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ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-30665
CNB Financial Services, Inc.
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(Exact name of registrant as specified in its charter)
United States of America 55-0773918
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 S. Washington Street, Berkeley Springs, WV 25411
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, ( 304 ) 258 - 1520
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Securities to be registered under Section 12(b) of the Act:
NONE
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Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 24, 2002 was approximately $32,063,360.
As of March 24, 2002, 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
PAGE
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PART I
Item 1. Business....................................................................................3
Item 2. Properties..................................................................................6
Item 3. Legal Proceedings...........................................................................6
Item 4. Submission of Matters to a Vote of Security Holders.........................................6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................7
Item 6. Selected Financial Data.....................................................................8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................21
Item 8. Financial Statements and Supplementary Data................................................24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures......51
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................51
Item 11. Executive Compensation.....................................................................53
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................53
Item 13. Certain Relationships and Related Transactions.............................................54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................55
SIGNATURES ...........................................................................................56
FORWARD LOOKING STATEMENTS
In our Annual Report and Form 10-K, we may include certain forward
looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products and
similar matters. The words or phrases "are expected to", "is anticipated",
"project", "will continue", "will likely result", "plans to" or similar
expressions are intended to "identify" forward looking statements. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for forward
looking statements. In order to comply with the terms of the safe harbor, we
must inform you that a variety of factors could cause CNB Financial Services,
Inc.'s actual results and experiences to differ materially from the anticipated
results or other expectations expressed in these forward looking statements. Our
ability to predict the results or the effect of future plans and strategies is
inherently uncertain. The risks and uncertainties that may affect the
operations, performance, development and results of CNB Financial Services,
Inc.'s business include:
- - 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
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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, 2001 and 2000, CNB employed 80 and 70 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 exercised an option to purchase a parcel of land in
Martinsburg, Berkeley County, West Virginia for the future site of a
full-service branch. The Bank expects the branch to open in the first quarter of
2002. The Bank opened a temporary banking facility near the location in August
2001. 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.
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.
3
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 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).
4
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, 2001, CNB qualified as a well-capitalized institution
based on the ratios and guidelines noted above. A bank's capital category,
however, is determined solely for the purpose of applying the prompt corrective
action rules and may not constitute an accurate representation of that bank's
overall financial condition or prospects.
The appropriate Federal banking agency may, under certain
circumstances, reclassify a well-capitalized insured depository institution as
adequately capitalized. The appropriate agency is also permitted to require an
adequately capitalized or undercapitalized institution to comply with the
supervisory provisions as if the institutions were in the next lower category
(but not treat a significantly undercapitalized institution as critically
undercapitalized) based on supervisory information other than the capital levels
of the institution.
The statute provides that an institution may be reclassified if the
appropriate Federal banking agency determines (after notice and opportunity for
hearing) that the institution is in an unsafe and unsound condition or deems the
institution to be engaging in an unsafe or unsound practice.
FDICIA generally prohibits a depository institution from making any
capital distributions (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan. The Federal
banking agencies may not accept a capital restoration plan without determining,
among other things, that the plan is based on realistic assumptions and is
likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of (i) an amount equal to 5% of the
depository institution's total assets at the time it became undercapitalized,
and (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards applicable with
respect to such institution as of the time it fails to comply with the plan. If
a depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of
receiver or conservator.
FDICIA also contains a variety of other provisions that may affect the
operation of CNB, including reporting requirements, regulatory standards for
real estate lending, "truth in savings" provisions, and the requirement that a
depository institution give 90 days' prior notice to customers and regulatory
authorities before closing any branch.
5
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, 2001, 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 23 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 an additional full service branch located at 2646 Hedgesville Road,
Martinsburg, West Virginia. In August 2001, the bank purchased land and is the
process of constructing a branch bank at 14994 Apple Harvest Drive, Martinsburg,
West Virginia. In August 2001, the bank opened a temporary banking facility in
Martinsburg, West Virginia near the location of the permanent branch bank. Each
location provides ATM services, in addition to traditional lobby and drive-in
services. During 1998, the bank purchased two cash machines and placed them at
Cacapon State Park Lodge and the Woods Resort. In November of 1998, the bank
acquired CNB Insurance Services, Inc. which is operated out of the main office
in Berkeley Springs. The main office and branches are owned free and clear of
any indebtedness. The net book value of the bank's premises and equipment as of
December 31, 2001 is $4.3 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 2001.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The price of CNB's common stock ranged from $66.75 to $135.00 in 2001
and from $75.00 to $285.00 in 2000. The prices listed below represent the high
and low market prices for stock trades reported during each quarter.
PER SHARE
HIGH LOW DIVIDEND
------------ ------------ ------------
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
2000
First quarter $ 75.00 $ 75.00
Second quarter $ 75.00 $ 75.00 $ 0.36
Third quarter $ 150.00 $ 150.00
Fourth quarter $ 285.00 $ 85.00 $ 0.66
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 8, 2002, the number of record
holders was 588.
7
ITEM 6. SELECTED FINANCIAL DATA
TABLE 1. FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
2001 2000 1999 1998 1997
-------------- --------------- --------------- --------------- ---------------
In thousands except for per share data
AT YEAR-END
Total assets $ 171,541 $ 149,982 $ 138,648 $ 129,600 $ 115,402
Securities available for sale 49,668 35,374 31,187 33,594 28,944
Loans and lease, net of
unearned income 111,874 105,220 98,272 86,377 81,084
Deposits 154,381 133,996 124,510 115,320 102,250
Shareholders' equity 14,926 13,864 12,249 12,518 11,644
SIGNIFICANT RATIOS
Return on average assets 0.77% 0.91% 0.90% 1.07% 1.16%
Return on average
shareholders' equity 8.49 10.16 9.66 10.60 11.76
Average shareholders' equity
to average assets 9.12 9.00 9.35 10.13 9.89
Net interest margin 3.73 4.03 4.01 4.21 4.26
SUMMARY OF OPERATIONS
Interest income $ 11,868 $ 11,035 $ 9,945 $ 9,243 $ 8,651
Interest expense 5,937 5,365 4,597 4,171 3,820
Net interest income 5,931 5,670 5,348 5,072 4,831
Provision for loan losses 226 170 118 196 174
Net interest income after
provision for loan losses 5,705 5,500 5,230 4,876 4,657
Non-interest income 1,025 843 565 415 304
Non-interest expense 4,794 4,279 3,954 3,372 3,008
Income before income taxes 1,936 2,064 1,841 1,919 1,953
Income tax expense 700 758 621 618 636
Net income 1,236 1,306 1,220 1,301 1,317
PER SHARE DATA (1)(2)
Net income $ 2.70 $ 2.85 $ 2.66 $ 2.84 $ 2.88
Cash dividends 1.02 1.02 1.00 1.00 0.94
Net book value 32.59 30.27 26.74 27.33 25.42
(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.
8
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, 2001 and 2000. 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 $1.2 million or $2.70 per share, $1.3
million or $2.85 per share and $1.2 million or $2.66 per share for fiscal years
2001, 2000 and 1999, respectively. Annualized return on average assets and
average equity were .77% and 8.5%, respectively for 2001 compared to .91% and
10.2% for 2000 and .90% and 9.7% for 1999.
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 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.
Net interest income in 2000 increased by $322,000 or 6.0% over 1999.
Interest income in 2000 increased by $1.1 million or 11.0% compared to 1999,
while interest expense increased by $767,000 or 16.7% during 2000 as compared to
1999. Interest income increased during 2000 compared to 1999 as a result of an
increase in the average balance of loans and an increase in the average rates
earned thereon. Interest expense increased during 2000 compared to 1999 as a
result of an increase in the average balance of time deposits and an increase in
the average rates paid thereon.
During both 2001 and 2000, 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 2000 to 2001. See Table 1 -
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and
Interest Differential.
