,330,303 110,536,744
Accrued interest receivable 921,907 1,052,620
Foreclosed real estate (held for sale), net 1,800 14,898
Premises and equipment, net 4,800,135 4,283,625
Deferred income taxes - 225,894
Cash surrender value of life insurance 964,179 883,533
Intangible assets 96,483 105,168
Other assets 538,687 540,672
--------------- ----------------
TOTAL ASSETS $ 191,602,080 $ 171,541,443
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 26,663,469 $ 19,174,111
Interest-bearing demand 30,087,763 24,878,709
Savings 21,489,855 17,851,684
Time, $100,000 and over 37,433,561 27,450,519
Other time 57,387,901 65,025,516
--------------- ----------------
$ 173,062,549 $ 154,380,539
Accrued interest payable 1,010,086 1,148,437
Deferred income taxes 158,269 -
Accrued expenses and other liabilities 1,101,158 1,086,230
--------------- ----------------
TOTAL LIABILITIES $ 175,332,062 $ 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 11,267,374 10,426,618
Accumulated other comprehensive income 681,004 177,979
--------------- ----------------
TOTAL SHAREHOLDERS' EQUITY $ 16,270,018 $ 14,926,237
--------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 191,602,080 $ 171,541,443
=============== ================
The Notes to Consolidated Financial Statements are an integral part of these
statements.
27
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------- -------------
INTEREST INCOME
Interest and fees on loans $ 9,072,329 $ 9,381,949 $ 8,887,114
Interest and dividends on securities:
United States Treasury securities - 274 25,232
U.S. Government agencies and
corporations 1,856,035 2,238,886 1,960,198
Mortgage backed securities 406,958 - -
State and political subdivisions 43,058 29,450 60,002
Other 28,802 57,686 7,779
Interest on federal funds sold 82,035 159,744 94,914
------------- ------------- -------------
$ 11,489,217 $ 11,867,989 $ 11,035,239
------------- ------------- -------------
INTEREST EXPENSE
Interest on interest bearing demand,
savings and time deposits $ 5,341,720 $ 5,935,078 $ 5,359,871
Interest on federal funds purchased - 2,291 5,051
------------- ------------- -------------
$ 5,341,720 $ 5,937,369 $ 5,364,922
------------- ------------- -------------
NET INTEREST INCOME $ 6,147,497 $ 5,930,620 $ 5,670,317
PROVISION FOR LOAN LOSSES 261,000 226,000 170,000
------------- ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 5,886,497 $ 5,704,620 $ 5,500,317
------------- ------------- -------------
NONINTEREST INCOME
Service charges on deposit accounts $ 747,343 $ 545,882 $ 282,866
Other service charges, commissions
and fees 338,481 259,887 211,982
Insurance income 106,304 124,514 94,691
Other operating income 72,726 49,498 59,148
Gain on demutualization of insurance company - - 195,889
Net gain (loss) on sale of securities 78,028 833 (13,991)
Income from title company 56,400 44,877 -
Gain (loss) on sale of other real estate owned 3,492 - 12,177
------------- ------------- -------------
$ 1,402,774 $ 1,025,491 $ 842,762
------------- ------------- -------------
NONINTEREST EXPENSES
Salaries $ 2,253,312 $ 2,013,709 $ 1,760,226
Employee benefits 752,564 621,036 562,625
Occupancy of premises 295,221 264,184 249,738
Furniture and equipment expense 337,050 254,232 248,053
Other operating expenses 1,662,288 1,640,764 1,458,762
------------- ------------- -------------
$ 5,300,435 $ 4,793,925 $ 4,279,404
------------- ------------- -------------
INCOME BEFORE INCOME TAXES $ 1,988,836 $ 1,936,186 $ 2,063,675
PROVISION FOR INCOME TAXES 680,871 699,781 757,835
------------- ------------- -------------
NET INCOME $ 1,307,965 $ 1,236,405 $ 1,305,840
============= ============= =============
BASIC EARNINGS PER SHARE $ 2.86 $ 2.70 $ 2.85
============= ============= =============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
28
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK (1) SURPLUS (1) EARNINGS (1) INCOME EQUITY
------------ ------------- ------------ ------------ -------------
BALANCE, DECEMBER 31, 1999 $ 458,048 $ 3,863,592 $ 8,818,791 $ (891,710) $12,248,721
-------------
Comprehensive income:
Net income for 2000 - - 1,305,840 - 1,305,840
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $475,898) - - - 776,466 776,466
-------------
Total Comprehensive Income - - - - 2,082,306
-------------
Issuance of common stock 12,000 - - - -
Cancellation of stock (12,000) - - - -
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
-------------
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 2002 - - 1,307,965 - 1,307,965
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $308,306) - - - 503,025 503,025
-------------
Total Comprehensive Income - - - - 1,810,990
-------------
Cash dividends ($1.02 per share) - - (467,209) - (467,209)
------------ ------------- ------------ ------------ -------------
BALANCE, DECEMBER 31, 2002 $ 458,048 $ 3,863,592 $11,267,374 $ 681,004 $16,270,018
============ ============= ============ ============ =============
(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
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,307,965 $ 1,236,405 $ 1,305,840
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 340,677 251,463 238,162
Provision for loan losses 261,000 226,000 170,000
Deferred income taxes 75,857 (30,103) (1,686)
Net (gain) loss on sale of securities (78,028) (833) 13,991
(Gain) loss on sale of real estate owned (3,492) - (12,177)
(Gain) on demutualization of insurance company - - (195,889)
Loss on disposal and abandonment of fixed assets 8,111 - 55,254
(Increase) decrease in loans held for sale - - 65,300
(Increase) decrease in accrued interest receivable 130,713 (48,363) (132,586)
(Increase) decrease in other assets 193,704 (235,995) 95,169
Increase (decrease) in accrued interest payable (138,351) 110,315 221,503
