Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM - TO --
Commission file number 0-30665
CNB Financial Services, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
United States of America 55 - 0773918
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 S. Washington Street, Berkeley Springs, WV 25411
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (304) 258 - 1520
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate 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,
2004), was approximately $30.9 million. This amount was based on the last
closing sale price of a share of common stock of $80.00 as of the same date.
Common Stock $1 par value, 458,048 shares outstanding as of August 3, 2004
CNB FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PAGE
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2004 (Unaudited)
and December 31, 2003 ................................................................. 3
Consolidated Statements of Income for the Three and Six Months ended June 30, 2004 and
2003 (Unaudited) ...................................................................... 4
Consolidated Statements of Changes in Shareholders' Equity for the Three and Six
Months Ended June 30, 2004 (Unaudited) and the Year Ended December 31, 2003 ........... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003 (Unaudited) .............................................. 6
Notes to Consolidated Financial Statements (Unaudited) .................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Three and Six Months ended June 30, 2004 .................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk .............................. 22
Item 4. Controls and Procedures ................................................................. 23
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ...................................................................... 25
Item 6. Exhibits and Reports on Form 8-K ........................................................ 25
SIGNATURES .................................................................. 27
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 indicates that the
disclosure of forward-looking information is desirable for investors and
encourages such disclosure by providing a safe harbor for forward-looking
statements that involve risk and uncertainty. All statements other than
statements of historical fact included in this Form 10-Q including statements in
Management's Discussion and Analysis of Financial Condition and Results of
Operations are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. In order to comply with the terms of the safe
harbor, CNB notes that a variety of factors could cause CNB's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in those forward-looking statements. These factors could
include the following possibilities: (1) competitive pressures among depository
and other financial institutions may increase significantly; (2) changes in the
interest rate environment may reduce margins; (3) general economic conditions
may become unfavorable resulting in reduced credit quality or demand for loans;
(4) legislative or regulatory changes could increase expenses; and (5)
competitors may have greater financial resources and develop products that
enable them to compete more successfully than CNB.
2
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
2004 2003
------------- -------------
(Unaudited)
ASSETS
Cash and due from banks $ 8,667,038 $ 7,641,280
Federal funds sold 43,000 3,000
Securities available for sale
(at approximate market value) 43,104,816 39,361,934
Federal Home Loan Bank stock, at cost 818,400 865,700
Federal Reserve Bank stock, at cost 129,650 129,650
Loans and lease receivable, net 158,263,963 144,665,208
Accrued interest receivable 924,378 838,659
Premises and equipment, net 5,606,557 5,288,633
Cash surrender value of life insurance 1,172,193 1,065,435
Deferred income taxes 817,548 352,405
Intangible assets 796,790 23,795
Other assets 491,244 820,052
------------- -------------
TOTAL ASSETS $ 220,835,577 $ 201,055,751
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 35,577,288 $ 29,485,097
Interest-bearing demand 39,404,984 34,042,317
Savings 29,843,028 24,360,890
Time, $100,000 and over 37,427,186 36,642,560
Other time 58,620,086 56,367,865
------------- -------------
$ 200,872,572 $ 180,898,729
Accrued interest payable 588,096 673,624
FHLB borrowings 700,000 1,200,000
Securities sold under repurchase agreement 213,080 -
Accrued expenses and other liabilities 1,673,752 1,714,457
------------- -------------
TOTAL LIABILITIES $ 204,047,500 $ 184,486,810
------------- -------------
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 13,438,612 12,460,556
Accumulated other comprehensive income (972,175) (213,255)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY $ 16,788,077 $ 16,568,941
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 220,835,577 $ 201,055,751
============= =============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
3
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans $ 2,429,297 $ 2,369,050 $ 4,813,495 $ 4,689,197
Interest and dividends on securities
U.S. Government agencies and
corporations 251,320 335,699 494,869 676,933
Mortgage backed securities 76,763 161,108 166,494 322,887
State and political subdivisions 58,116 14,613 103,094 27,725
Other 7,048 7,499 9,911 12,098
Interest on federal funds sold 4,821 5,454 7,606 12,981
------------ ------------ ------------ ------------
$ 2,827,365 $ 2,893,423 $ 5,595,469 $ 5,741,821
------------ ------------ ------------ ------------
INTEREST EXPENSE
Interest on interest bearing demand, $ 746,012 $ 1,073,340 $ 1,524,871 $ 2,289,608
savings and time deposits
Interest on federal funds purchased - 124 - 270
Interest on borrowings 1,257 - 4,157 -
------------ ------------ ------------ ------------
$ 747,269 $ 1,073,464 $ 1,529,028 $ 2,289,878
------------ ------------ ------------ ------------
NET INTEREST INCOME $ 2,080,096 $ 1,819,959 $ 4,066,441 $ 3,451,943
PROVISION FOR LOAN LOSSES 94,000 86,000 181,000 137,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 1,986,096 $ 1,733,959 $ 3,885,441 $ 3,314,943
------------ ------------ ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts $ 286,844 $ 247,305 $ 544,033 $ 438,094
Other service charges, commissions
and fees 101,373 95,547 190,620 187,430
Insurance commissions 33,711 26,363 66,713 50,634
Other operating income 13,455 26,542 30,986 45,391
Net gain on sale of securities 85,670 52,497 135,546 97,092