9
TABLE 2. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------------------- -------------------------------------
YTD YTD YIELD/ YTD YTD YIELD/
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ ----------- ------------ ------------------------ ------------
In thousands
Interest earning assets:
Federal funds sold $ 4,298 $ 160 3.79 % $ 1,026 $ 95 6.12 %
Securities:
Taxable 38,385 2,312 6.02 31,098 2,016 6.48
Tax-exempt (1) 302 14 7.02 825 45 8.26
Loans (net of unearned
interest) (2) (4) (5) 108,526 9,096 8.38 102,096 8,646 8.47
------------ ----------- ------------ ------------------------ ------------
Total interest
earning assets (1) $ 151,511 $ 11,582 7.64 % $ 135,045 $10,802 8.00 %
------------ ----------- ------------ ------------------------ ------------
Nonearning assets:
Cash and due
from banks $ 3,609 $ 3,457
Bank premises and
equipment, net 3,700 3,221
Other assets 2,202 2,226
Allowance for
loan losses (1,277) (1,169)
------------ ------------
Total assets $ 159,745 $ 142,780
============ ============
Interest bearing
liabilities:
Savings deposits $ 16,614 $ 272 1.64 % $ 16,080 $ 323 2.01 %
Time deposits 84,987 5,094 5.99 73,522 4,360 5.93
NOW accounts 19,321 476 2.46 17,984 564 3.14
Money market
accounts 4,802 93 1.94 5,001 113 2.26
Borrowings 44 2 4.55 69 5 7.25
------------ ----------- ------------ ------------------------- ------------
Total interest
bearing liabilities $ 125,768 $ 5,937 4.72 % $ 112,656 $ 5,365 4.76 %
------------ ----------- ------------ ------------------------ ------------
Noninterest bearing
liabilities:
Demand deposits $ 17,469 $ 16,004
Other liabilities 1,944 1,269
Shareholders' equity 14,564 12,851
------------ ------------
Total liabilities and
shareholders' equity $ 159,745 $ 142,780
============ ============
----------- ------------
Net interest income (1) $ 5,645 $ 5,437
=========== ============
Net interest spread (3) 2.92 % 3.24 %
============ ============
Net interest income to
average interest earning
assets (1) 3.73 % 4.03 %
============ ============
DECEMBER 31, 1999
-------------------------------------
YTD YTD YIELD/
AVERAGE
BALANCE INTEREST RATE
------------ ----------- ------------
Interest earning assets:
Federal funds sold $ 1,202 $ 61 5.07 %
Securities:
Taxable 30,637 1,934 6.31
Tax-exempt (1) 3,337 171 7.76
Loans (net of unearned
interest) (2) (4) (5) 91,717 7,516 8.19
------------ ----------- ------------
Total interest
earning assets (1) $ 126,893 $ 9,682 7.63 %
------------ ----------- ------------
Nonearning assets:
Cash and due
from banks $ 3,666
Bank premises and
equipment, net 3,427
Other assets 2,117
Allowance for
loan losses (1,155)
------------
Total assets $ 134,948
============
Interest bearing
liabilities:
Savings deposits $ 17,272 $ 373 2.16 %
Time deposits 65,607 3,638 5.55
NOW accounts 17,512 459 2.62
Money market
accounts 5,591 125 2.24
Borrowings 25 2 -
------------ ----------- ------------
Total interest
bearing liabilities $ 106,007 $ 4,597 4.34 %
------------ ----------- ------------
Noninterest bearing
liabilities:
Demand deposits $ 14,947
Other liabilities 1,371
Shareholders' equity 12,623
------------
Total liabilities and
shareholders' equity $ 134,948
============
-----------
Net interest income (1) $ 5,085
===========
Net interest spread (3) 3.29 %
============
Net interest income to
average interest earning
assets (1) 4.01 %
============
(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 $285,000 in 2001, $233,000 in
2000 and $263,000 in 1999.
(5) Interest income on loans includes fees of $200,039 in 2001, $141,729 in
2000 and $78,891 in 1999 from the Business Manager Program, student loans
and lease receivables.
10
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 2001, net interest income increased $380,000 due to changes in
volume and decreased $172,000 due to changes in interest rates. Also, net
interest income was affected by a $52,000 increase in loan fees. In 2000, net
interest income increased $310,000 due to changes in volume and increased
$42,000 due to changes in interest rates. Also, net interest income was affected
by a $30,000 decrease in loan fees.
TABLE 3. VOLUME AND RATE ANALYSIS OF CHANGES IN INTEREST INCOME
---------------------------------- -----------------------------------
(Taxable equivalent basis) 2001 OVER 2000 2000 OVER 1999
---------------------------------- -----------------------------------
CHANGE DUE TO CHANGE DUE TO
--------------------- TOTAL -------------------- TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
------- ------- ------- ------- ------- -------
In thousands
Interest earned on:
Federal funds sold $ 150 $ (85) $ 65 $ 2 $ 32 $ 34
Taxable securities 446 (150) 296 47 35 82
Tax-exempt securities (25) (6) (31) (128) 2 (126)
Loans 540 (90) 450 869 261 1,130
------- ------- ------- ------- ------- -------
Total interest earned $ 1,111 $ (331) $ 780 $ 790 $ 330 $ 1,120
------- ------- ------- ------- ------- -------
Interest expense on:
Savings deposits $ 10 $ (61) $ (51) $ (25) $ (25) $ (50)
Time deposits 686 48 734 474 248 722
NOW accounts 40 (128) (88) 49 56 105
Money market accounts (4) (16) (20) (18) 6 (12)
Other borrowing (1) (2) (3) -- 3 3
------- ------- ------- ------- ------- -------
Total interest expense $ 731 $ (159) $ 572 $ 480 $ 288 $ 768
------- ------- ------- ------- ------- -------
Net interest income $ 380 $ (172) $ 208 $ 310 $ 42 $ 352
======= ======= ======= ======= ======= =======
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.
11
TABLE 4. INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS
(Taxable equivalent basis) 2001 2000 1999
-------------------------- -------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------------------------- ------------ ------------ ------------ ------------
In thousands
Earning assets $151,511 7.64 % $135,045 8.00 % $126,893 7.63 %
============ ============ ============
Interest bearing liabilities $125,768 4.72 % $112,656 4.76 % $106,007 4.34 %
-------------- --------------- --------------
Interest rate spread 2.92 % 3.24 % 3.29 %
Interest free sources used
to fund earning assets(1) 25,743 0.81 % 22,389 0.79 % 20,886 0.72 %
------------ -------------- ------------ --------------- ------------ --------------
Total sources of funds $151,511 $135,045 $126,893
============ ============ ============
Net interest margin 3.73 % 4.03 % 4.01 %
============== =============== ==============
(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 32 basis points in 2001 while the net
interest margin declined 30 basis points. Both the interest rate spread and
margin were negatively impacted by a 36 basis point decrease in earning asset
yields 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 because a significant portion of the loan portfolio are
fixed rate loans which are not directly affected by changes in the prime rate.
The decrease in liability costs is primarily the result of the lower cost of
funds on savings, NOW and money market accounts during the year.
Interest rate spread decreased 5 basis points in 2000 while the net
interest margin increased 2 basis points. The interest rate spread was
negatively impacted by a 42 basis point increase in interest bearing liability
costs and offset by a 37 basis point increase in earning asset yields. The
interest rate margin was positively affected by higher average earning assets
offset by a 5 basis point decrease in net interest rate spread. Although the
prime rate increased 100 basis points in 2000, loan yields only increased 28
basis points due to intense competition in our market area. The increase in
liability costs is primarily the result of higher rates on interest bearing
checking and time deposit accounts during the year.
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 $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. Bounce
Protection is a form of overdraft protection which enables the customer to have
their insufficient funds checks paid instead of returned. The customer is
charged a fee for each check paid.
12
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 was 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 income increased $278,000 or 49.0% during 2000 over the
prior comparable period. The increase in 2000 was primarily due to a gain
recognized on stock received from the demutualization of an insurance company of
$196,000. The Bank received the stock in exchange for its previous membership
interest as a participating policyholder. Also, the Bank continues to see
increased revenue associated with debit card and automated teller machines (ATM)
usage. In July 1999, the Bank increased the service charge assessed for
insufficient funds, which has provided additional revenue from service charges
on deposit accounts. Fees generated from trust assets under management increased
as the level of assets being managed reached $21.5 million at December 31, 2000,
a 5.9% increase from $20.3 million at December 31, 1999.
NONINTEREST EXPENSES
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 pursuing 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.
Noninterest expenses increased $326,000 or 8.2% during 2000 over the
prior comparable period. The increase was primarily due to an increase in
salaries and employee benefits, occupancy of premises and other operating
expenses.
Higher health insurance costs, normal employee merit increases and
increased employer contributions to retirement and profit sharing plans
accounted for the additional costs of salaries and benefits in 2000.
A loss associated with the abandonment of fixed assets, routine
building repairs and maintenance and the painting of the Main Office branch were
the primary reasons for higher occupancy of premises expense. In 1997, the
Bank's management began the process of developing plans for expansion of the
main office facility on the adjacent parking lot, incurring costs associated
with surveys and architect fees. In 2000, management decided to abandon the
original plans due to constraints on parking, and to consider enclosing the
office space between the original building and the drive-up facility. The Bank
wrote off the survey and architect fees since the original drawings were no
longer part of the plan the Bank intends to pursue.
Components of other operating expense, which significantly increased
during 2000, included professional fees, data processing fees, advertising and
public relations expenses, FDIC insurance premiums, ATM and debit card expenses
and business manager program expenses. A larger deposit account assessment base
and rate changes contributed to increased FDIC insurance premiums. A new
advertising program focused on public awareness that began in the third quarter
of 2000, and the continuing promotion of the Hedgesville branch location caused
advertising and public relations costs to increase during 2000. Professional
fees increased due to the formation of the holding company. Maintenance expense
related to technology systems caused data processing expense to increase.
Increased usage by customers generated additional debit card and ATM expenses. A
growing number of merchants in the Business Manager program caused the expenses
related to this program to increase.
INCOME TAXES
Provision for income tax totaled $700,000 in 2001, $758,000 in 2000
and $621,000 in 1999. The effective tax rate was 36.1% in 2001 compared to 36.7%
and 33.7% in 2000 and 1999, 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 19 of the Notes to
Consolidated Financial Statements for a comprehensive analysis of income tax
expense.
13
FINANCIAL CONDITION
Table 5 examines Citizens National Bank's financial condition in terms
of its sources and uses of funds. Average funding uses increased $16.5 million
or 12.2% in 2001 compared with an increase of $8.2 million or 6.4% in 2000.