(Increase) in cash surrender value on life insurance in excess
of premiums paid (31,568) (42,882) (70,180)
Increase in accrued expenses and other liabilities 14,928 1,653 12,126
Amortization of deferred loan (fees) cost 72,833 55,000 42,633
Amortization (accretion) of premium and discount on investments 36,889 (28,920) (1,709)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,191,238 $ 1,493,740 $ 1,805,751
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) in loans $(18,159,192) $ (6,824,573) $ (8,118,916)
Proceeds from loan sales - - 1,027,345
Proceeds from sales of securities 7,075,471 901,406 2,659,593
Proceeds from maturities of securities 44,889,207 52,450,000 1,570,000
Purchases of securities (45,628,781) (67,124,098) (6,374,538)
Purchases of Federal Home Loan Bank stock (21,400) (18,800) (606,700)
Redemptions of Federal Home Loan Bank stock 217,900 - -
Purchases of premises and equipment and computer software (1,048,332) (1,456,617) (83,935)
Proceeds from sale of other real estate owned, net 48,390 - 79,115
Net (increase) in real estate owned, net - (4,138) -
Investment in title company - (5,000) -
Return of capital from title company - 2,715 -
Net (increase) decrease in federal funds sold (4,127,299) 1,207,684 (1,207,684)
Premiums paid on life insurance (49,078) (49,843) (49,893)
Purchase of intangibles - - (14,270)
------------- ------------- -------------
NET CASH (USED IN) INVESTING ACTIVITIES $(16,803,114) $(20,921,264) $(11,119,883)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits $ 16,336,583 $ 6,156,422 $ 705,412
Net increase in time deposits 2,345,427 14,228,267 8,780,490
Cash dividends paid (467,209) (467,209) (467,209)
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 18,214,801 $ 19,917,480 $ 9,018,693
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 3,602,925 $ 489,956 $ (295,439)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,229,810 3,739,854 4,035,293
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,832,735 $ 4,229,810 $ 3,739,854
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year:
Interest $ 5,480,071 $ 5,827,054 $ 5,143,419
Income taxes $ 682,000 $ 768,500 $ 716,000
Net transfer to foreclosed real estate, held for sale
from loans receivable $ 31,800 $ 10,760 $ -
The Notes to Consolidated Financial Statements are an integral part of these
statements.
30
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 Morgan County, West Virginia
and its two locations in Berkeley County, West Virginia. 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.
In February 2001, CNB became a 50% member in a limited liability
corporation, Morgan County Title Insurance Agency, LLC which sells title
insurance.
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 wholly owned subsidiary,
Citizens National Bank and CNB Insurance Services, Inc., a wholly owned
subsidiary of the Bank. The financial statements of Morgan County Title
Insurance Agency, LLC are not included in these consolidated financial
statements. 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.
CNB classifies all investments as available for sale, except for stock in
the Federal Reserve Bank and Federal Home Loan Bank, which are restricted
investments.
31
Interest and dividends on securities, including amortization of premiums
and accretion of discounts, are included in interest income. Realized
gains and losses from the sales of securities are determined using the
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, 2002 and 2001.
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. On January 1, 2002, CNB
adopted SFAS No. 142, Goodwill and Other Intangible Assets. The
implementation of SFAS No. 142 did not have a significant impact on the
financial statements.
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 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.
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
32
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:
Loan origination fees, net of certain direct costs of originating loans
are being deferred and recognized 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. Computer software is being amortized over 3 to 5
years. 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.
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 due
or 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.
33
ADVERTISING COSTS:
The Company expenses advertising costs in the period in which they are
incurred. Advertising cost amounted to $118,017, $110,979 and $112,642 for
the years ended December 31, 2002, 2001 and 2000, 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 gains or losses on
available for sale securities.
The components of the change in net unrealized gains (losses) on
securities were as follows:
2002 2001 2000
------------- ------------ -------------
Unrealized holding gains (losses) arising during
the year $ 889,359 $ 473,774 $ 1,238,373
Reclassification adjustment for (gains) losses
realized in net income (78,028) (833) 13,991
------------- ------------ -------------
Net unrealized holding gains
(losses) before taxes $ 811,331 $ 472,941 $ 1,252,364
Tax effect (308,306) (179,718) (475,898)
------------- ------------ -------------
Net change $ 503,025 $ 293,223 $ 776,466
============= ============ =============
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 interests.
NOTE 3. INVESTMENT IN LIMITED LIABILITY CORPORATION
In February 2001, CNB paid $5,000 to become a 50% member in a limited
liability corporation, Morgan County Title Insurance Agency, LLC for
the purpose of selling title insurance. CNB accounts for their
investment in Morgan County Title Insurance Agency, LLC as part of
"Other Assets" using the equity method of accounting.