Income from title company 17,791 13,300 27,620 23,550
------------ ------------ ------------ ------------
$ 538,844 $ 461,554 $ 995,518 $ 842,191
------------ ------------ ------------ ------------
NONINTEREST EXPENSES
Salaries $ 620,503 $ 483,439 $ 1,216,421 $ 1,162,828
Employee benefits 221,328 216,920 439,207 429,140
Occupancy of premises 84,505 75,801 162,411 147,814
Furniture and equipment expense 210,956 184,898 413,010 302,435
Other operating expenses 532,431 509,738 948,319 912,237
------------ ------------ ------------ ------------
$ 1,669,723 $ 1,470,796 $ 3,179,368 $ 2,954,454
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES $ 855,217 $ 724,717 $ 1,701,591 $ 1,202,680
PROVISION FOR INCOME TAXES 267,391 283,873 544,896 446,484
------------ ------------ ------------ ------------
NET INCOME $ 587,826 $ 440,844 $ 1,156,695 $ 756,196
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 1.28 $ 0.96 $ 2.52 $ 1.65
============ ============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2002 $ 458,048 $ 3,863,592 $ 11,267,374 $ 681,004 $ 16,270,018
------------
Comprehensive income:
Net income for 2003 - - 1,742,840 - 1,742,840
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $382,304) - - - (623,758) (623,758)
Change in minimum pension liability
adjustment (net of tax of $165,792) (270,501) (270,501)
------------
Total Comprehensive Income - - - - 848,581
------------
Cash dividends ($1.20 per share) - - (549,658) - (549,658)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2003 $ 458,048 $ 3,863,592 $ 12,460,556 $ (213,255) $ 16,568,941
------------
Comprehensive income:
Net income for six months
ended June 30, 2004 - - 1,156,695 - 1,156,695
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $465,143) - - - (758,920) (758,920)
------------
Total Comprehensive Income - - - - 397,775
------------
Cash dividends ($0.39 per share) - - (178,639) - (178,639)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2004 (unaudited) $ 458,048 $ 3,863,592 $ 13,438,612 $ (972,175) $ 16,788,077
============ ============ ============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
5
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,156,695 $ 756,196
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 349,145 265,230
Provision for loan losses 181,000 137,000
Net (gain) on sale of securities (135,546) (97,092)
(Increase) decrease in accrued interest receivable (51,193) 90,334
(Increase) decrease in other assets 268,155 (344,733)
(Decrease) in accrued interest payable (85,528) (193,230)
(Increase) in cash surrender value on life insurance in excess
of premiums paid (47,936) (15,000)
Increase (decrease) in accrued expenses and other liabilities (47,286) 239,714
Amortization of deferred loan (fees) cost 7,491 14,333
Amortization (accretion) of premium and discount on investments 40,042 77,789
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,635,039 $ 930,541
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans $ (5,367,273) $ (4,418,738)
Proceeds from sales of securities 6,391,436 4,758,799
Proceeds from maturities, repayments and calls of securities 10,719,660 15,499,727
Purchases of securities (21,982,537) (20,571,948)
Purchases of Federal Home Loan Bank stock (416,400) (217,900)
Redemptions of Federal Home Loan Bank stock 463,700 -
Purchases of premises and equipment (272,490) (359,550)
Net (increase) decrease in federal funds sold (40,000) 1,905,666
Premiums paid on life insurance (58,822) (68,566)
Cash from acquired branch 5,020,017 -
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES $ (5,542,709) $ (3,472,510)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits $ 8,727,807 $ 3,482,332
Net (decrease) in time deposits (3,328,820) (150,905)
Net increase in securities sold under repurchase agreement 213,080 -
Net (decrease) in FHLB borrowings (500,000) -
Cash dividends paid (178,639) (178,639)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 4,933,428 $ 3,152,788
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 1,025,758 $ 610,819
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,641,280 7,832,735
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,667,038 $ 8,443,554
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 1,614,556 $ 2,482,837
Income taxes $ 554,009 $ 246,000
Net transfer to foreclosed real estate, held for sale from loans
receivable $ - $ -
The Notes to Consolidated Financial Statements are an integral part of these
statements.
6
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation and Contingencies
In the opinion of CNB Financial Services, Inc. ("CNB" or the
"Company"), the accompanying unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary for a fair presentation of CNB financial condition as of June
30, 2004 and the results of operations for the three and six months ended
June 30, 2004 and 2003 and cash flows for the six months ended June 30,
2004 and 2003.
The accompanying unaudited financial statements have been prepared
in accordance with the instructions for Form 10-Q. These financial
statements should be read in conjunction with the consolidated financial
statements and the notes included in CNB's Annual Report for the year
ended December 31, 2003.
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.
Note 2. Business Combinations
On June 11, 2004, Citizens National Bank purchased certain assets
and liabilities associated with the Hancock Branch of Fidelity Bank, a
subsidiary bank of Mercantile Bankshares Corporation (formerly Home
Federal). The results of the Hancock Branch's operations have been
included in the consolidated financial statements since that date.
The following table provides information concerning the allocations
of the purchase price and the fair values of the assets and liabilities
acquired of the Hancock branch:
AT JUNE 30, 2004
Assets acquired:
Loans $ 8,419,973
Accrued interest receivable 34,526
Fixed assets 324,166
Intangible asset-premium on deposits 780,616
Prepaid expenses 2,139
------------
Total assets acquired $ 9,561,420
------------
Liabilities assumed:
Deposit accounts $(14,574,856)
Accrued expenses (6,581)
------------
Total liabilities assumed $(14,581,437)
------------
Cash from acquired branch $ (5,020,017)
============
7
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2. Business Combinations (continued)
The aggregate purchase price was $5.0 million, including $253,000 of
cash and currency. Citizens National Bank recorded $781,000 of core
deposit intangible, which has a weighted-average useful life of 7 years.