TABLE 5. SOURCES AND USES OF FUNDS
2001 2000 1999
----------------------------------- ------------------------------- --------
INCREASE (DECREASE) INCREASE (DECREASE)
AVERAGE ----------------------- AVERAGE ------------------- AVERAGE
BALANCE AMOUNT % BALANCE AMOUNT % BALANCE
-------- -------- -------- -------- -------- --- --------
In thousands
Funding uses:
Federal funds
sold $ 4,298 $ 3,272 318.9 % $ 1,026 $ (176) (14.6)% $ 1,202
Securities available
for sale 38,687 6,764 21.2 31,923 (2,051) (6.0) 33,974
Loans 108,526 6,430 6.3 102,096 10,379 11.3 91,717
-------- -------- -------- -------- --------
Total uses $151,511 $ 16,466 12.2 % $135,045 $ 8,152 6.4 % $126,893
======== ======== ===== ======== ======== ===== ========
Funding sources:
Interest-bearing
demand deposits $ 24,123 $ 1,138 5.0 % $ 22,985 $ (118) (0.5)% $ 23,103
Savings deposits 16,614 534 3.3 16,080 (1,192) (6.9) 17,272
Time deposits 84,987 11,465 15.6 73,522 7,915 12.1 65,607
Short-term
borrowings 44 (25) (36.2) 69 44 176.0 25
Noninterest bearing
funds, net(1) 25,743 3,354 15.0 22,389 1,503 7.2 20,886
-------- -------- -------- -------- --------
Total sources $151,511 $ 16,466 12.2 % $135,045 $ 8,152 6.4 % $126,893
======== ======== ===== ======== ======== ===== ========
(1) Noninterest bearing liabilities and shareholders' equity less noninterest
earning assets.
Total assets increased $21.6 million or 14.4% to $171.5 million from
December 31, 2000 to December 31, 2001, due primarily to a $6.5 million increase
in loans, a $14.3 million increase in securities available for sale and a
$490,000 increase in cash and cash equivalents and a $1.1 million increase in
premises and equipment, net, which were partially offset by a $1.2 million
decrease in federal funds sold.
Total liabilities increased $20.5 million or 15.1% to $156.6 million
from December 31, 2000 to December 31, 2001 substantially due to the increase in
deposits. Shareholders' equity increased $1.1 million to $14.9 million at
December 31, 2001 primarily due to net income of $1.2 million and a $293,000
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, 2001 was unrealized gains and losses on available for sale
securities net of deferred income taxes. The unrealized gains and losses are
primarily a function of available market interest rates relative to the yield
being generated on the available for sale portfolio. No earnings impact results,
however, unless the securities are actually sold.
14
LOAN PORTFOLIO
At December 31, 2001, total loans increased $6.5 million or 6.3% to
$110.5 million from $104.0 million at December 31, 2000. The loan mix changed
slightly compared with December 31, 2000. The Bank's commercial real estate and
business loans grew as a direct result of the Bank hiring a commercial lender
and continued efforts to develop new commercial lending relationships especially
in the Berkeley County, West Virginia market. Also, the Bank's semi-annual auto
loan sales generated an increase in consumer loans. The Bank's management
believes additional growth in all lending areas is possible into year 2002.
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 71.6% at December 31, 2001 and 77.6% at December
31, 2000. The Bank had substantial deposit growth and slower loan demand in 2001
resulting in a lower loan to deposit ratio. Management continued to fund the
loan growth with deposits and the excess deposit growth was invested in high
quality US government agencies securities. The ratio of net charge-offs to
average loans outstanding was .10% in 2001 and .10% in 2000.
Growth recorded in the commercial loan area resulted in increases of
15.6% to $7.0 million outstanding at December 31, 2001 and 16.4% to $6.0 million
outstanding at December 31, 2000. The Bank participates in the Business Manager
program, commercial lines of credit collateralized by accounts receivable, which
has generated an increase in commercial loans during 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 2002.
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 61% or $67.9 million of the total loan portfolio at
December 31, 2001 compared to 62% or $65.3 million at December 31, 2000.
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, 2001,
66.6% of the Bank's mortgage loans were adjustable rate loans and 33.4% were
fixed rate loans. Currently, the Bank has approximately $1.4 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 slowed a slight increase. In the first half
of 2001, the Bank's auto loan sale generated an increase. However, during the
third quarter, new auto loans were considerably affected by the dealer incentive
programs offered by the competition.
Additional information on the composition of the loan portfolio may be
found in Note 6 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, 2001 and 2000, nonaccrual loans approximated
.02% of total loans (net) in each year.
15
TABLE 6. LOANS AND LEASE RECEIVABLE
DECEMBER 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ -------------
In thousands
Real estate $ 67,860 $ 65,278 $ 61,625
Commercial real estate 12,459 9,944 9,569
Consumer 24,198 23,708 21,778
Commercial 6,978 6,037 5,185
Overdrafts 87 20 28
------------ ------------ -------------
$111,582 $104,987 $ 98,185
Lease: 139 143 -
------------ ------------ -------------
111,721 105,130 98,185
Net deferred loan fees,
premiums and discounts 153 90 88
Allowance for loan losses (1,337) (1,216) (1,148)
------------ ------------ -------------
$110,537 $104,004 $ 97,125
============ ============ =============
TABLE 7. LOAN MATURITIES AND INTEREST SENSITIVITY (1)
DECEMBER 31, 2001
--------------------------------------------------
ONE YEAR ONE THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
------- ------- ------- -------
In thousands
Commercial, financial and agricultural $ 6,996 $ 1,153 $11,287 $19,436
Real estate - construction 2,636 -- -- $ 2,636
------- ------- ------- -------
Total $ 9,632 $ 1,153 $11,287 $22,072
======= ======= ======= =======
Loans with predetermined interest rate $ 5,567 $ 996 $ 2,181 $ 8,744
Loans with variable interest rate 4,065 157 9,106 $13,328
------- ------- ------- -------
Total $ 9,632 $ 1,153 $11,287 $22,072
======= ======= ======= =======
(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,
2001 and 2000. As of December 31, 2001, management is aware of two commercial
loans with aggregate uninsured balances of $280,739 which the borrowers have
exhibited weaknesses. A specific allowance of $100,000 related to these loans
has been established as part of the allowance for loan losses. The loans are
collateralized and any additional potential loss would be minimal.
16
TABLE 8. NON-PERFORMING ASSETS
DECEMBER 31,
-----------------------------
2001 2000 1999
---- ---- ----
In thousands
Nonaccrual loans $ 25 $ 22 $ 22
Loans past due 90 days or more
still accruing interest 450 360 79
Restructured loans -- -- --
---- ---- ----
Total nonperforming loans $475 $382 $101
---- ---- ----
Other real estate owned $ 15 $-- $ 67
---- ---- ----
Total nonperforming assets $490 $382 $168
==== ==== ====
Ratios:
Nonperforming loans/Total loans 0.43% 0.37% 0.10%
Nonperforming assets/Total assets 0.29% 0.25% 0.12%
Allowance for loan losses/Total loans 1.21% 1.17% 1.18%
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, 2001 and 2000, the allowance for loan losses
totaled $1.3 million and $1.2 million, respectively. The allowance for loan
losses as a percentage of loans was 1.20% and 1.16% as of December 31, 2001 and
2000. The provision for loan losses exceeded net charge-offs by $121,000 and
$68,000 in 2001 and 2000. An analysis of the allowance for loan losses for the
years ended December 31, 2001 and 2000 may be found in Note 6 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 2001, 2000 and
1999, the provision totaled $226,000, $170,000 and $118,000, respectively. While
loan quality remains good and past due and nonaccrual loans are minimal,
management increased the provision for loan losses in 2001 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.
17
TABLE 9. ALLOWANCE FOR LOAN LOSSES
2001 2000 1999
------- ------- -------
In thousands
Balance, beginning of year $ 1,216 $ 1,148 $ 1,122
------- ------- -------
Provision charged to expense $ 226 $ 170 $ 118
------- ------- -------
Loans charged off:
Commercial, financial and agricultural $ 3 $ 6 $ 7
Consumer 133 115 97
Mortgage -- -- 14
------- ------- -------
Total loans charged off $ (136) $ (121) $ (118)
------- ------- -------
Recoveries:
Commercial, financial and agricultural $ 2 $ 1 $ 5
Consumer 29 18 21
------- ------- -------
Total recoveries $ 31 $ 19 $ 26
------- ------- -------
Net charge-offs $ (105) $ (102) $ (92)
------- ------- -------
Balance, end of year $ 1,337 $ 1,216 $ 1,148
======= ======= =======
TABLE 10. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31
----------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------- ----------------------------------- ----------------------------------
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
and agriculture $ 363 6% $ 206 6% $ 89 5%
Real estate - mortgage 294 72 257 72 284 73
Installment and other 370 22 351 22 558 22
Unallocated 310 N/A 402 N/A 217 N/A
------ -------- ------ -------- ------ -------
Total $1,337 100% $1,216 100% $1,148 100%
====== ======== ====== ======== ====== =======
SECURITIES PORTFOLIO AND FEDERAL FUNDS SOLD
The Bank's securities portfolio consists of only available for sale
securities. Classifying the securities portfolio as available for sale provides
management with increased ability to manage the balance sheet structure and
address asset/liability management issues when needed. The fair value of the
investment portfolio has increased $14.3 million to $49.7 million at December
31, 2001 from 2000.
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, 2001, approximately 97.4% of the portfolio is
comprised of US Treasury and Agency securities and 1.1% 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, 2001 was 4.4 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 2001 and 2000, the average balance in
federal funds sold was $4.3 million and $1.0 million, respectively.
18
DEPOSITS AND OTHER FUNDING SOURCES
Total deposits were $154.4 million at December 31, 2001, an increase
of $20.4 million or 15.2% over deposits at December 31, 2000. Average deposits,
however, showed a $14.6 million, or 11.3% growth, to $143.2 million in 2001.