34
The following represents the limited liability corporation's financial
information:
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
DECEMBER 31, 2002 AND 2001
2002 2001
---------------- ---------------
ASSETS
Cash $ 5,191 $ 4,571
---------------- ---------------
TOTAL ASSETS $ 5,191 $ 4,571
================ ===============
MEMBERS' EQUITY $ 5,191 $ 4,571
---------------- ---------------
TOTAL MEMBERS' EQUITY $ 5,191 $ 4,571
================ ===============
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF INCOME
(Unaudited)
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
-------------- -------------
INCOME
Insurance commissions $ 241,902 $ 115,135
-------------- -------------
TOTAL INCOME $ 241,902 $ 115,135
-------------- -------------
EXPENSES
Management fees $ 125,789 $ 22,000
Other expenses 2,693 3,382
-------------- -------------
TOTAL EXPENSES $ 128,482 $ 25,382
-------------- -------------
NET INCOME $ 113,420 $ 89,753
============== =============
35
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 113,420 $ 89,753
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 113,420 $ 89,753
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Members capital contribution $ - $ 10,000
Profit and capital distributed (112,800) (95,182)
------------- ------------
NET CASH (USED IN) FINANCING ACTIVITIES $ (112,800) $ (85,182)
------------- ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS $ 620 $ 4,571
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,571 -
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,191 $ 4,571
============= ============
NOTE 4. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of debt securities at
December 31, 2002 and 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 are summarized as follows:
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 $ 5,300,481 $ 26,917 $ - $ 5,327,398 4.75 %
After 1 but within 5 years 9,880,564 496,919 - 10,377,483 4.76
After 5 but within 10 years 12,135,426 187,756 - 12,323,182 4.99
------------ ------------- ------------ -------------
$27,316,471 $ 711,592 $ - $28,028,063 4.86 %
------------ ------------- ------------ -------------
States and political subdivisions
Within one year $ 350,000 $ 9,747 $ - $ 359,747 8.27 %
After 1 but within 5 years - - - - -
After 5 but within 10 years 775,000 21,967 - 796,967 6.22
------------ ------------- ------------ -------------
$ 1,125,000 $ 31,714 $ - $ 1,156,714 6.86 %
------------ ------------- ------------ -------------
Mortgage backed securities $13,890,037 $ 355,088 $ - $14,245,125 5.20 %
------------ ------------- ------------ -------------
Total securities available for sale $42,331,508 $ 1,098,394 $ - $43,429,902 5.02 %
============ ============= ============ =============
Restricted:
Federal Reserve Bank stock $ 129,650 $ - $ - $ 129,650 6.00 %
Federal Home Loan Bank stock 429,000 - - 429,000 3.25
------------ ------------- ------------ -------------
Total restricted investments $ 558,650 $ - $ - $ 558,650 3.89 %
============ ============= ============ =============
36
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 5.29 %
============ ============= ============ =============
Restricted:
Federal Reserve Bank stock $ 129,650 $ - $ - $ 129,650 6.00 %
Federal Home Loan Bank stock 625,500 - - 625,500 5.75
------------ ------------- ------------ -------------
Total restricted investments $ 755,150 $ - $ - $ 755,150 5.79 %
============ ============= ============ =============
The carrying value of securities pledged to secure public deposits and
for other purposes as required or permitted by law totaled $12,864,841
at December 31, 2002 and $12,099,922 at December 31, 2001.
Proceeds from sales of securities available for sale (excluding
maturities) for the years ended December 31, 2002, 2001 and 2000 were
$7,075,471, $901,406 and $2,659,593, respectively. Gross gains and
(losses) of $78,028 and $(0) in 2002, $7,071 and $(6,238) in 2001, and
$7,115 and $(21,106) in 2000 were realized on the respective sales.
NOTE 5. LOANS AND LEASE RECEIVABLE
Major classifications of loans at December 31, 2002 and 2001 were as
follows:
2002 2001
------------- -------------
Loans:
Real estate $ 83,239,409 $ 67,859,963
Commercial real estate 13,934,900 12,458,880
Consumer 22,575,379 24,197,964
Commercial 9,684,720 6,977,624
Overdrafts 72,763 86,694
------------- -------------
$ 129,507,171 $ 111,581,125
Lease: 135,341 139,608
------------- -------------
$ 129,642,512 $ 111,720,733
Net deferred loan fees, costs,
premiums and discounts 172,239 152,971
Allowance for loan losses (1,484,448) (1,336,960)
------------- -------------
$ 128,330,303 $ 110,536,744
============= =============
37
At December 31, 2002, approximately $38,467,000 or 39.6% of the real
estate loans had fixed rates of interest and $58,708,000 or 60.4% had
adjustable rates of interest.
The net investment in the direct financing lease was $135,341 at
December 31, 2002.
An analysis of the allowance for loan losses were as follows:
2002 2001 2000
----------- ----------- -----------
Balance, beginning $ 1,336,960 $ 1,216,333 $ 1,147,846
Provision charged to
operations 261,000 226,000 170,000
Recoveries 37,230 29,729 19,494
Loans charged off (150,742) (135,102) (121,007)
----------- ----------- -----------
Balance, ending $ 1,484,448 $ 1,336,960 $ 1,216,333
=========== =========== ===========
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 nonperforming
loans is as follows:
DECEMBER 31,
---------------------
2002 2001
-------- --------
Nonaccrual loans $ 12,711 $ 25,173
Loans past due 90 days or more still accruing interest 553,170 449,675
-------- --------
Total $565,881 $474,848
======== ========
The contractual amount of interest that would have been recorded on
nonaccrual loans during 2002 and 2001 was $6,599 and $9,976,
respectively. The amount of interest income that was recorded on
nonaccrual loans during 2002 and 2001 was $5,248 and $6,719,
respectively.