Note 3. Securities
The amortized cost and estimated market value of debt securities at
June 30, 2004 and December 31, 2003 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:
JUNE 30, 2004 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
After 1 but within 5 years $ 3,443,706 $ 46,442 $ 3,191 $ 3,486,957 4.36%
After 5 but within 10 years 23,861,300 4,690 770,688 23,095,302 4.17
------------ ------------ ------------ ------------
$ 27,305,006 $ 51,132 $ 773,879 $ 26,582,259 4.19%
------------ ------------ ------------ ------------
States and political subdivisions
Within one year $ 315,000 $ - $ 12,352 $ 302,648 4.03%
After 1 but within 5 years 934,948 4,802 19,039 920,711 2.78
After 5 but within 10 years 6,914,396 11,629 210,116 6,715,909 3.60
------------ ------------ ------------ ------------
$ 8,164,344 $ 16,431 $ 241,507 $ 7,939,268 3.44%
------------ ------------ ------------ ------------
Mortgage backed securities $ 8,767,196 $ - $ 183,907 $ 8,583,289 4.36%
------------ ------------ ------------ ------------
Total securities available for sale $ 44,236,546 $ 67,563 $ 1,199,293 $ 43,104,816 4.37%
============ ============ ============ ============
Restricted:
Federal Reserve Bank stock $ 129,650 $ - $ - $ 129,650 6.00%
Federal Home Loan Bank stock 818,400 - - 818,400 1.34
------------ ------------ ------------ ------------
Total restricted investments $ 948,050 $ - $ - $ 948,050 1.98%
============ ============ ============ ============
8
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Securities (continued)
DECEMBER 31, 2003 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 $ 3,679,936 $ 56,310 $ - $ 3,736,246 4.41%
After 1 but within 5 years 4,015,285 182,346 21,560 4,176,071 4.76
After 5 but within 10 years 17,436,050 32,346 162,056 17,306,340 4.26
------------ ------------ ------------ ------------
$ 25,131,271 $ 271,002 $ 183,616 $ 25,218,657 4.36%
------------ ------------ ------------ ------------
States and political subdivisions
After 1 but within 5 years $ 468,556 $ 7,274 $ 193 $ 475,637 2.85%
After 5 but within 10 years 4,143,424 42,818 6,904 4,179,338 3.42
------------ ------------ ------------ ------------
$ 4,611,980 $ 50,092 $ 7,097 $ 4,654,975 3.07%
------------ ------------ ------------ ------------
Mortgage backed securities $ 9,526,351 $ 42,478 $ 80,527 $ 9,488,302 4.44%
------------ ------------ ------------ ------------
Total securities available for sale $ 39,269,602 $ 363,572 $ 271,240 $ 39,361,934 4.25%
============ ============ ============ ============
Restricted:
Federal Reserve Bank stock $ 129,650 $ - $ - $ 129,650 6.00%
Federal Home Loan Bank stock 865,700 - - 865,700 3.52
------------ ------------ ------------ ------------
Total restricted investments $ 995,350 $ - $ - $ 995,350 3.84%
============ ============ ============ ============
The carrying value of securities pledged to secure public deposits
and for other purposes as required or permitted by law totaled $15,232,407
at June 30, 2004 and $15,337,515 at December 31, 2003. Also, a security
with a carrying value of $240,548 is designated for customer repurchase
agreements at June 30, 2004.
Proceeds from sales of securities available for sale (excluding
maturities) during the six months ended June 30, 2004 and the year ended
December 31, 2003 were $6,391,436 and $13,044,280, respectively. Gross
gains (losses) of $135,546 and $(-0-) during the six months ended June 30,
2004 and $210,572 and $(69,122) for the year ended December 31, 2003 were
realized on the respective sales.
9
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Securities (continued)
The following table shows our investments' gross unrealized losses
and fair value, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position,
at June 30, 2004.
LESS THAN 12 MONTHS TOTAL
--------------------------- ---------------------------
FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES
- -------------------------------- ------------ ------------ ------------ ------------
U.S. government agencies
and corporations $ 23,576,624 $ 773,879 $ 23,576,624 $ 773,879
State and political subdivisions 5,899,415 241,507 5,899,415 241,507
Mortgage backed securities 8,583,289 183,907 8,583,289 183,907
------------ ------------ ------------ ------------
Total temporarily impaired
securities $ 38,059,328 $ 1,199,293 $ 38,059,328 $ 1,199,293
============ ============ ============ ============
Note 4. Loans and Leases Receivable
Major classifications of loans at June 30, 2004 and December 31,
2003, were as follows:
JUNE 30, DECEMBER 31,
2004 2003
-------------- --------------
Loans:
Real estate $ 109,799,888 $ 98,404,610
Commercial real estate 23,254,610 21,521,317
Consumer 16,957,155 16,852,449
Commercial 9,450,851 8,934,099
Overdrafts 97,631 135,958
-------------- --------------
$ 159,560,135 $ 145,848,433
Leases: 177,134 186,318
-------------- --------------
$ 159,737,269 $ 146,034,751
Net deferred loan fees, costs,
premiums and discounts 259,071 238,220
Allowance for loan losses (1,732,377) (1,607,763)
-------------- --------------
$ 158,263,963 $ 144,665,208
============== ==============
10
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. Loans and Leases Receivable (continued)
An analysis of the allowance for possible loan losses is as follows:
JUNE 30, DECEMBER 31,
---------------------------- ------------
2004 2003 2003
------------ ------------ ------------
Balance, Beginning $ 1,607,763 $ 1,484,448 $ 1,484,448
Provision charged to
operations 181,000 137,000 312,000
Recoveries 98,422 24,910 80,626
Loans charged off (154,808) (104,769) (269,311)
------------ ------------ ------------
Balance, Ending $ 1,732,377 $ 1,541,589 $ 1,607,763
============ ============ ============
Loans are placed in nonaccrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When interest accruals are
discontinued, interest credited to income is reversed. Nonaccrual loans
are restored to accrual status when all delinquent principal and interest
becomes current or the loan is considered secured and in the process of
collection. Certain loans that are determined to be sufficiently
collateralized may continue to accrue interest after reaching 90 days past
due. A summary of nonperforming loans is as follows:
JUNE 30, DECEMBER 31,
----------------------- ------------
2004 2003 2003
---------- ---------- ----------
Nonaccrual loans $ 749,987 $ 420,519 $ 348,660
Loans past due 90 days or more still accruing
interest - - 27,045
---------- ---------- ----------
Total $ 749,987 $ 420,519 $ 375,705
========== ========== ==========
Note 5. Time Deposits
At June 30, 2004, the scheduled maturities of time deposits are as
follows:
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- ------------
Within 3 months $ 3,772,417 $ 10,198,614
3 months thru 6 months 3,976,524 10,067,374
6 months thru 12 months 4,581,893 11,600,236
Over 12 months 25,096,352 64,181,048
------------ ------------
$ 37,427,186 $ 96,047,272
============ ============
11
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6. Federal Home Loan Bank Borrowings
JUNE 30, DECEMBER 31,
-------------------------- ------------
2004 2003 2003
--------- ------ ------------
Federal Home Loan Bank advances $ 700,000 $ - $ 1,200,000
Citizens National Bank is a member of the Federal Home Loan Bank
("FHLB") of Pittsburgh and, as such, can take advantage of the FHLB
program for overnight and term advances at published daily rates. Under
the terms of a blanket collateral agreement, advances from the FHLB are
collateralized by qualifying mortgages and US government agencies and
mortgage-backed securities. In addition, all of the Bank's stock in the
FHLB is pledged as collateral for such debt. Advances available under this
agreement are limited by available and qualifying collateral and the
amount of FHLB stock held by the borrower.