Deposits at the Hedgesville branch totaled $20.6 million at December 31, 2001,
an increase of $6.6 million over December 31, 2000. Deposits at the temporary
banking facility located in south Martinsburg totaled $1.3 million at December
31, 2001. The Bank has experienced a slight change in the deposit account mix
during 2001. 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 $3.0 million or 18.6%,
during 2001, from $16.2 million at December 31, 2000, to $19.2 million at
December 31, 2001. At December 31, 2001, noninterest-bearing deposits
represented 12.4% of total deposits, compared to 12.1% for 2000. Average
noninterest-bearing deposits increased 9.2% from $16.0 million in 2000 to $17.5
million in 2001. 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 $17.4 million or 14.8% to
$135.2 million at December 31, 2001. Interest-bearing checking increased by
$867,000 in 2001. Included in this category are NOW accounts and Money Market
accounts. Savings accounts increased $2.3 million in 2001 from the previous year
to $17.9 million, while the average savings deposits increased only $534,000 or
3.3% to $16.6 million at December 31, 2001. The Bank's largest source of
interest-bearing funds is certificates of deposit. These accounts totaled $92.5
million at December 31, 2001, an increase of $14.2 million or 18.2%. 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, 2000.
TABLE 11. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
AMOUNT PERCENT
-------------- ------------
In thousands
Three months or less $ 3,991 14.54 %
Three through six months 1,924 7.01
Six through twelve months 3,607 13.14
Over twelve months 17,929 65.31
-------- -----
Total $ 27,451 100 %
======== ======
CAPITAL RESOURCES
The Bank remains well capitalized. Total shareholders' equity at
December 31, 2001 of $14.9 million represents 8.7% of total assets. This
compares to $13.9 million or 9.2%, at December 31, 2000. Included in capital at
December 31, 2001 are $178,000 of unrealized gains on available for sale
securities, net of deferred income taxes. At December 31, 2000, the Bank had
unrealized losses on available for sale securities, net of deferred income taxes
of $115,000. 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 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 2001 were at a price that ranged from $67 to $135
per share. During 2000, information available to management indicates that stock
trades ranged from $75 to $285 per share. Book value per share increased from
$30.74 at December 31, 2000 to $32.59 at December 31, 2001.
19
Dividends which have been declared by the Board of Directors
semiannually, remained the same in 2001 and 2000 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,
2001 2000
---- ----
Return on average assets .77% .91%
Return on average equity 8.49 10.16
Dividend payout ratio 37.79 35.78
Average equity to average assets ratio 9.12 9.00
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of the Bank's liquidity management program is to ensure
the continuous availability of funds to meet the withdrawal demands of
depositors and the credit needs of borrowers. The basis of the Bank's liquidity
comes from the stability of its core deposits. Liquidity is also available
through the available for sale securities portfolio and short-term funds such as
federal funds sold. At December 31, 2001, these sources totaled $49.7 million,
or 29.0% 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, 2001, 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 $1.5 million of cash from operations in
2001, which compares to $1.8 million in 2000 and $1.8 million in 1999.
Additional cash of $19.9 million, $9.0 million and $8.7 million was generated
through net financing activities in 2001, 2000 and 1999, 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 $20.9 million in 2001 compared to
$11.1 million in 2000 and $9.4 million in 1999. 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 affects. 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.
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 4.75
percent through December 2002. Based on the January 2002 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.
21
TABLE 13. INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 2001
-----------------------------------------------------------------------
INTEREST SENSITIVITY PERIOD
-----------------------------------------------------------------------
2002 2003 2004 2005 2006
------------ ------------ ------------ ------------ -----------
In thousands
Rate sensitive assets
Loans, net of unearned interest $ 31,567 $ 15,030 $ 17,944 $ 12,818 $ 10,292
Average interest rate 8.08% 8.69% 8.36% 8.35% 7.73%
Securities 1,005 851 8,082 20,628 764
Average interest rate 6.63% 4.29% 4.50% 4.30% 5.60%
------------ ------------------------------------------------------
Total interest sensitive assets $ 32,572 $ 15,881 $ 26,026 $ 33,446 $ 11,056
=========== ======================================================
Interest sensitive liabilities
Non-interest-bearing deposits $ 1,917 $ 1,917 $ 1,917 $ 1,917 $ 1,917
Average interest rate - - - - -
Savings and interest-bearing checking 4,273 4,273 4,273 4,273 4,273
Average interest rate 1.00% 1.00% 1.00% 1.00% 1.00%
Time deposits 40,028 34,039 14,802 1,821 1,786
Average interest rate 2.13% 2.88% 2.75% 3.17% 3.42%
------------ ------------------------------------------------------
Total interest sensitive liabilities $ 46,218 $ 40,229 $ 20,992 $ 8,011 $ 7,976
=========== ======================================================
GAP $(13,646) $(24,348) $ 5,034 $ 25,435 $ 3,080
Cumulative GAP $(13,646) $(37,994) $(19,314) $ 6,121 $ 9,200
GAP to sensitive assets ratio (8.45)% (15.07)% 3.12 % 15.74 % 1.91 %
Cumulative GAP to sensitive
assets ratio (8.45)% (23.52)% (20.40)% (4.66)% (2.75)%
GAP to total assets ratio (7.95)% (14.19)% 2.93 % 14.83 % 1.80 %
Cumulative GAP to total assets ratio (7.95)% (22.15)% (11.26)% 3.57 % 5.36 %
DECEMBER 31, 2001
---------------------------
INTEREST SENSITIVITY PERIOD
THEREAFTER TOTAL FAIR VALUE
---------- ------------ ------------
Rate sensitive assets
Loans, net of unearned interest $ 24,224 $111,874 $110,959
Average interest rate 7.47% 7.70%
Securities 18,338 49,668 49,668
Average interest rate 6.08% 5.29%
----------------------------
Total interest sensitive assets $ 42,562 $161,542
============================
Interest sensitive liabilities
Non-interest-bearing deposits $ 9,589 19,174 $ 19,174
Average interest rate - -
Savings and interest-bearing checking 21,365 42,730 42,730
Average interest rate 1.00% 1.00%
Time deposits - 92,476 95,724
Average interest rate - 2.55%
----------------------------
Total interest sensitive liabilities $ 30,954 $ 19,174
============================
GAP $ 11,608
Cumulative GAP $ 20,808
GAP to sensitive assets ratio 7.19%
Cumulative GAP to sensitive
assets ratio 4.43%
GAP to total assets ratio 6.77%
Cumulative GAP to total assets ratio 12.13%
RECENTLY ISSUED ACCOUNTING STANDARDS
Business Combinations and Intangible Assets - In June 2001, the
Financial Accounting Standards Board (FASB) issued Statements of Financial
Accounting Standards Nos. 141 "Business Combinations" (Statement 141), and 142,
"Goodwill and Other Intangible Assets" (Statement 142). Statement 141 requires
that the purchase method of accounting be used for all business combinations and
eliminated the use of pooling of interests for transactions initiated subsequent
to June 30, 2001. Statement 142 eliminates the amortization to expense of
goodwill recorded as a result of such combinations, but requires periodic
evaluation of the goodwill for impairment. Write-downs of the balance, if
necessary, are to be charged to results of operations. Goodwill existing prior
to the issuance of the statement was required to be amortized through December
31, 2001. At this time, these statements are not expected to have a significant
impact on CNB's future Consolidated Financial Statements.
Accounting for the Impairment or Disposal of Long-Lived Assets - In
August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement
144). Statement 144 supersedes Statement 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and certain
other related accounting standards. In general, Statement 144 established a
single accounting model for a segment of a business to be accounted for as a
discontinued operation and resolved significant implementation issues related to
Statement 121. Statement 144 was effective for years beginning after December
15, 2001. CNB is evaluating the impact, if any, this statement may have on its
future Consolidated Financial Statements.
22
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.
A comparison of the carrying value of the Bank's financial instruments to their
estimated fair value as of December 31, 2001 and December 31, 2000 is disclosed
in Note 25 of the Notes to the Consolidated Financial Statements.