The Bank is not committed to lend additional funds to debtors whose
loans are nonperforming or on nonaccrual status.
The Bank has no loans which are considered to be impaired at December
31, 2002 and 2001.
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 $5,207,621 and $6,089,473 at December 31, 2002
and 2001, respectively.
Custodial balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were $100,206 and $10,988 at
December 31, 2002 and 2001, respectively.
The Bank did not capitalize any mortgage servicing rights in 2002, 2001
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 $2,248, $1,792 and $2,264 in 2002, 2001 and 2000, respectively.
Mortgage servicing rights at December 31, 2002 and 2001 were $29,921 and
$32,169, respectively.
38
NOTE 7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 were as
follows:
2002 2001
---------- ----------
Land and land improvements $1,435,174 $1,435,174
Banking house - Main 1,355,096 1,334,788
Banking house - Valley Road branch 532,624 521,431
Banking house - Hedgesville branch 766,743 765,137
Banking house - Martinsburg branch 697,006 -
Bank owned automobiles 20,555 -
Furniture, fixtures and equipment 2,106,114 2,124,581
---------- ----------
$6,913,312 $6,181,111
Less accumulated depreciation 2,123,691 2,344,408
---------- ----------
$4,789,621 $3,836,703
Construction in progress 10,514 446,922
---------- ----------
$4,800,135 $4,283,625
========== ==========
Depreciation expense amounted to $293,787, $220,698 and $200,995 in
2002, 2001 and 2000, respectively.
Computer software included in the statement of financial condition
caption "Other Assets" amounted to $400,742 and $128,534 at December 31,
2002 and 2001, respectively. Amortization expense on computer software
amounted to $38,205, $22,080 and $28,482 in 2002, 2001 and 2000,
respectively.
In December 2001, the Bank entered into a contract to upgrade its
technology systems. The technology is expected to create operational
efficiencies and enhance customer service and product delivery.
The Bank's remaining commitments totaled $273,000 at December 31, 2002
to upgrade the Bank's technology systems.
NOTE 8. INTANGIBLE ASSETS
Amortized intangible assets representing customer lists, contracts and
records acquired by CNB Insurance Services, Inc. have a carrying amount
of $130,270 and accumulated amortization of $33,787 and $25,107 at
December 31, 2002 and 2001, respectively. These intangibles are
amortized over fifteen years on a straight line basis.
Amortization expense on intangible assets amounted to $8,685 in 2002,
2001 and 2000, respectively.
The estimated amortization expense for 2003 through 2007 is $8,685 per
year.
39
NOTE 9. TIME DEPOSITS
At December 31, 2002, the scheduled maturities of time deposits are as
follows:
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- -----------
2003 $25,773,805 $54,699,723
2004 6,653,324 19,296,123
2005 3,751,748 13,988,210
2006 267,459 1,970,736
2007 987,225 4,866,670
----------- -----------
$37,433,561 $94,821,462
=========== ===========
NOTE 10. 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, 2002 and 2001, respectively.
NOTE 11. 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, 2003. The Bank
had not drawn on these funds at December 31, 2002 and 2001.
The Bank also entered into an open-ended unsecured line of credit with
Wachovia Bank of N.C. for $1,000,000 for federal fund purchases and
$200,000 for a standby letter of credit. 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, 2003. The Bank had
not drawn any of these funds at December 31, 2002 and 2001.
NOTE 12. OPERATING LEASES
The Bank entered into two lease agreements in 2001, which were
terminated in March 2002. A lease for a parcel of land to locate a
temporary banking unit required a monthly payment of $1,500. The
additional lease was for the temporary banking unit which required a
monthly payment of $3,575. Both leases were classified as operating
leases.
Lease expense under operating leases for the periods ending December 31,
2002, 2001 and 2000 amounted to $15,019, $30,738 and $1,205,
respectively.
NOTE 13. 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.
40
The following table sets forth information about the Bank's plan as of
October 31:
2002 2001 2000
----------- ----------- -----------
Change in benefit obligation:
Benefit obligation at
beginning of year $ 2,711,735 $ 2,356,019 $ 2,265,218
Service cost 116,959 107,250 115,427
Interest cost 189,547 185,125 179,194
Actuarial (gain) loss (37,581) 17,282 (93,277)
Change due to amendment - - 3,069
Change in discount rate 63,471 166,447 -
Benefits paid (126,291) (120,388) (113,612)
----------- ----------- -----------
Benefit obligation at end of
year $ 2,917,840 $ 2,711,735 $ 2,356,019
----------- ----------- -----------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 2,116,828 $ 2,294,234 $ 2,112,741
Actual return on plan assets (274,542) (156,520) 116,729
Employer contribution 188,051 99,502 178,376
Benefits paid (126,291) (120,388) (113,612)
Fair value of plan assets
at end of year $ 1,904,046 $ 2,116,828 $ 2,294,234
----------- ----------- -----------
Funded status $(1,013,794) $ (594,907) $ (61,785)
Unrecognized net actuarial (gain) loss 821,797 321,327 (188,435)
Unrecognized prior service cost 23,804 44,855 68,514
Unrecognized net transition (asset) (7,371) (16,941) (26,511)
----------- ----------- -----------
Prepaid (accrued) benefit cost $ (175,564) $ (245,666) $ (208,217)
=========== =========== ===========
Weighted average assumptions as of October 31:
Discount rate 7.0% 7.3% 8.0%
Expected return on plan
assets 8.5% 8.5% 8.5%
Rate of compensation increase 4.0% 4.3% 5.0%
Components of net periodic cost:
Service cost $ 116,959 $ 107,250 $ 115,427
Interest cost 189,547 185,125 179,194
Expected return on plan assets (200,038) (189,974) (176,764)
Special termination benefit cost - 23,069 -
Net amortization 11,481 11,481 11,446
----------- ----------- -----------
Net periodic plan cost $ 117,949 $ 136,951 $ 129,303
=========== =========== ===========
41
NOTE 14. 401(k) PROFIT SHARING PLAN
All employees are eligible to participate in the Bank's 401(k) Profit
Sharing Plan after completing one year of service. Employees may defer
up to 15% of their salary in 2002, 2001 and 2000. The Bank may, at the
discretion of the Board of Directors, match all or part of the employee
deferrals. For 2002, 2001 and 2000, 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 2002, 2001 and 2000 was
$25,600, $24,000 and $25,200, respectively.