Note 7. Supplemental Retirement Plan
On January 2, 2004, the Bank entered into a nonqualified
supplemental retirement benefit agreement with the President which when
fully vested would pay the President or his beneficiary an amount of
$30,000 per year for 10 years beginning June 11, 2011, if he retires on or
after May 29, 2011. Termination of employment prior to that date other
than by reasons of death or disability will result in a reduced benefit.
The expense for the three and six months ended June 30, 2004 was $8,160
and $16,320, respectively.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
CNB Financial Services, Inc. ("CNB" or the "Company") was organized
under the laws of West Virginia in March 2000 at the direction of the
Board of Directors of Citizens National Bank (the "Bank") for the purpose
of becoming a financial services holding company. The Company's primary
function is to direct, plan and coordinate the business activities for the
Bank and its subsidiary. We refer to the Company and its subsidiary as
"CNB".
On August 31, 2000, the Bank, via merger, became a wholly-owned
subsidiary of the Company and the shareholders of the Bank became
shareholders of the Company. Each Bank shareholder received two shares of
the Company stock for each share of the Bank's common stock. The merger
was accounted for as a pooling of interests.
The Bank was organized on June 20, 1934, and has operated in
Berkeley Springs in Morgan County, West Virginia, as a national banking
association continuously since that time. The Bank is a full-service
commercial bank conducting general banking and trust activities through
four full-service offices and three automated teller machines located in
Morgan and Berkeley Counties, West Virginia. The Bank formed CNB Insurance
Services, Inc., a wholly owned subsidiary, which is a property and
casualty insurance agency selling primarily personal lines of insurance.
The Bank exercised an option in December 2003 to purchase a parcel
of land in Falling Waters, Berkeley County, West Virginia for the future
site of an additional full-service branch. The expected building
completion date is the first quarter of 2005.
On January 26, 2004, CNB entered into an agreement to purchase
certain assets and liabilities associated with the Hancock Branch of
Fidelity Bank, a subsidiary bank of Mercantile Bankshares Corporation
(formerly Home Federal). The purchase, which took place on June 11, 2004,
increased the assets and liabilities of CNB by $14.6 million. CNB assumed
responsibility for all the deposit services including checking, savings
and certificate of deposits. Additionally, CNB acquired loans, equipment
and leasehold improvements and assumed the lease for the real estate
located at 333 East Main Street, Hancock, Maryland.
The following discussion and analysis presents the significant
changes in financial condition and results of operations of CNB for the
three and six months ended June 30, 2004 and 2003. This discussion may
include forward-looking statements based upon management's expectations.
Actual results may differ. We have rounded amounts and percentages used in
this discussion and have based all average balances on daily averages.
CRITICAL ACCOUNTING POLICIES
CNB has established various accounting policies which govern the
application of accounting principles generally accepted in the United
States of America in the preparation and presentation of CNB's
consolidated financial statements. The significant accounting policies of
CNB are described in "Item 1, Critical Accounting Policies" and Note 1:
Summary of Significant Accounting Policies of the Consolidated Financial
Statements on Form 10-K as of December 31, 2003, and along with the
disclosures presented in other financial statement notes, provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. Certain
accounting policies involve significant judgments, assumptions and
estimates by management that have a material impact on the carrying value
of certain assets and liabilities, which management considers to be
critical accounting policies. The judgments, assumptions and estimates
used by management are based on historical experience, knowledge of the
accounts and other factors, which are believed to be reasonable under the
circumstances. Because of the nature of the judgment and assumptions made
by management, actual results could differ from these judgments and
estimates, which could have a material impact on the carrying values of
assets and liabilities and the results of operations of the Company.
13
CNB views the determination of the allowance for loan losses as a
critical accounting policy that requires the most significant judgments,
assumptions and estimates used in the preparation of its consolidated
financial statements. For a more detailed discussion on the allowance for
loan losses, see Nonperforming Loans and Allowance For Loan Losses in the
Management's Discussion and Analysis and Allowance for Loan Losses in Note
1: Summary of Significant Accounting Policies and Note 4: Loans and Leases
Receivable in the Notes to Consolidated Financial Statements in the Form
10-K for December 31, 2003.
EARNINGS SUMMARY
Net income for the three months ended June 30, 2004 was $588,000 or
$1.28 per share compared to $441,000 or $0.96 per share for the same
period in 2003. Annualized return on average assets and average equity
were 1.1% and 13.3% respectively, for the three months ended June 30,
2004, compared with .9% and 10.6%, respectively, for the three months
ended June 30, 2003.
Net income for the six months ended June 30, 2004 was $1.2 million
or $2.52 per share compared to $756,000 or $1.65 per share for the same
period in 2003. Annualized return on average assets and average equity
were 1.1% and 13.4% respectively, for the six months ended June 30, 2004,
compared with .8% and 9.2%, respectively, for the six months ended June
30, 2003.
Net income for the second half of 2004 is expected to decrease
compared to net income for the first half of 2004 due to the additional
expenses related to the opening of the new branch facility and the slowing
of the maturities of the higher interest bearing 36 month Certificate of
Deposits causing interest expense to level out. Although, net income
increased during the first six months of 2004 compared to the first six
months of 2003, the additional expenses relating to the opening of the
branch facility will be incurred in the second half of the year. The
steady loan growth is expected to continue through 2004 although not at
the level experienced in the recent past. As a result of lower interest
rates and slower loan growth, interest income on loans will be impacted.