23
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.................................. 25
Consolidated Balance Sheets................................... 26
Consolidated Statements of Income............................. 27
Consolidated Statements of Stockholders' Equity............... 28
Consolidated Statements of Cash Flows......................... 29
Notes to Consolidated Financial Statements.................... 30
24
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ SMITH ELLIOTT KEARNS & COMPANY, LLC
Hagerstown, Maryland
January 30, 2002
25
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2001 AND 2000
ASSETS 2001 2000
------------- -------------
Cash and due from banks $ 4,229,810 $ 3,739,854
Federal funds sold -- 1,207,684
Securities available for sale
(at approximate market value) 49,668,479 35,374,293
Loans and lease receivable, net 110,536,744 104,003,931
Accrued interest receivable 1,052,620 1,004,257
Foreclosed real estate (held for sale), net 14,898 --
Premises and equipment, net 4,283,625 3,167,302
Deferred income taxes 225,894 375,509
Cash surrender value of life insurance 883,533 790,807
Intangible assets 105,168 113,853
Other assets 540,672 204,877
------------- -------------
TOTAL ASSETS $ 171,541,443 $ 149,982,367
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 19,174,111 $ 16,164,702
Interest-bearing demand 24,878,709 24,012,083
Savings 17,851,684 15,571,297
Time, $100,000 and over 27,450,519 17,764,825
Other time 65,025,516 60,482,943
------------- -------------
$ 154,380,539 $ 133,995,850
Accrued interest payable 1,148,437 1,038,122
Accrued expenses and other liabilities 1,086,230 1,084,577
------------- -------------
TOTAL LIABILITIES $ 156,615,206 $ 136,118,549
------------- -------------
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 10,426,618 9,657,422
Accumulated other comprehensive income 177,979 (115,244)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY $ 14,926,237 $ 13,863,818
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 171,541,443 $ 149,982,367
============= =============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
26
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans $ 9,381,949 $ 8,887,114 $ 7,779,359
Interest and dividends on securities:
United States Treasury securities 274 25,232 55,516
U.S. Government agencies and
corporations 2,238,886 1,960,198 1,855,665
State and political subdivisions 29,450 60,002 185,680
Other 57,686 7,779 8,206
Interest on federal funds sold 159,744 94,914 60,968
------------ ------------ ------------
$ 11,867,989 $ 11,035,239 $ 9,945,394
------------ ------------ ------------
INTEREST EXPENSE
Interest on interest bearing demand,
savings and time deposits $ 5,935,078 $ 5,359,871 $ 4,594,966
Interest on federal funds purchased 2,291 5,051 2,607
------------ ------------ ------------
$ 5,937,369 $ 5,364,922 $ 4,597,573
------------ ------------ ------------
NET INTEREST INCOME $ 5,930,620 $ 5,670,317 $ 5,347,821
PROVISION FOR LOAN LOSSES 226,000 170,000 117,999
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 5,704,620 $ 5,500,317 $ 5,229,822
------------ ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts $ 545,882 $ 282,866 $ 247,159
Other service charges, commissions
and fees 259,887 211,982 176,951
Insurance income 124,514 94,691 92,650
Other operating income 49,498 59,148 55,139
Gain on demutualization of insurance company -- 195,889 --
Net gain (loss) on sale of securities 833 (13,991) (4,262)
Income from title company 44,877 -- --
Gain (loss) on sale of other real estate owned -- 12,177 (2,890)
------------ ------------ ------------
$ 1,025,491 $ 842,762 $ 564,747
------------ ------------ ------------
NONINTEREST EXPENSES
Salaries $ 2,013,709 $ 1,760,226 $ 1,713,298
Employee benefits 621,036 562,625 532,762
Occupancy of premises 264,184 249,738 203,442
Furniture and equipment expense 254,232 248,053 262,794
Other operating expenses 1,640,764 1,458,762 1,241,226
------------ ------------ ------------
$ 4,793,925 $ 4,279,404 $ 3,953,522
------------ ------------ ------------
INCOME BEFORE INCOME TAXES $ 1,936,186 $ 2,063,675 $ 1,841,047
PROVISION FOR INCOME TAXES 699,781 757,835 620,818
------------ ------------ ------------
NET INCOME $ 1,236,405 $ 1,305,840 $ 1,220,229
============ ============ ============
BASIC EARNINGS PER SHARE $ 2.70 $ 2.85 $ 2.66
============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
27
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK (1) SURPLUS (1) EARNINGS (1) INCOME EQUITY
------------ ------------- ------------- -------------- --------------
BALANCE, DECEMBER 31, 1998 $ 458,048 $ 3,863,592 $ 8,056,610 $ 140,015 $ 12,518,265
------------
Comprehensive income:
Net income for 1999 -- -- 1,220,229 -- 1,220,229
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $632,348) -- -- -- (1,031,725) (1,031,725)
------------
Total Comprehensive Income -- -- -- -- 188,504
------------
Cash dividends ($1.00 per share) -- -- (458,048) -- (458,048)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 $ 458,048 $ 3,863,592 $ 8,818,791 $ (891,710) $ 12,248,721
------------
Comprehensive income:
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
============ ============ ============ ============ ============
(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.
28
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,236,405 $ 1,305,840 $ 1,220,229
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 251,463 238,162 256,642
Provision for loan losses 226,000 170,000 117,999
Deferred income taxes (30,103) (1,686) 33,468
Net (gain) loss on sale of securities (833) 13,991 4,262
(Gain) loss on sale of real estate owned -- (12,177) 2,890
(Gain) on demutualization of insurance company -- (195,889) --
Loss on disposal and abandonment of fixed assets -- 55,254 407
(Increase) decrease in loans held for sale -- 65,300 (65,300)
(Increase) in accrued interest receivable (48,363) (132,586) (24,927)
(Increase) decrease in other assets (235,995) 95,169 131,082
Increase in accrued interest payable 110,315 221,503 84,740
(Increase) in cash surrender value on life insurance in excess
of premiums paid (42,882) (70,180) (16,059)
Increase in accrued expenses and other liabilities 1,653 12,126 42,647
Amortization of deferred loan (fees) cost 55,000 42,633 44,375
Amortization (accretion) of premium and discount on investments (28,920) (1,709) (1,030)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,493,740 $ 1,805,751 $ 1,831,425
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) in loans $ (6,824,573) $ (8,118,916) $(12,094,817)
Proceeds from loan sales -- 1,027,345 --
Proceeds from sales of securities 901,406 2,659,593 7,290,995
Proceeds from maturities of securities 52,450,000 1,570,000 8,495,000
Purchases of securities (67,142,898) (6,981,238) (15,046,019)
Purchases of premises and equipment and computer software (1,456,617) (83,935) (100,377)
Proceeds from sale of other real estate owned, net -- 79,115 119,489
Net (increase) in real estate owned, net (4,138) -- (4,438)
Investment in title company (5,000) -- --
Return of capital from title company 2,715 -- --
Net (increase) decrease in federal funds sold 1,207,684 (1,207,684) 2,000,000
Premiums paid on life insurance (49,843) (49,893) (49,944)
Purchase of intangibles -- (14,270) --
------------ ------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES $(20,921,264) $(11,119,883) $ (9,390,111)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits $ 6,156,422 $ 705,412 $ 845,246
Net increase in time deposits 14,228,267 8,780,490 8,344,481
Cash dividends paid (467,209) (467,209) (458,048)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 19,917,480 $ 9,018,693 $ 8,731,679
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 489,956 $ (295,439) $ 1,172,993
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,739,854 4,035,293 2,862,300
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,229,810 $ 3,739,854 $ 4,035,293
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year:
Interest $ 5,827,054 $ 5,143,419 $ 4,512,832
Income taxes $ 768,500 $ 716,000 $ 639,000
Net transfer to foreclosed real estate, held for sale
from loans receivable $ 10,760 $ -- $ 62,500
The Notes to Consolidated Financial Statements are an integral part of these
statements.
29
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.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
Gain or loss on sale of securities is based on specific identification
method.
IMPAIRED LOANS:
Impaired loans are defined as those loans for which it is probable that
contractual amounts due will not be received. Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, requires that the
measurement of impaired loans is based on the present value of expected
30
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, 2001 and 2000.
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. Intangible
assets also included computer software, which is being amortized over 3-5
years.
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. Upon
such discontinuance, all unpaid accrued interest is reversed.
NONPERFORMING/NONACCRUAL ASSETS:
Nonperforming/nonaccrual assets consist of loans on which interest is no
longer accrued, loans which have been restructured in order to allow the
borrower the ability to maintain control of the collateral, real estate
acquired by foreclosure and real estate upon which deeds in lieu of
foreclosure have been accepted. Interest previously accrued but not
collected on nonaccrual loans is reversed against current income when a
loan is placed on a nonaccrual basis.
LOANS AND LEASE RECEIVABLE:
Loans and lease receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are reported
at their outstanding unpaid principal balances reduced by any charge-offs
or specific valuation accounts and net of any deferred fees or costs on
originated loans, or unamortized premiums or discounts on purchased
loans.
LOAN ORIGINATION FEES AND COSTS:
Certain direct costs of originating loans are being capitalized and
amortized over the contractual life of the loan as an adjustment of the
yield on the related loan.
PREMISES AND EQUIPMENT:
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated on both straight-line and accelerated methods
over the estimated useful lives of 15 to 50 years for buildings and 3 to
20 years for equipment. Maintenance and repairs are charged to operating
expenses as incurred.
31
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 payable.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS:
Postretirement insurance benefits are provided to selected officers and
employees. During the years that the employee renders the necessary
service, the Bank accrues the cost of providing postretirement health and
life insurance benefits to the employee.
FORECLOSED REAL ESTATE:
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried
at the lower of carrying amount or fair value less estimated cost to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in loss on foreclosed real estate. The historical
average holding period for such properties is twelve to eighteen months.
TRUST ASSETS:
Assets held by CNB in a fiduciary or agency capacity are not included in
the consolidated financial statements since such assets are not assets of
CNB. In accordance with banking industry practice, income from fiduciary
activities is generally recognized on a cash basis which is not
significantly different from amounts that would have been recognized
accrual basis.
ADVERTISING COSTS:
The Company expenses advertising costs in the period in which they are
incurred. Advertising cost amounted to $110,979, $112,642 and $82,459 for
the years ended December 31, 2001, 2000 and 1999, respectively.
COMPREHENSIVE INCOME:
Comprehensive income is defined as the change in equity from
transactions and other events from nonowner sources. It includes all
changes in equity except those resulting from investments by shareholders
and distributions to shareholders. Comprehensive income includes net
income and certain elements of "other comprehensive income" such as
foreign currency translations; accounting for futures contracts;
employers accounting for pensions; and accounting for certain investments
in debt and equity securities.
CNB has elected to report its comprehensive income in the
Consolidated Statements of Changes in Shareholders' Equity. The only
element of "other comprehensive income" that CNB has is the unrealized
gain or losses on available for sale securities.
The components of the change in net unrealized gains (losses)
on securities were as follows:
32
2001 2000 1999
------------ ------------ ------------
Unrealized holding gains (losses) arising during
the year $ 473,774 $ 1,238,373 $(1,668,335)
Reclassification adjustment for (gains) losses
realized in net income (833) 13,991 4,262
----------- ----------- -----------
Net unrealized holding gains
(losses) before taxes $ 472,941 $ 1,252,364 $(1,664,073)
Tax effect (179,718) (475,898) 632,348
----------- ----------- -----------
Net change $ 293,223 $ 776,466 $(1,031,725)
=========== =========== ===========
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 under the equity method of
accounting.