NOTE 15. 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 net expense for
these benefits was $(2,967), $11,032 and $(18,941) for 2002, 2001 and
2000, respectively.
NOTE 16. 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.
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 2002, 2001 and 2000.
NOTE 17. 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.
42
NOTE 18. INCOME TAXES
Income taxes reflected in the statements of income are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
--------- --------- ---------
Federal:
Current $ 554,466 $ 656,915 $ 677,117
Deferred 69,195 (50,201) 1,932
State:
Current 50,548 72,969 82,404
Deferred 6,662 20,098 (3,618)
--------- --------- ---------
Provision for income taxes $ 680,871 $ 699,781 $ 757,835
========= ========= =========
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.
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,
---------------------------------------
2002 2001 2000
--------- --------- ---------
Income tax expense at the
statutory rate (34%) $ 676,204 $ 658,303 $ 701,650
Increases (decreases) resulting
from:
Nontaxable interest income,
net of non-deductible interest
expense (35,750) (19,739) (26,139)
State income taxes, net of
federal income tax benefit 57,210 93,027 78,786
Other (16,793) (31,810) 3,538
--------- --------- ---------
Provision for income taxes $ 680,871 $ 699,781 $ 757,835
========= ========= =========
Federal and state income taxes receivable included in the balance sheet
as other assets were $155,625 and $80,538 at December 31, 2002 and 2001,
respectively.
43
The components of deferred taxes included in the balance sheet as of
December 31 are as follows:
2002 2001
--------- ---------
Deferred tax assets:
Provision for loan losses $ 472,495 $ 416,943
Deferred compensation plan 216,063 206,813
Postretirement benefits 55,805 46,950
Defined benefit plan 65,249 79,992
Organizational costs 2,274 3,637
--------- ---------
$ 811,886 $ 754,335
--------- ---------
Deferred tax liabilities:
Deferred compensation plan $(192,835) $(176,707)
Mortgage servicing rights (10,772) (11,581)
Net unrealized gain on securities
available for sale (417,390) (109,084)
Depreciation (349,158) (231,069)
--------- ---------
$(970,155) $(528,441)
--------- ---------
Net deferred tax asset (liability) $(158,269) $ 225,894
========= =========
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 19. OTHER OPERATING EXPENSES
YEARS ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
---------- ---------- ----------
Stationery, supplies and printing $ 144,511 $ 159,195 $ 122,410
Data processing 202,755 194,639 163,125
Director's fees 144,262 138,600 133,875
Postage 101,399 92,899 75,516
Telephone 87,972 62,567 58,709
Professional fees 212,758 210,345 161,632
ATM fees 107,839 100,369 101,149
Advertising and public relations 146,314 136,463 141,843
Other 514,478 545,687 500,503
---------- ---------- ----------
Total other operating expenses $1,662,288 $1,640,764 $1,458,762
========== ========== ==========
NOTE 20. 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 needs 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.
44
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.
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:
2002 2001
----------- -----------
Commitments
to originate:
Fixed rate loans $ 1,456,003 $ 601,585
Adjustable rate loans 1,058,600 1,158,644
----------- -----------
$ 2,514,603 $ 1,760,229
Letters of credit 485,109 519,364
Undisbursed portion of construction
loans 4,089,134 3,012,301
Available credit granted on commercial
loans 3,626,501 4,599,816
Available credit on personal lines
of credit 375,066 453,613
Undisbursed portion of home equity loans 2,253,585 1,715,316
----------- -----------
$13,343,998 $12,060,639
=========== ===========
NOTE 21. 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.
NOTE 22. 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.
45
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, 2002, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 2002 and 2001, 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 presented in the table.
There were no deductions from capital for interest-rate risk in 2002 and
2001.
RATIO
---------------------------------------------------------------------
ACTUAL TO BE WELL
AMOUNT CAPITALIZED UNDER
IN FOR CAPITAL PROMPT CORRECTIVE
THOUSANDS ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------------------------------------------------------------------
As of December 31, 2002:
Total Capital
(to Risk Weighted
Assets) $16,996 15.10% 8.0% 10.0%
Tier I Capital
(to Risk Weighted
Assets) $15,588 13.85% 4.0% 6.0%
Tier I Capital
(to Average Assets) $15,588 8.14% 4.0% 5.0%
As of December 31, 2001:
Total Capital
(to Risk Weighted
Assets) $15,981 16.19% 8.0% 10.0%
Tier I Capital
(to Risk Weighted
Assets) $14,746 14.94% 4.0% 6.0%
Tier I Capital
(to Average Assets) $14,746 8.73% 4.0% 5.0%
NOTE 23. REGULATORY RESTRICTIONS
Included in Cash and Due From Banks are average daily reserve balances
the Bank is required to maintain with the Federal Reserve Bank. The
amount of these required reserves, calculated based on percentages of
certain deposit balances was $1,751,000 at December 31, 2002.