NET INTEREST INCOME
Net interest income represents the primary component of CNB's
earnings. It is the difference between interest and fee income related to
earning assets and interest expense incurred to carry interest-bearing
liabilities. Changes in the volume and mix of interest earning assets and
interest bearing liabilities, as well as changing interest rates, impact
net interest income. To manage these changes, their impact on net interest
income and the risk associated with them, CNB utilizes an ongoing
asset/liability management program. This program includes analysis of the
difference between rate sensitive assets and rate sensitive liabilities,
earnings sensitivity to rate changes, and source and use of funds. A
discussion of net interest income and the factors impacting it is
presented below.
Net interest income for the three months ended June 30, 2004
increased by $260,000 or 14.3% over the same period in 2003. Interest
income for the three months ended June 30, 2004 decreased by $66,000 or
2.3% compared to the same period in 2003, while interest expense decreased
by $326,000 or 30.4% during the three months ended June 30, 2004, as
compared to the same period in the prior year.
Net interest income for the six months ended June 30, 2004 increased
by $614,000 or 17.8% over the same period in 2003. Interest income for the
six months ended June 30, 2004 decreased by $146,000 or 2.6% compared to
the same period in 2003, while interest expense decreased by $761,000 or
33.2% during the six months ended June 30, 2004, as compared to the same
period in the prior year.
Increased net interest income for the three and six month period is
attributable to a higher level of net interest earning assets offset by a
decrease in the rates earned thereon. The Bank continues to experience a
shift in the asset mix from lower yielding overnight federal funds and
investment securities to higher yielding loans due to the continued high
loan demand. The decrease in the rates earned on interest earning assets
is due to the current economic conditions.
14
The Bank has continued to experience steady deposit growth. Although the
average balance on interest bearing liabilities increased, total interest
expense decreased due to a decrease in the average rates paid on all
interest bearing liabilities. The Bank's higher loan demand and steady
deposit growth has resulted in an increased loan to deposit ratio.
During the second quarter of 2004 compared to the same period in
2003, average net interest earning assets increased $11.6 million or 6.4%
and average net interest bearing liabilities increased $6.3 million or
4.3% resulting in increased net interest income. CNB experienced a 40
basis point increase in the ratio of net interest income to average
interest earning assets. The 96 basis point decrease in rates paid on
average interest bearing liabilities offset by a 42 basis point decrease
in rates earned on average interest earning assets contributed to the
increase in the net interest margin. The acquisition of the Hancock branch
did not have a significant impact on the net interest margin due to the
transaction occurring only 19 days prior to quarter end.
During the first six months of 2004 compared to the same period in
2003, average net interest earning assets increased $9.1 million or 5.0%
and average net interest bearing liabilities increased $5.7 million or
3.9% resulting in increased net interest income. CNB experienced a 55
basis point increase in the ratio of net interest income to average
interest earning assets. The 110 basis point decrease in rates paid on
average interest bearing liabilities offset by a 38 basis point decrease
in rates earned on average interest earning assets contributed to the
increase in the net interest margin.
See Table 1 and Table 2 - Distribution of Assets, Liabilities, and
Shareholders' Equity; Interest Rates and Interest Differential.
The net interest margin is impacted by the change in the spread
between yields on earning assets and rates paid on interest bearing
liabilities.
15
INTEREST RATES AND INTEREST DIFFERENTIAL
JUNE 30, 2004 JUNE 30, 2003
------------------------------------- ------------------------------------
QTR QTR
AVERAGE QTR YIELD/ AVERAGE QTR YIELD/
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
--------- -------- ------- --------- -------- -------
(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold $ 1,585 $ 5 0.91% $ 1,796 $ 5 1.15%
Securities:
Taxable 32,809 335 4.08 45,255 508 4.49
Tax-exempt(1) 7,040 58 4.99 1,164 11 5.73
Loans (net of unearned interest)
(2)(5)(6) 151,485 2,350 6.21 133,131 2,251 6.76
--------- ------- ---- --------- -------- ----
Total interest earning assets(1) $ 192,919 $ 2,748 5.70% $ 181,346 $ 2,775 6.12%
--------- ------- ---- --------- -------- ----
Nonearning assets:
Cash and due from banks $ 8,249 $ 6,401
Bank premises and equipment, net 5,348 4,724
Other assets 2,953 2,951
Allowance for loan losses (1,705) (1,531)
--------- ---------
Total assets $ 207,764 $ 193,891
========= =========
Interest bearing liabilities:
Savings deposits $ 26,961 $ 34 0.50% $ 22,819 $ 28 0.49%
Time deposits 92,301 624 2.70 94,536 961 4.07
NOW accounts 25,910 70 1.08 24,574 71 1.16
Money market accounts 9,088 18 0.79 6,485 13 0.80
Borrowings 475 1 0.84 - -
--------- ------- ---- --------- -------- ----
Total interest bearing
liabilities $ 154,735 $ 747 1.93% $ 148,414 $ 1,073 2.89%
--------- ------- ---- --------- -------- ----
Noninterest bearing liabilities:
Demand deposits $ 33,057 $ 26,538
Other liabilities 2,302 2,357
Shareholders' equity 17,670 16,582
--------- ---------
Total liabilities and
shareholders' equity $ 207,764 $ 193,891
========= =========
------- --------
Net interest income (1) $ 2,001 $ 1,702
======= ========
Net interest spread (3) 3.77% 3.23%
==== ====
Net interest income to average
interest earning assets (1) 4.15% 3.75%
==== ====
(1) Yields are expressed on a tax equivalent basis using a 34% tax rate.
(2) For the purpose of these computations, nonaccruing loans are included in the
amounts of average loans outstanding.
(3) Net interest spread is the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(4) Yields/Rates are expressed on annualized basis.
(5) Interest income on loans excludes fees of $79,000 in 2004 and $118,000 in
2003.
(6) Interest income on loans includes fees of $29,257 in 2004 and $38,445 in
2003 from the Business Manager Program, student loans and lease receivables.