The following represents the limited liability corporation only financial
information:
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 2001
ASSETS
Cash $4,571
------
TOTAL ASSETS $4,571
======
MEMBERS' EQUITY $4,571
------
TOTAL MEMBERS' EQUITY $4,571
======
33
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2001
INCOME
Insurance commissions $115,135
--------
TOTAL INCOME $115,135
--------
EXPENSES
Management fees $ 22,000
Other expenses 3,382
--------
TOTAL EXPENSES $ 25,382
--------
NET INCOME $ 89,753
========
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 89,753
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 89,753
--------
CASH FLOWS FROM FINANCING ACTIVITIES
Members capital contribution $ 10,000
Profit and capital distributed (95,182)
--------
NET CASH (USED IN) FINANCING ACTIVITIES $(85,182)
--------
NET INCREASE IN CASH AND CASH
EQUIVALENTS $ 4,571
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ --
--------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,571
========
NOTE 4. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average daily reserve balances with the
Federal Reserve Bank. The amount of these required reserves, calculated
based on percentages of certain deposit balances was $949,000 at December
31, 2001.
NOTE 5. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of debt securities at
December 31, 2001 and December 31, 2000 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.
34
Securities available for sale are summarized as follows:
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
----------- ----------- ----------- -----------
Federal Reserve Bank stock $ 129,650 $ -- $ -- $ 129,650 6.00
Federal Home Loan Bank stock 625,500 -- -- 625,500 5.75
----------- ----------- ----------- -----------
$ 755,150 $ -- $ -- $ 755,150 5.79
----------- ----------- ----------- -----------
Total securities available for sale $49,381,415 $ 446,392 $ 159,328 $49,668,479 5.30 %
=========== =========== =========== ===========
35
2000 WEIGHTED
--------------------------------------------------------------------- AVERAGE
GROSS GROSS ESTIMATED TAX
AMORTIZED UNREALIZED UNREALIZED FAIR EQUIVALENT
COST GAINS LOSSES VALUE YIELD
--------------- --------------- --------------- ------------------------------
Available for sale:
U.S. Treasury securities
After 1 but within 5 years $ 400,432 $ 6,443 $ -- $ 406,875 6.78 %
----------- ----------- ----------- -----------
U.S. Government agencies
and corporations
After 1 but within 5 years $18,597,039 $ 15,689 $ 179,645 $18,433,083 6.40
After 5 but within 10 years 15,276,363 43,845 76,654 15,243,554 7.01
----------- ----------- ----------- -----------
$33,873,402 $ 59,534 $ 256,299 $33,676,637 6.68
----------- ----------- ----------- -----------
States and political subdivisions
After 1 but within 5 years $ 350,000 $ 810 $ -- $ 350,810 6.75
After 5 but within 10 years 100,000 907 -- 100,907 7.33
After 10 years 100,000 2,714 -- 102,714 8.72
----------- ----------- ----------- -----------
$ 550,000 $ 4,431 $ -- $ 554,431 7.21
----------- ----------- ----------- -----------
Federal Reserve Bank stock $ 129,650 $ -- $ -- $ 129,650 6.00
Federal Home Loan Bank stock 606,700 -- -- 606,700 7.25
----------- ----------- ----------- -----------
$ 736,350 $ -- $ -- $ 736,350 7.03
----------- ----------- ----------- -----------
Total securities available for sale $35,560,184 $ 70,408 $ 256,299 $35,374,293 6.70 %
=========== =========== =========== ===========
The carrying value of securities pledged to secure public deposits and
for other purposes as required or permitted by law totaled $12,099,922 at
December 31, 2001 and $10,591,329 at December 31, 2000.
Proceeds from sales of securities available for sale (excluding
maturities) for the years ended December 31, 2001, 2000 and 1999 were
$901,406, $2,659,593 and $7,290,995, respectively. Gross gains and
(losses) of $7,071 and $(6,238) in 2001, $7,115 and $(21,106) in 2000,
and $15,829 and $(20,091) in 1999 were realized on the respective sales.
36
NOTE 6. LOANS AND LEASE RECEIVABLE
Major classifications of loans at December 31, 2001 and 2000 were as
follows:
2001 2000
-------------- -------------
Loans:
Real estate $ 67,859,963 $ 65,278,200
Commercial real estate 12,458,880 9,944,333
Consumer 24,197,964 23,707,840
Commercial 6,977,624 6,036,583
Overdrafts 86,694 20,441
------------- -------------
$ 111,581,125 $ 104,987,397
Lease: 139,608 143,000
------------- -------------
$ 111,720,733 $ 105,130,397
Net deferred loan fees,
premiums and discounts 152,971 89,867
Allowance for loan losses (1,336,960) (1,216,333)
------------- -------------
$ 110,536,744 $ 104,003,931
============= =============
At December 31, 2001, approximately $26,906,000 or 33.4% of the real
estate loans had fixed rates of interest and $53,552,000 or 66.6% had
adjustable rates of interest.
The net investment in the direct financing lease was $139,608 at December
31, 2001.
An analysis of the allowance for loan losses were as follows:
2001 2000 1999
------------ ------------ -----------
Balance, beginning $ 1,216,333 $ 1,147,846 $ 1,122,155
Provision charged to
operations 226,000 170,000 117,999
Recoveries 29,729 19,494 26,270
Loans charged off (135,102) (121,007) (118,578)
----------- ----------- -----------
Balance, ending $ 1,336,960 $ 1,216,333 $ 1,147,846
=========== =========== ===========
37
Loans are placed on nonaccrual status when, in the judgement of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. A summary of nonaccrual loans is
as follows:
DECEMBER 31,
---------------------------------------
2001 2000
----------------- -----------------
Consumer loans $ 25,173 $ 22,125
================= =================
The contractual amount of interest that would have been recorded on
nonaccrual loans during 2001 and 2000 was $9,976 and $6,532,
respectively. The amount of interest income that was recorded on
nonaccrual loans during 2001 and 2000 was $6,719 and $427, 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,
2001 and 2000. However, at December 31, 2001, management is aware of two
commercial loans with aggregate uninsured balances of $280,739 which the
borrowers have exhibited weaknesses. A specific allowance of $100,000
related to these loans has been established as part of the allowance for
loan losses. The loans are collateralized and any additional potential
loss would be minimal.
NOTE 7. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
financial statements. The unpaid principal balances of mortgage loans
serviced for others were $6,089,473 and $6,383,029 at December 31, 2001
and 2000, respectively.
Custodial balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were $10,988 and $79,558 at
December 31, 2001 and 2000, respectively.
The Bank did not capitalize any mortgage servicing rights in 2001, 2000
or 1999. 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
$1,792, $2,264 and $2,258 in 2001, 2000 and 1999, respectively. Mortgage
servicing rights at December 31, 2001 and 2000 were $32,169 and $33,961,
respectively.
38
NOTE 8. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 were as
follows:
2001 2000
----------- ----------
Land and land improvements $1,435,174 $ 985,050
Banking house - Main 1,334,788 1,299,557
Banking house - Valley Road branch 521,431 521,431
Banking house - Hedgesville branch 765,137 765,137
Furniture, fixtures and equipment 2,124,581 1,722,487
---------- ----------
$6,181,111 $5,293,662
Less accumulated depreciation 2,344,408 2,126,360
---------- ----------
$3,836,703 $3,167,302
Construction in progress 446,922 --
---------- ----------
$4,283,625 $3,167,302
========== ==========
Depreciation expense amounted to $220,698, $200,995 and $209,339 in 2001,
2000 and 1999, respectively.
The Bank exercised an option to purchase a parcel of land in Martinsburg,
Berkeley County West Virginia for the future site of a full-service
branch. A building is under construction and the Bank expects the branch
to open in the first quarter of 2002. The Bank opened a temporary banking
facility near the location in August 2001.
Also, 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 $921,000 at December 31, 2001 to
construct the new branch location and upgrade the Bank's technology
systems.
NOTE 9. INTANGIBLE ASSETS
Computer software included in the balance sheet caption "Other Assets"
amounted to $128,534 and $31,018 at December 31, 2001 and 2000,
respectively. Comptuer software is amortized over 3 to 5 years.
Intangible assets representing customer lists, contracts and records
acquired by CNB Insurance amounted to $105,168 and $113,852 at December
31, 2001 and 2000, respectively. These intangibles are amortized over
fifteen years on a straight line basis.
Amortization expense on intangible assets amounted to $30,765, $37,167
and $47,303 in 2001, 2000 and 1999, respectively.
39
NOTE 10. TIME DEPOSITS
At December 31, 2001, the scheduled maturities of time deposits are as
follows:
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- -----------
2002 $ 9,521,464 $40,027,878
2003 13,829,338 34,038,875
2004 3,841,295 14,802,033
2005 -- 1,821,155
2006 258,422 1,786,094
----------- -----------
$27,450,519 $92,476,035
=========== ===========
NOTE 11. 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, 2001 and 2000, respectively.
NOTE 12. 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, 2002. The Bank had
not drawn on these funds at December 31, 2001 and 2000.
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, 2002. The Bank had
not drawn any of these funds at December 31, 2001 and 2000.
NOTE 13. OPERATING LEASES
The Bank entered into two lease agreements in 2001. 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.
The Bank had two lease agreements which were terminated in 2000. A lease
for additional parking which required an annual payment of $2,500 was not
renewed by the Bank in March 2000.