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.
Certain regulations prohibit 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 $1,558,000 available for loans or
advances to CNB as of December 31, 2002, at which time there were no
material loans or advances outstanding.
46
NOTE 24. 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.
The estimated fair value of financial instruments at December 31, is
summarized as follows:
47
2002 2001
------------------------------------- ----------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
Financial Assets:
Cash, due from banks and
federal funds sold $ 7,832,735 $ 7,832,735 $ 4,229,810 $ 4,229,810
Securities available for
sale 43,429,902 43,429,902 48,913,329 48,913,329
Loans 128,330,303 128,425,985 110,536,744 110,959,202
Accrued interest receivable 921,907 921,907 1,052,620 1,052,620
Mortgage servicing rights 29,921 29,921 32,169 32,169
Financial Liabilities:
Demand deposits $ 78,241,087 $ 78,241,087 $ 61,904,504 $ 61,904,504
Time deposits 94,821,462 97,507,166 92,476,035 95,724,104
Accrued interest payable 1,010,086 1,010,086 1,148,437 1,148,437
Off Balance - Sheet
Financial Instruments:
Letters of credit $ - $ 1,260 $ - $ 1,472
NOTE 25. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to
officers, directors, and their affiliates amounting to $1,433,386 and
$1,308,100 at December 31, 2002 and 2001, respectively. During 2002,
$1,166,544 of new loans were made, or became reportable, and repayments
and other decreases totaled $1,041,258. Deposits from related parties
held by the Bank at December 31, 2002 and 2001 amounted to $4,347,387
and $2,248,568, respectively.
48
NOTE 26. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following represents parent company only financial information:
STATEMENTS OF FINANCIAL (PARENT ONLY)
DECEMBER 31, 2002, AND 2001
ASSETS 2002 2001
----------- -----------
Cash $ 58,991 $ 2,591
Investment in Citizens National Bank 16,256,896 14,924,237
Deferred income taxes 2,274 3,637
Other assets 4,385 5,785
----------- -----------
TOTAL ASSETS $16,322,546 $14,936,250
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities $ 52,528 $ 10,013
----------- -----------
TOTAL LIABILITIES $ 52,528 $ 10,013
----------- -----------
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 11,267,374 10,426,618
Accumulated other comprehensive income 681,004 177,979
----------- -----------
TOTAL SHAREHOLDERS' EQUITY $16,270,018 $14,926,237
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $16,322,546 $14,936,250
=========== ===========
49
STATEMENTS OF INCOME (PARENT ONLY)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ----------- -----------
Dividend income $ 467,209 $ 477,209 $ 302,311
Income from title company 56,400 44,876 -
Noninterest expense (36,340) (42,225) (11,888)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF CITIZENS NATIONAL BANK $ 487,269 $ 479,860 $ 290,423
Income tax (expense) credit (8,938) (2,757) 3,994
----------- ----------- -----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
CITIZENS NATIONAL BANK $ 478,331 $ 477,103 $ 294,417
Equity in undistributed earnings of Citizens National Bank 829,634 759,302 1,011,423
----------- ----------- -----------
NET INCOME $ 1,307,965 $ 1,236,405 $ 1,305,840
=========== =========== ===========
STATEMENTS OF CASH FLOWS (PARENT ONLY)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,307,965 $ 1,236,405 $ 1,305,840
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 1,363 357 (3,994)
(Increase) decrease in other assets 1,400 (3,500) -
Increase (decrease) in accrued expenses and other liabilities 42,515 (1,875) 11,888
Equity in undistributed earnings of Citizens National Bank (829,634) (759,302) (1,011,423)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 523,609 $ 472,085 $ 302,311
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in title company $ - $ (5,000) $ -
Return of capital from title company - 2,715 -
----------- ----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES $ - $ (2,285) $ -
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (467,209) (467,209) $ (302,311) (1)
----------- ----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES $ (467,209) $ (467,209) $ (302,311)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS $ 56,400 $ 2,591 $ -
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 2,591 $ - $ -
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 58,991 $ 2,591 $ -
=========== =========== ===========
(1) Represents dividends paid by CNB Financial Services, Inc. subsequent to its
acquisition of the Bank.