16
INTEREST RATES AND INTEREST DIFFERENTIAL
JUNE 30, 2004 JUNE 30, 2003
------------------------------------- ------------------------------------
YTD YTD
AVERAGE YTD YIELD/ AVERAGE YTD YIELD/
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
--------- -------- ------- --------- -------- -------
(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold $ 1,421 $ 8 0.91% $ 1,950 $ 13 1.15%
Securities:
Taxable 32,206 671 4.17 45,513 1,019 4.48
Tax-exempt(1) 6,200 103 5.03 1,036 20 5.85
Loans (net of unearned interest)
(2)(5)(6) 149,953 4,672 6.23 132,231 4,483 6.78
--------- ------- ---- --------- -------- ----
Total interest earning assets(1) $ 189,780 $ 5,454 5.75% $ 180,730 $ 5,535 6.13%
--------- ------- ---- --------- -------- ----
Nonearning assets:
Cash and due from banks $ 8,629 $ 6,443
Bank premises and equipment, net 5,306 4,761
Other assets 2,985 3,102
Allowance for loan losses (1,684) (1,513)
--------- ---------
Total assets $ 205,016 $ 193,523
========= =========
Interest bearing liabilities:
Savings deposits $ 26,079 $ 65 0.50% $ 22,274 $ 55 0.49%
Time deposits 92,375 1,285 2.78 95,121 2,070 4.35
NOW accounts 25,600 139 1.09 24,396 141 1.16
Money market accounts 9,085 36 0.79 6,322 24 0.76
Borrowings 684 4 1.17 - -
--------- ------- ---- --------- -------- ----
Total interest bearing
liabilities $ 153,823 $ 1,529 1.99% $ 148,113 $ 2,290 3.09%
--------- ------- ---- --------- -------- ----
Noninterest bearing liabilities:
Demand deposits $ 31,608 $ 26,508
Other liabilities 2,295 2,369
Shareholders' equity 17,290 16,533
--------- ---------
Total liabilities and
shareholders' equity $ 205,016 $ 193,523
========= =========
------- --------
Net interest income (1) $ 3,925 $ 3,245
======= ========
Net interest spread (3) 3.76% 3.04%
==== ====
Net interest income to average
interest earning assets (1) 4.14% 3.59%
==== ====
(1) Yields are expressed on a tax equivalent basis using a 34% tax rate.
(2) For the purpose of these computations, nonaccruing loans are included in the
amounts of average loans outstanding.
(3) Net interest spread is the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(4) Yields/Rates are expressed on annualized basis.
(5) Interest income on loans excludes fees of $141,000 in 2004 and $207,000 in
2003.
(6) Interest income on loans includes fees of $65,688 in 2004 and $69,338 in
2003 from the Business Manager Program, student loans and lease receivables.
17
PROVISION FOR LOAN LOSSES
The amount charged to provision for loan losses is based on
management's evaluation of the loan portfolio. Management determines the
adequacy of the allowance for loan losses, based on past loan loss
experience, current economic conditions and composition of the loan
portfolio. The allowance for loan losses is the best estimate of
management of the probable losses which have been incurred as of a balance
sheet date.
The provision for loan losses is a charge to earnings which is made
to maintain the allowance for loan losses at a sufficient level. The
provision for loan losses for the three months ended June 30, 2004, and
June 30, 2003, amounted to $94,000 and $86,000, respectively. The
provision for loan losses for the six months ended June 30, 2004, and June
30, 2003, amounted to $181,000 and $137,000, respectively. Loan quality
remains stable and past dues are minimal while nonaccruals have shown an
increase. Nonaccruals have increased primarily due to one borrower with an
outstanding loan balance of $308,000. Management believes this loan is
sufficiently collateralized and the Bank will not incur any loss.
Management believes the allowance for loan losses is adequate and is not
aware of any information relating to the loan portfolio which it expects
will materially impact future operating results, liquidity or capital
resources. In addition, federal regulators may require additional reserves
as a result of their examination of the bank. See "Nonperforming Assets
and Allowance for Loan Losses" for further discussion.
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 2004
increased $77,000 or 16.8% to $539,000 from $462,000 in the second quarter
of 2003. Noninterest income for the six months ended June 30, 2004
increased $153,000 or 18.2% to $995,000 from $842,000 during the first six
months of 2003. The increase in noninterest income is attributable, in
general, to an increase in service charge fees effective October 1, 2003
the bank assesses its customers. Specifically, noninterest income
increased due to fees generated from the Bounce Protection program,
insurance commissions, gain on sale of investment securities and offset by
a decrease in gain on sale of loans. This increase for the first six
months of 2004 was offset by a decrease in overdraft fees and trust fees.
The fees related to the Bounce Protection program have a direct
correlation to the increased deposit base of the bank. Insurance
commissions increased due to a large group health account written in the
third quarter of 2003 and general rate increases from the insurance
companies.
NONINTEREST EXPENSES
Noninterest expenses for the three months ended June 30, 2004,
increased $199,000 or 13.5% and for the six months ended June 30, 2004,
increased $225,000 or 7.6%. Salaries increased due to normal merit
increases, salaries for employees of the acquired Hancock branch and
additional payroll expenses related to the conversion of the Hancock
branch. The increase in furniture and equipment expense was due to an
increase in depreciation expense relating to the new computer equipment,
software and peripherals associated with the 2003 upgrade of the Bank's
technology systems. Another factor relating to the increase in furniture
and equipment expense was an increase in the cost and number of equipment
maintenance contracts the Bank entered into primarily due to the 2003
technology system upgrade. The increase in other operating expenses was
due to an increase in stationery, supplies & printing, telephone and
advertising expense offset by a decrease in postage, data processing
expense and bounce protection expense. The increase in stationery,
supplies and printing and advertising are a direct result of the Bank's
acquisition of the full service branch of Fidelity Bank in Hancock,
Maryland. Bounce protection expense decreased due to the expiration of the
Bank's contract with Pinnacle Financial Strategies in February 2004.
18
INCOME TAXES
The Bank's provision for income taxes decreased $16,000 or 5.8% to
$267,000 for the three months ended June 30, 2004 and increased $98,000 or
22.0% to $545,000 for the six months ended June 30, 2004. The effective
tax rates for the second quarter of 2004 and 2003 were 31.3% and 39.2%,
respectively and for the first six months of 2004 and 2003 were 32.0% and
37.1%, 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.
FINANCIAL CONDITION
The Bank's total assets increased during the second quarter ended
June 30, 2004 due to the acquisition of the Hancock branch. In particular,
$8.4 million in loans, $324,000 in premises and equipment were acquired
along with $781,000 in core deposit intangible assets. The total
liabilities which were assumed were $14.6 million in deposits and $6,600
in other accrued expenses.