The lease for equipment was terminated by the Bank in February 2000. Both
leases were classified as operating leases.
Lease expense under operating leases for the periods ending December 31,
2001, 2000 and 1999 amounted to $30,738, $1,205 and $11,752,
respectively.
NOTE 14. 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:
2001 2000 1999
------------ ----------- -----------
Change in benefit obligation:
Benefit obligation at
beginning of year $ 2,356,019 $ 2,265,218 $ 2,451,242
Service cost 107,250 115,427 116,483
Interest cost 185,125 179,194 167,701
Actuarial (gain) loss 17,282 (93,277) (5,239)
Change due to amendment -- 3,069 (350,612)
Change in discount rate 166,447 -- --
Benefits paid (120,388) (113,612) (114,357)
----------- ----------- -----------
Benefit obligation at end of
year $ 2,711,735 $ 2,356,019 $ 2,265,218
----------- ----------- -----------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 2,294,234 $ 2,112,741 $ 2,008,519
Actual return on plan assets (156,520) 116,729 98,484
Employer contribution 99,502 178,376 120,095
Benefits paid (120,388) (113,612) (114,357)
----------- ----------- -----------
Fair value of plan assets
at end of year $ 2,116,828 $ 2,294,234 $ 2,112,741
----------- ----------- -----------
Funded status $ (594,907) $ (61,785) $ (152,477)
Unrecognized net actuarial
(gain) loss 321,327 (188,435) (155,193)
Unrecognized prior service
cost 44,855 68,514 76,376
Unrecognized net transition
(asset) (16,941) (26,511) (36,081)
----------- ----------- -----------
Prepaid (accrued) benefit cost $ (245,666) $ (208,217) $ (267,375)
=========== =========== ===========
Weighted average assumptions
as of October 31:
Discount rate 7.3% 8.0% 8.0%
Expected return on plan
assets 8.5% 8.5% 8.5%
Rate of compensation increase 4.3% 5.0% 5.0%
Components of net periodic cost:
Service cost $ 107,250 $ 115,427 $ 116,483
Interest cost 185,125 179,194 167,701
Expected return on plan assets (189,974) (176,764) (167,776)
Special termination benefit cost 23,069 -- --
Net amortization 11,481 11,446 11,446
----------- ----------- -----------
Net periodic plan cost $ 136,951 $ 129,303 $ 127,854
=========== =========== ===========
41
NOTE 15. 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 2001, 2000 and 1999. The Bank may, at the
discretion of the Board of Directors, match all or part of the employee
deferrals. For 2001, 2000 and 1999, 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 2001, 2000 and 1999 was
$24,000, $25,200 and $19,800, respectively.
NOTE 16. DEFERRED COMPENSATION PLAN
The Bank has a plan pursuant to which a director may elect to waive
receipt of all or a portion of his fees for Board of Directors' meetings
or committee meetings in exchange for a retirement benefit to be received
during a ten-year period after attaining a certain age. The Bank has
acquired life insurance on the lives of participating directors to fund
its obligation under the plan. The cash surrender value of these life
insurance policies has been recorded as an asset. The present value of
payments to be paid to directors or their beneficiaries for services
rendered to date has been recorded as a liability. The expense for these
benefits was $11,032, $(18,941) and $33,727 for 2001, 2000 and 1999,
respectively.
NOTE 17. 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 2001, 2000 and 1999.
42
NOTE 18. GAIN ON DEMUTUALIZATION OF INSURANCE COMPANY
The Bank owns several life insurance policies which were issued by a
mutual insurance company. In January 2000, the insurance company
demutualized and converted to a stock company. The Bank received stock
from the insurance company as part of the demutualization. There was no
direct effect on the Bank's interest as a policyholder. The receipt of
the stock was accounted for at fair value with a gain recognized in
income from continuing operations. The stock was sold during 2000 at an
additional gain of $4,401, included in gain (loss) on sale of securities.
NOTE 19. INCOME TAXES
Income taxes reflected in the statements of income are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
----------- ---------- ---------
Federal:
Current $ 656,915 $ 677,117 $ 526,454
Deferred (50,201) 1,932 30,090
State:
Current 72,969 82,404 60,896
Deferred 20,098 (3,618) 3,378
--------- --------- ---------
Provision for income taxes $ 699,781 $ 757,835 $ 620,818
========= ========= =========
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,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Income tax expense at the
statutory rate (34%) $ 658,303 $ 701,650 $ 625,956
Increases (decreases) resulting
from:
Nontaxable interest income,
net of non-deductible interest
expense (19,739) (26,139) (66,084)
State income taxes, net of
federal income tax benefit 93,027 78,786 64,274
Other (31,810) 3,538 (3,328)
--------- --------- ---------
Provision for income taxes $ 699,781 $ 757,835 $ 620,818
========= ========= =========
43
Federal and state income taxes receivable included in the balance sheet
as other assets were $80,538 and $41,513 at December 31, 2001 and 2000,
respectively.
The components of deferred taxes included in the balance sheet as of
December 31 are as follows:
2001 2000
---------- ---------
Deferred tax assets:
Provision for loan losses $ 416,943 $ 373,518
Deferred compensation plan 206,813 197,515
Postretirement benefits 46,950 38,845
Defined benefit plan 79,992 89,874
Organizational costs 3,637 3,994
Net unrealized loss on securities
available for sale -- 70,634
--------- ---------
$ 754,335 $ 774,380
--------- ---------
Deferred tax liabilities:
Deferred compensation plan $(176,707) $(158,161)
Mortgage servicing rights (11,581) (12,226)
Net unrealized gain on securities
available for sale (109,084) --
Depreciation (231,069) (228,484)
--------- ---------
$(528,441) $(398,871)
--------- ---------
Net deferred tax asset $ 225,894 $ 375,509
========= =========
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 20. OTHER OPERATING EXPENSES
2001 2000 1999
--------- --------- ---------
Stationery, supplies and printing $ 159,195 $ 122,410 $ 117,146
Data processing 194,639 163,125 131,213
Director's fees 138,600 133,875 137,002
Postage 92,899 75,516 77,043
Telephone 62,567 58,709 57,823
Professional fees 210,345 161,632 123,981
ATM fees 100,369 101,149 84,676
Advertising and public relations 136,463 141,843 96,133
Other 545,687 500,503 416,209
----------- ----------- -----------
Total other operating expenses $ 1,640,764 $ 1,458,762 $ 1,241,226
=========== =========== ===========
NOTE 21. 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.
44
CNB's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual
amount of those instruments. CNB uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend funds as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Commercial line of credit arrangements usually require payment
of a fee.
CNB evaluates each customer's creditworthiness and related collateral on
a case-by-case basis. The amount of collateral obtained if deemed
necessary by CNB upon extension of credit is based on management's credit
evaluation of the customer. Collateral held varies but may include
accounts receivable, inventory, real estate, equipment and
income-producing commercial properties.
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:
2001 2000
--------------- ---------------
Commitments:
To originate:
Fixed rate loans $ 601,585 $ 316,530
Adjustable rate loans 1,158,644 362,127
------------ ----------
$ 1,760,229 $ 678,657
Letters of credit 519,364 700,783
Undisbursed portion of construction
loans 3,012,301 1,225,775
Available credit granted on commercial
loans 4,599,816 2,917,707
Available credit on personal lines
of credit 453,613 420,833
Undisbursed portion of home equity loans 1,715,316 1,340,053
----------- -----------
$12,060,639 $ 7,283,808
=========== ===========
NOTE 22. 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 23. 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, 2001, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2001 and 2000, 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 2001 and
2000.
RATIO
--------------------------------------------------------
ACTUAL TO BE WELL
AMOUNT CAPITALIZED UNDER
IN FOR CAPITAL PROMPT CORRECTIVE
THOUSANDS ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-----------------------------------------------------------------------------
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%
As of December 31, 2000:
Total Capital
(to Risk Weighted
Assets) $15,103 16.94% 8.0% 10.0%
Tier I Capital
(to Risk Weighted
Assets) $13,987 15.69% 4.0% 6.0%
Tier I Capital
(to Average Assets) $13,987 9.33% 4.0% 5.0%
NOTE 24. REGULATORY RESTRICTIONS
Certain restrictions exist regarding the ability of the Bank subsidiary
to transfer funds to CNB in the form of cash dividends, which in turn
impact the ability of CNB to declare dividends to its shareholders. The
approval of the Comptroller of the Currency is required if the total
dividends declared by a national bank in any calendar year exceed the
bank's net profits (as defined) for that year combined with its retained
net profits for the preceding two calendar years.
Section 23A of the Federal Reserve Act (the "Act") prohibits affiliates
from transferring funds to CNB in the form of loans or advances exceeding
10% of its capital stock and surplus, as defined in the Act. In addition,
all loans or advances to nonbank affiliates must be secured by specific
collateral. Based on this limitation, there was approximately $1,474,000
available for loans or advances to CNB as of December 31, 2001, at which
time there were no material loans or advances outstanding.