50
NOTE 27. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2002
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
In thousands
Interest income $2,823 $2,889 $2,861 $2,916
Interest expense 1,382 1,344 1,335 1,281
------ ------ ------ ------
Net interest income 1,441 1,545 1,526 1,635
Provision for loan losses 73 39 40 109
Noninterest income 345 381 328 349
Noninterest expense 1,307 1,308 1,357 1,328
------ ------ ------ ------
Income before income taxes 406 579 457 547
Provision for income taxes 132 213 160 176
------ ------ ------ ------
Net income $ 274 $ 366 $ 297 $ 371
===== ===== ===== =====
Basic earnings per share $ 0.60 $ 0.80 $ 0.65 $ 0.81
===== ===== ===== =====
2001
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
In thousands
Interest income $2,900 $3,012 $3,029 $2,927
Interest expense 1,472 1,519 1,489 1,457
------ ------ ------ ------
Net interest income 1,428 1,493 1,540 1,470
Provision for loan losses 51 61 57 57
Noninterest income 172 269 286 298
Noninterest expense 1,094 1,188 1,223 1,289
------ ------ ------ ------
Income before income taxes 455 513 546 422
Provision for income taxes 160 187 187 166
------ ------ ------ ------
Net income $ 295 $ 326 $ 359 $ 256
===== ===== ===== =====
Basic earnings per share $ 0.64 $ 0.71 $ 0.78 $ 0.57
===== ===== ===== =====
51
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 20, 2003,
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 73 1974 Retired - President, Citizens National Bank
John E. Barker 74 1972 Auto Sales - Service
Margaret S. Bartles 49 2002 Realtor
Jay E. Dick 50 1983 Retired - Manager-Hunters' Hardware, Inc.
Herbert L. Eppinger 70 1979 Retired - Agriculture
Robert L. Hawvermale 73 1967 Retired - Professional Engineer
J. Philip Kesecker 73 1965 Real Estate Development
Jerry McGraw 56 1988 Insurance
Martha H. Quarantillo 43 1999 Pharmacist
Thomas F. Rokisky 56 1993 President and Chief Executive Officer, CNB and
Citizens National Bank
Charles S. Trump IV 42 1986 Attorney at Law
Arlie R. Yost 55 1988 Licensed Residential Appraiser
All nominees are incumbent directors of CNB Financial Services, Inc.
52
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
MARCH 20,
NAME 2003 POSITION AND EXPERIENCE DURING THE PAST 5 YEARS
- ---- ---- -----------------------------------------------
J. Philip Kesecker (1) 73 2000 to present - Chairman of the Board, CNB Financial Services, Inc.
1987 to present - Chairman of the Board, Citizens National Bank
Thomas F. Rokisky 56 2000 to present - President/CEO, CNB Financial Services, Inc.
1996 to present - President/CEO, Citizens National Bank
1990 to 1996 - Executive Vice President/COO, Citizens National Bank
Arnold K. Stotler 43 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. Stotler 42 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 62 2000 to January 31, 2003 - Vice President, CNB Financial Services, Inc.
1996 to January 31, 2003 - Vice President of Lending, Citizens National Bank
Patricia C. Muldoon 42 2001 to present - Vice President/COO, Citizens National Bank
1999 to 2001 - Consultant/Audit Staff, Smith Elliott Kearns & Company, LLC
1997 to 1999 - VP/Mgr of Accounting Operations and Financial Reporting
Farmers and Mechanics National Bank
(1) Mr. Kesecker is not an employee of CNB.
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 Arnold
K. Stotler, who filed one report late. CNB is required to report late filings.
53
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, 2002, 2001 and 2000, of those persons who were, as of
December 31, 2002, (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 2002 $103,420 $ -0- $16,424 (1)(2)
2001 $ 98,759 $ -0- $13,722 (1)(2)
2000 $ 93,358 $ -0- $12,436 (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 for the plan year of $168,151, $99,502 and $178,376 were
made by CNB in 2002, 2001 and 2000, respectively.
CNB does not maintain any form of stock option, stock
appreciation rights, or other long-term compensation plans.
Directors receive $125 for each board meeting of the bank they
attend, $150 for each discount committee meeting and $75 for other
committee meetings they attend. There is no compensation for attendance
at CNB board meetings. In addition, each director receives a fee of
$4,150 per year. The chairman of the board receives an additional $3,500
per year and the vice chairman receives an additional $1,000 per year.
Other than the deferred compensation/supplemental insurance plan
described below, there are no other special arrangements with any
directors. In 2002, the board of directors of CNB received $144,262, in
the aggregate, for all board of directors' meetings attended and all
fees paid.
CNB maintains a deferred compensation/supplemental insurance
plan for directors pursuant to which a director may elect to defer
receipt of a portion of fees for board meetings for at least four years
or until he reaches age 65, whichever is later. An amount equal to fees
waived in addition to interest at an annual rate of 10% per year will be
paid to each participating director or his designated beneficiary during
a period of 10 years after the director reaches age 65. The payments
after retirement will be paid from the general funds of CNB. CNB
purchases and is the beneficiary of insurance on the lives of
participants, the proceeds of which are used to help recover the net
after-tax cost of the benefits and insurance premiums paid. Funds from
the deferred fees of a participating director will be used to reimburse
CNB for the costs of the premium for the insurance policies. The cost of
the insurance premiums in 2002 was $49,078. At December 31, 2002, these
policies had a net accumulated cash value of $964,179.
54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 21, 2003,
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 power
with respect to each of the shares reported as beneficially owned by
such person.
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS (1)
---------------- ---------------- ----------------
J. Robert Ayers (2) 1,915 *
John E. Barker (3) 17,364 3.79
Margaret S. Bartles 100 *
Jay E. Dick (4) 15,691 3.43
Herbert L. Eppinger (5) 2,870 *
Robert L. Hawvermale (6) 3,730 *
J. Philip Kesecker (7) 14,282 3.12
Jerald McGraw (8) 1,514 *
Martha H. Quarantillo 400 *
Thomas F. Rokisky (9) 1,546 *
Charles S. Trump IV (10) 11,380 2.48
Arlie R. Yost (11) 2,210 *
All directors and executive officers as a group (15 persons) 73,202 15.98
D. Louise Stotler and Deborah Dhayer 47,488 10.37
3077 Valley Road, Berkeley Springs, WV 25411
Mary Lou Trump 53,470 11.67
298 Grove Heights Road, 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, 2002.
(2) Includes 1,815 shares held jointly with spouse.