The Bank's assets also increased due primarily to a $1.0 million
increase in cash and due from banks, $3.7 million increase in investment
securities, $5.2 million increase in loans due to normal business growth.
The Bank's liabilities also increased due primarily to $5.4 million in
deposit growth and an increase of $213,000 in securities sold under
repurchase agreements offset by a decrease of $500,000 in borrowings.
Shareholders' equity increased $219,000 to $16.8 million at June 30, 2004,
primarily due to net income of $1.2 million offset by the semi-annual cash
dividend of $179,000 and a $759,000 decrease in accumulated other
comprehensive income. The components of accumulated other comprehensive
income at June 30, 2004, were unrealized gains and losses on available for
sale securities, net of deferred income taxes and minimum pension
liability adjustment, 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 unless the securities are actually sold.
LOAN PORTFOLIO
At June 30, 2004, total loans increased $13.6 million or 9.4% to
$158.3 million from $144.7 million at December 31, 2003. This increase is
mainly a result of the purchase of $8.4 million in loans from the Hancock
branch acquisition. Also, contributing to the growth is an increase in
real estate lending with an increased emphasis in commercial real estate
and land development. The Bank feels additional growth in all lending
areas is possible during the remainder of 2004.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of nonaccrual loans, loans which are
past due 90 days or more and still accruing interest, restructured loans
and other real estate owned. The following table summarized the Bank's
nonperforming assets as of the periods shown:
19
JUNE 30, DECEMBER 31,
------------------------ ------------
2004 2003 2003
---------- ---------- ------------
Nonaccrual loans $ 749,987 $ 420,519 $ 348,660
Loans past due 90 days or more
still accruing interest - - 27,045
---------- ---------- ----------
Total nonperforming loans $ 749,987 $ 420,519 $ 375,705
---------- ---------- ----------
Other real estate owned $ - $ 1,800 $ -
---------- ---------- ----------
Total nonperforming assets $ 749,987 $ 422,319 $ 375,705
========== ========== ==========
Nonperforming loans/Total loans 0.47% 0.32% 0.26%
Nonperforming assets/Total assets 0.34% 0.22% 0.19%
Allowance for loan losses/Total loans 1.09% 1.16% 1.11%
As of June 30, 2004, the Bank has no loans which management
considers to be impaired. Management is aware of four borrowers who have
exhibited weaknesses. Their loans have aggregate uninsured balances of
$1.3 million. A specific allowance of $80,000 related to these loans has
been established as part of the allowance for loan losses. The loans are
collateralized and management anticipates any additional potential loss
would be minimal.
The allowance for loan losses is the best estimate by management of
the probable losses which have been incurred as of a balance sheet date.
Management makes this determination quarterly by its analysis of overall
loan quality, changes in the mix and size of the loan portfolio, previous
loss experience, general economic conditions, information about specific
borrowers and other factors. The Bank's methodology for determining the
allowance for loan losses established both an allocated and an unallocated
component. The allocated portion of the allowance represents the results
of analyses of individual loans that the Bank monitors for potential
credit problems and pools of loans within the portfolio. Management bases
the allocated portion of the allowance for loans principally on current
loan risk ratings, historical loan loss rates adjusted to reflect current
conditions, as well as analyses of other factors that may have affected
the collectibility of loans in the portfolio. The Bank analyzes all
commercial loans it is monitoring as potential credit problems to
determine whether those loans are impaired, with impairment measured by
reference to the borrowers' collateral values and cash flows.
The unallocated portion of the allowance for loan losses represents
the results of analyses that measure probable losses inherent in the
portfolio that are not adequately captured in the allocated allowance
analyses. These analyses include consideration of unidentified losses
inherent in the portfolio resulting from changing underwriting criteria,
changes in the types and mix of loans originated, industry concentrations
and evaluations, allowance levels relative to selected overall credit
criteria and other economic indicators used to estimate probable incurred
losses. At June 30, 2004, the allowance for loans losses totaled $1.7
million compared to $1.6 million at December 31, 2003. The allowance for
loans losses as a percentage of loans was 1.1% as of June 30, 2004 and
December 31, 2003.
20
An analysis of the allowance for loan losses is summarized below:
In thousands JUNE 30, DECEMBER 31,
----------------------- --------------------------
2004 2003
----------------------- --------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------- ------- -------------
Commercial, financial $ 817 21% $ 782 21%
and agriculture
Real estate - residential 467 68 401 67
mortgage
Installment and other 315 11 274 12
Unallocated 133 N/A 151 N/A
------- --- ------- ---
Total $ 1,732 100% $ 1,608 100%
======= === ======= ===
DEPOSITS
The Bank's deposits increased $20.0 million or 11.0% during the six
months ended June 30, 2004. This increase is mainly a result of the
assumption of $14.6 million in deposits from the Hancock acquisition. The
breakdown of the assumed deposits are $8.2 million in demand and savings
and $6.4 million in certificates of deposit. The Bank continues to
experience a slight change in the deposit account mix through the first
six months of 2004. Steady growth continues in regular demand,
interest-bearing demand and savings deposits due to the continued customer
growth in the Bank's other branches in Morgan and Berkeley Counties, West
Virginia. The slight change in the deposit account mix is attributable to
the continued maturity of rate sensitive certificate of deposits and
customers temporarily placing their money in demand or savings accounts.
The Bank experienced an overall increase of $3.1 million in other time
deposits and rate sensitive jumbo certificate of deposits during the first
six months of 2004. This increase is attributable to the $6.4 million in
certificates of deposit acquired from the Hancock branch acquisition
offset by a decrease of $3.3 million. This decrease is primarily due to
the maturity of the 36-month Ultimate Certificate of Deposit. Deposits, in
general, have experienced an increase due to customer's concerns with the
weak economy and stock market.