NOTE 25. 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
46
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:
2001 2000
-------------------------------------- ------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- ----------------- ------------- ---------------
Financial Assets:
Cash, due from banks and
federal funds sold $ 4,229,810 $ 4,229,810 $ 4,947,538 $ 4,947,538
Securities available for
sale 49,668,479 49,668,479 35,374,293 35,374,293
Loans 110,536,744 110,959,202 104,003,931 103,766,162
Accrued interest receivable 1,052,620 1,052,620 1,004,257 1,004,257
Mortgage servicing rights 32,169 32,169 33,961 33,961
Financial Liabilities:
Demand deposits $ 61,904,504 $ 61,904,504 $ 55,748,082 $ 55,748,082
Time deposits 92,476,035 95,724,104 78,247,768 83,199,316
Accrued interest payable 1,148,437 1,148,437 1,038,122 1,038,122
Off Balance - Sheet
Financial Instruments:
Letters of credit $ -- $ 1,472 $ -- $ 2,706
NOTE 26. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to
officers, directors, and their affiliates amounting to $1,308,100 and
$1,390,281 at December 31, 2001 and 2000, respectively. During 2001,
$708,747 of new loans were made, or became reportable, and repayments and
other decreases totaled $790,928. Deposits from related parties held by
the Bank at December 31, 2001 and 2000 amounted to $2,248,568 and
$2,513,952, respectively.
47
NOTE 27. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following represents parent company only financial information:
STATEMENTS OF FINANCIAL CONDITION (PARENT ONLY)
DECEMBER 31, 2001 AND 2000
ASSETS 2001 2000
------------- -------------
Cash $ 2,591 $ --
Investment in Citizens National Bank 14,924,237 13,871,712
Deferred income taxes 3,637 3,994
Other assets 5,785 --
------------ ------------
TOTAL ASSETS $ 14,936,250 $ 13,875,706
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities $ 10,013 $ 11,888
------------ ------------
TOTAL LIABILITIES $ 10,013 $ 11,888
------------ ------------
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 10,426,618 9,657,422
Accumulated other comprehensive income 177,979 (115,244)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 14,926,237 $ 13,863,818
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,936,250 $ 13,875,706
============ ============
48
STATEMENTS OF INCOME (PARENT ONLY)
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ -----------
Dividend income $ 477,209 $ 302,311
Income from title company 44,876 --
Noninterest expense (42,225) (11,888)
----------- -----------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF CITIZENS NATIONAL BANK $ 479,860 $ 290,423
Income tax credit (expense) (2,757) 3,994
----------- -----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
CITIZENS NATIONAL BANK $ 477,103 $ 294,417
Equity in undistributed earnings of Citizens National Bank 759,302 1,011,423
----------- -----------
NET INCOME $ 1,236,405 $ 1,305,840
=========== ===========
STATEMENTS OF CASH FLOWS (PARENT ONLY)
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,236,405 $ 1,305,840
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 357 (3,994)
Increase (decrease) in accrued expenses and other liabilities (1,875) 11,888
Increase in other assets (3,500) --
Equity in undistributed earnings of Citizens National Bank (759,302) (1,011,423)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 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) $ (302,311)(1)
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES $ (467,209) $ (302,311)
----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS $ 2,591 $ --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ -- $ --
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,591 $ --
=========== ===========
(1) Represents dividends paid by CNB Financial Services, Inc. subsequent to
its acquisition of the Bank.
49
NOTE 28. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
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
=========== =========== =========== ===========
2000
----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
In thousands
Interest income $ 2,631 $ 2,692 $ 2,795 $ 2,917
Interest expense 1,238 1,277 1,382 1,468
----------- ----------- ----------- -----------
Net interest income 1,393 1,415 1,413 1,449
Provision for loan losses 30 30 30 80
Noninterest income 365 153 161 164
Noninterest expense 1,124 1,047 1,024 1,084
----------- ----------- ----------- -----------
Income before income taxes 604 491 520 449
Provision for income taxes 205 197 186 170
----------- ----------- ----------- -----------
Net income $ 399 $ 294 $ 334 $ 279
=========== =========== =========== ===========
Basic earnings per share $ 0.87 $ 0.64 $ 0.73 $ 0.61
=========== =========== =========== ===========
50
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, 2002,
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 72 1974 Retired - President, Citizens National Bank
John E. Barker 73 1972 Auto Sales - Service
Margaret S. Bartles 48 -- Realtor
Jay E. Dick 49 1983 Retired - Manager-Hunters' Hardware, Inc.
Herbert L. Eppinger 69 1979 Retired - Agriculture
Robert L. Hawvermale 72 1967 Retired - Professional Engineer
J. Philip Kesecker 72 1965 Real Estate Development
Raymond H. Lawyer 67 (1) 1979 Retired - President, Citizens National Bank
Jerry McGraw 55 1988 Insurance
Martha H. Quarantillo 42 1999 Pharmacist
Thomas F. Rokisky 55 1993 President and Chief Executive Officer, CNB and
Citizens National Bank
Charles S. Trump IV 41 1986 Attorney at Law
Arlie R. Yost 54 1988 Licensed Residential Appraiser
All nominees except for Margaret S. Bartles are incumbent directors of
CNB Financial Services, Inc. Margaret S. Bartles is a resident of Berkeley
County, West Virginia, has been a professional realtor for 25 years and is
currently an associate broker with Marlene and Markay Real Estate Inc.
(1) Raymond H. Lawyer passed away on March 18, 2002.
51
The names, ages and position of each executive officer of the company
are listed below along with the positions with Citizens National Bank held by
each of them during the last five years. Officers are appointed annually by the
Board of Directors at the meeting of directors immediately following the annual
meeting.
AGE AS OF
NAME MARCH 20, 2002 POSITION AND EXPERIENCE DURING THE PAST 5 YEARS
- ---- -------------- -----------------------------------------------
J. Philip Kesecker (1) 72 2000 to present - Chairman of the Board, CNB Financial Services, Inc.
1987 to present - Chairman of the Board, Citizens National Bank
Thomas F. Rokisky 55 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 42 2000 to present - Vice President, Secretary and Treasurer,
CNB Financial Services, Inc.
1996 to present - Sr. Vice President of Lending, Citizens National Bank
Rebecca S. Brock 41 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 61 2000 to present - Vice President, CNB Financial Services, Inc.
1996 to present - Vice President of Lending, Citizens National Bank
Patricia C. Muldoon 41 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 Jay E.
Dick and Charles S. Trump, IV, who each filed one report late. CNB is required
to report late filings.
52
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, 2001, 2000 and 1999, of those persons who were, as of
December 31, 2001, (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 2001 $98,759 $ -0- $13,722 (1)(2)
2000 $93,358 $ -0- $12,436 (1)(2)
1999 $89,095 $ -0- $11,403 (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 $99,502, $178,376 and $120,095 were
made by CNB in 2001, 2000 and 1999, 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 2001, the board of directors of CNB received $138,600, 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 2001 was $49,893. At December 31, 2001, these
policies had a net accumulated cash value of $883,533.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 22, 2002,
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.
53
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS (1)
---------------- ---------------- ----------------
J. Robert Ayers (2) 1,915 *
John E. Barker (3) 17,364 3.79
Jay E. Dick (4) 15,691 3.43
Herbert L. Eppinger (5) 2,870 *
Robert L. Hawvermale (6) 3,730 *
J. Philip Kesecker (7) 14,382 3.14
Raymond H. Lawyer (8) 1,374 *
Jerald McGraw (9) 1,514 *
Martha H. Quarantillo 400 *
Thomas F. Rokisky (10) 1,550 *
Charles S. Trump IV (11) 11,380 2.48
Arlie R. Yost (12) 2,210 *
All directors and executive officers as a group (15 persons) 72,913 15.92
D. Louise Stotler and Deborah Dhayer 47,488 10.37
RR 6 Box 12460, Berkeley Springs, WV 25411
Mary Lou Trump 53,470 11.67
RR 7 Box 12840, Berkeley Springs, WV 25411
* Indicates holdings of less than 1%.
(1) Includes shares of common stock held by the named individual as of
February 22, 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 1,274 shares held jointly with spouse.
(9) Includes 110 shares held by spouse and 964 shares held jointly
with spouse.
(10) Includes 1,425 shares held in an Individual Retirement Account.
(11) Includes 842 shares held by spouse and 270 shares held as custodian
for children.
(12) 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, 2001, 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 $1,003,168, or approximately
6.7% 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 $48,064 during 2001.
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 $22,000. Charles S. Trump, IV and
George I. McVey are partners in Trump and Trump.
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements listed on the index to Item 8
of this Annual Report on Form 10-K are filed as a part of this
Annual Report.
2. Financial Statement Schedules
All schedules applicable to the Registrant are shown in the
respective financial statements or in the notes thereto included in
this Annual Report.
3. Exhibits
2.2 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.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed in the fourth quarter of
2001.
55
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, 2002 /s/ Rebecca S. Brook
- -------------------------- ----------------------------------------
Rebecca S. Brock, Vice President/CFO
(Principal Financial and Accounting
Officer
Date March 28, 2002 /s/ Thomas F. Rokisky
- -------------------------- ----------------------------------------
Thomas F. Rokisky, President/CEO
56
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 2002.
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 Avers Director
- --------------------------------
J. ROBERT AVERS
/s/ John E. Barker Director
- --------------------------------
JOHN E. BARKER
/s/ Jav E. Dick Director
- --------------------------------
JAV E. DICK
/s/ Herbert L. Eppinger Director
- --------------------------------
HERBERT L. EPPINGER
/s/ Robert L. Hawvermale Director
- --------------------------------
ROBERT L. HAWVERMALE
/s/ Raymond H. Lawyer Director
- --------------------------------
RAYMOND H. LAWYER
/s/ Jerald McGraw Director
- --------------------------------
JERALD MCGRAW
/s/ Martha H. Quarantillo Director
- --------------------------------
MARTHA H. QUARANTILLO
/s/ Charles S. Trump IV Director
- --------------------------------
CHARLES S. TRUMP IV
/s/ Arlie R. Yost Director
- --------------------------------
ARLIE R. YOST
57