(3) Includes 14,164 shares held jointly with spouse and 3,000 shares held jointly with children.
(4) Includes 15,591 shares held jointly with spouse.
(5) Includes 2,770 shares held jointly with spouse.
(6) Includes 1,200 shares held by spouse and 100 shares held jointly with spouse.
(7) Includes 3,098 shares held by spouse and 1,860 shares held jointly with spouse.
(8) Includes 110 shares held by spouse and 964 shares held jointly with spouse.
(9) Includes 1,425 shares held in an Individual Retirement Account.
(10) Includes 842 shares held by spouse and 270 shares held as custodian for children.
(11) Includes 1,770 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, 2002, 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 $1,101,859, or
approximately 6.8% 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 $39,670 during 2002.
55
CNB, Charles S. Trump, IV and George I. McVey are members in a Limited
Liability Corporation, Morgan County Title Insurance Agency, LLC, which
was formed in February 2001. Morgan County Title Insurance Agency, LLC,
paid Trump and Trump management fees of $125,789. Charles S. Trump, IV
and George I. McVey are partners in Trump and Trump.
ITEM 14. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial
officer, based on their evaluation within 90 days prior to the date of
this report of the Company's disclosure controls and procedures (as
defined in Rule 13(a)-14(c) of the Securities Exchange Act of 1934),
have concluded that the Company's disclosure controls and procedures are
adequate and effective for purposes of Rule 13(a)-14(c) and timely,
alerting them to material information relating to the Company required
to be included in the Company's filings with the Securities and Exchange
Commission under the Securities Exchange Act of 1934.
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation with the exception
of the Company converting to the use of new software for its core
processing system on February 14, 2003. The conversion significantly
affected the Company's accounting systems as well as the loan and
deposit processing. The conversion resulted in changes to procedures and
controls, both manual and through electronic data processing. Throughout
the preparation for the conversion, the new procedures and controls were
reviewed and planned for and are in the implementation stage. Although,
the Company's procedures and controls have changed with the conversion,
management's conclusion that the controls are adequate and effective has
not changed.
Appearing immediately following the signatures of this annual
report on Form 10-K, certificates of the chief executive office and
chief financial officer appear. This form of certification is required
in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This
section of the annual report on Form 10-K is the information concerning
the controls evaluation referred to in the Section 302 certifications.
This information should be read in conjunction with those certifications
for a more complete understanding of the topics presented.
Disclosure controls are procedures that a company designs with
the objective of ensuring that information required to be disclosed in
their reports filed under the Securities Exchange Act of 1934 (such as
this Form 10-K), is recorded, processed, summarized and reported within
the time period specified under the SEC's rules and forms. Disclosure
controls are also designed with the objective of ensuring that such
information is accumulated and communicated to management, including the
CEO and CFO, as appropriate, to allow timely decisions regarding
required disclosure. Internal controls are procedures that a company
designs with the objective of providing reasonable assurance that
transactions are properly authorized, assets are safeguarded against
unauthorized or improper use and transactions are properly recorded and
reported all to permit the preparation of a company's financial
statements in conformity with generally accepted accounting principles.
The Company's management, including the CEO and CFO, does not
expect that our disclosure controls or internal controls will prevent
all error and fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have
been detected. These inherent limitations include the realities that
judgements and decision-making can be faulty, and that breakdowns can
occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of
any system of control also is based in part upon certain assumptions
about the likelihood of future events and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate.
Based upon the controls evaluation conducted by our CEO and CFO,
they have concluded that, subject to the limitations noted above, the
Company's disclosure controls are effective to ensure
56
that material information relating to CNB Financial Services, Inc. and
its subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being
prepared, and that our internal controls are effective to provide
reasonable assurance that our financial statements are fairly presented
in conformity with generally accepted accounting principles.
57
PART IV
ITEM 15. 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
2.2 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 Subsidiaries of CNB Financial Services, Inc. filed as an exhibit
hereto and incorporated herein by reference.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
There were no reports on Form 8-K filed in the fourth quarter of 2002.
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, 2003 /s/ Thomas F. Rokisky
- ----------------------- ------------------------------------------------
Thomas F. Rokisky, President/CEO
Date March 28, 2003 /s/ Rebecca S. Stotler
- ----------------------- ------------------------------------------------
Rebecca S. Stotler, Vice President/CFO
(Principal Financial and Accounting Officer)
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 2003.
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/ Margaret S. Bartles Director
- -----------------------------
MARGARET S. BARTLES
/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/ 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
60
CERTIFICATION
I, Thomas F. Rokisky, certify that:
1. I have reviewed this annual report on Form 10-K of CNB Financial
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial conditions, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 12a-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
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (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
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Thomas F. Rokisky
---------------------
Thomas F. Rokisky
Chief Executive Officer
61
CERTIFICATION
I, Rebecca S. Stotler, certify that:
7. I have reviewed this annual report on Form 10-K of CNB Financial
Services, Inc.;
8. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
9. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial conditions, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
10. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 12a-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
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
11. 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
12. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Rebecca S. Stotler
----------------------
Rebecca S. Stotler
Chief Financial Officer
62