CAPITAL RESOURCES
Shareholders' equity increased $219,000 or 1.3% during the first six
months of 2004 due to $1.2 million in net income offset by the semi-annual
cash dividend of $179,000 and a $759,000 decrease in accumulated other
comprehensive income. The Bank is subject to regulations of the Office of
the Comptroller of the Currency that impose certain minimum regulatory
capital requirements. Under each measure, the Bank was substantially in
excess of the minimum regulatory requirements, and, by definition was
"well capitalized" at June 30, 2004. The following table summarized, as of
June 30, 2004, the Bank's capital ratios.
Components Actual Required
of Capital Ratio Ratio
---------- ----- --------
Tier 1 Capital $ 17,699 8.5% 4.0%
Total Risk Based Capital $ 19,401 14.3% 8.0%
RECENTLY ISSUED ACCOUNTING STANDARDS
On March 9, 2004, the SEC staff issued Accounting Bulletin No. 105,
"Application of Accounting Principles to Loan Commitments", which provides
guidance regarding mortgage loan interest rate lock commitments related to
loans held for sale as written options, effective for commitments entered
into after March 31, 2004. This Statement had no material effect on the
Company's consolidated financial statements.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to economic loss that arises from
changes in the values of certain financial instruments. The types of
market risk exposures generally faced by banking entities include interest
rate risk, equity market price risk, foreign currency risk and commodity
price risk. Due to the nature of its operations, only equity market price
risk and interest rate risk are significant to the Bank.
The objective of the Bank's liquidity management program is to
ensure the continuous availability of funds to meet the withdrawal demands
of depositors and the credit needs of borrowers. The basis of the Bank's
liquidity comes from the stability of its core deposits. Liquidity is also
available through the available for sale securities portfolio and
short-term funds such as federal funds sold which totaled $43.1 million,
or 19.5% of total assets at June 30, 2004. In addition, liquidity may be
generated through loan repayments and over $3.0 million of available
borrowing arrangements with correspondent banks. At June 30, 2004,
management considered the Bank's ability to satisfy its anticipated
liquidity needs over the next twelve months. Management believes that the
Bank is well positioned and has ample liquidity to satisfy these needs.
The Bank generated $1.6 million of cash from operations in the first six
months of 2004, which compares to $931,000 during the same time period in
2003. Additional cash of $4.9 million was generated through net financing
activities through June 30, 2004, which compares to $3.2 million for the
first six months of 2003. These proceeds along with proceeds from the
sales and calls of investment securities were used to fund loans and
purchase securities during each year. Net cash used in investing
activities totaled $5.5 million during the first six months of 2004
compared to $3.5 million during the same time period in 2003. 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 the Bank measures a range of rate
scenarios and patterns of rate movements that are reasonably possible. The
Bank measures the impact that 200 basis point changes in rates would have
on earnings over the next twelve months.
In analyzing interest rate sensitivity for policy measurement, the
Bank compares its forecasted earnings in both a "high rate" and "low rate"
scenario to a base-line scenario. The Bank's base-line scenario is its
estimated most likely path for future short-term interest rates over the
next 12 months. The "high rate" and "low rate" scenarios assumes a 100 and
200 basis point increases or decreases in the prime rate from the
beginning point of the base-line scenario over the most current 12-month
period. The Bank's policy limit for the maximum negative impact on
earnings resulting from "high rate" or "low rate" scenarios is 10 percent.
The policy measurement period is 12 months in length, beginning with the
first month of the forecast.
22
The Bank's base-line scenario holds the prime rate constant at 4.25
percent through June 2005. Based on the July 2004 outlook, if interest
rates increased or decreased by 200 basis points, the model indicates that
net interest income during the policy measurement period would be affected
by less than 10 percent, in both an increasing or decreasing interest rate
scenario.
CONTRACTUAL OBLIGATIONS
During the quarter and six months ended June 30, 2004, there were no
material changes outside of the normal course of business to the
quantitative and qualitative disclosures about contractual obligations
previously reported on Form 10-K for the year ended December 31, 2003. See
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Contractual Obligations" in the Form 10-K for
December 31, 2003 for a detailed discussion.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer,
based on their evaluation as of the end of the reporting period of this
quarterly 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 have been no changes in the Company's internal controls over
financial reporting in the fiscal quarter ended June 30, 2004, that have
materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
As exhibits to this quarterly report on Form 10-Q, certificates of
the chief executive officer 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 quarterly report on Form
10-Q 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-Q), 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 that 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 judgments 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
23
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 that material
information relating to CNB Financial Services and its subsidiaries is
made known to management, including the CEO and CFO, particularly during
that 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.
24
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None; however, CNB is involved in various legal proceedings occurring in
the ordinary course of business. There are no material legal proceedings
to which CNB or its subsidiary is a part, or to which any of their
property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
a.) The annual meeting of stockholders of CNB Financial Services, Inc. was
held April 7, 2004.
b.) Proxies for the annual meeting were solicited pursuant to Regulation 14A
under the Securities and Exchange Act of 1934. There was no solicitation
in opposition to management's nominees as listed in the proxy statement,
and all such nominees were reelected.
c.) (1) Election of Directors
Elected to serve as directors until the 2005 annual meeting of
stockholders:
Without
For Authority
Kenneth W. Apple 295,288 470
J. Robert Ayers 295,288 470
John E. Barker 295,288 470
Margaret S. Bartles 295,288 470
Jay E. Dick 295,288 470
Herbert L. Eppinger 295,288 470
Robert L. Hawvermale 295,288 470
J. Philip Kesecker 295,288 470
Jerald McGraw 295,288 470
Martha H. Quarantillo 295,288 470
Thomas F. Rokisky 295,288 470
Charles S. Trump, IV 295,288 470
Arlie R. Yost 295,288 470
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits:
31.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
25
b.) Reports on Form 8-K:
Date of Report Item Description
- -------------- --------- ------------------------------------
May 17, 2004 7, 9 & 12 The Company issued a press release
that announced operating results of
its first three months ended March 31,
2004.
June 14, 2004 5 The Company issued a press release
that announced the opening of its
newly acquired Hancock, Maryland
banking office.
26
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CNB Financial Services, Inc.
(Registrant)
Date August 3, 2004 /s/ Thomas F. Rokisky, President/CEO
-------------------------------------
Date August 3, 2004 /s/ Rebecca S. Stotler, Vice President/CFO
------------------------------------------
27