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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from - to --
Commission file number 0-30665
CNB Financial Services, Inc.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
United States of America 55-0773918
- --------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 S. Washington Street, Berkeley Springs, WV 25411
- ---------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (304) 258-1520
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES [ ] NO [ X ]
The aggregate value of the common stock of the Registrant that was held by
non-affiliates as of the most recently completed second fiscal quarter (June 30,
2003), was approximately $38.5 million. This amount was based on the last
closing sale price of a share of common stock of $100.00 as of the same date.
Common Stock $1 par value, 458,048 shares outstanding as of August 8, 2003
CNB FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART 1: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2003 (Unaudited) and December 31, 2002......... 3
Consolidated Statements of Income for the Three and Six
Months ended June 30, 2003 and 2002 (Unaudited)........ 4
Consolidated Statements of Changes in Shareholders'
Equity for the Six Months Ended June 30, 2003
(Unaudited) and the Year Ended December 31, 2002....... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002 (Unaudited)............... 6
Notes to Consolidated Financial Statements (Unaudited).... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three and Six
Months ended June 30, 2003............................. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 18
Item 4. Controls and Procedures...................................... 19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................. 21
SIGNATURES................................................... 22
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 indicates that
the disclosure of forward-looking information is desirable for investors and
encourages such disclosure by providing a safe harbor for forward-looking
statements that involve risk and uncertainty. All statements other than
statements of historical fact included in this Form 10-Q including statements in
Management's Discussion and Analysis of Financial Condition and Results of
Operations are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. In order to comply with the terms of the safe
harbor, CNB notes that a variety of factors could cause CNB's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in those forward-looking statements. These factors could
include the following possibilities: (1) competitive pressures among depository
and other financial institutions may increase significantly; (2) changes in the
interest rate environment may reduce margins; (3) general economic conditions
may become unfavorable resulting in reduced credit quality or demand for loans;
(4) legislative or regulatory changes; and (5) competitors may have greater
financial resources and develop products that enable them to compete more
successfully than CNB.
2
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
ASSETS 2003 2002
------------ ------------
(Unaudited)
Cash and due from banks $ 8,443,554 $ 7,832,735
Federal funds sold 2,221,633 4,127,299
Securities available for sale
(at approximate market value) 43,730,863 43,429,902
Federal Home Loan Bank stock, at cost 646,900 429,000
Federal Reserve Bank stock, at cost 129,650 129,650
Loans and lease receivable, net 132,597,708 128,330,303
Accrued interest receivable 801,652 891,986
Foreclosed real estate (held for sale), net 1,800 1,800
Premises and equipment, net 4,675,939 4,800,135
Cash surrender value of life insurance 1,047,745 964,179
Intangible assets 92,141 96,483
Other assets 1,152,632 568,608
------------ ------------
TOTAL ASSETS $195,542,217 $191,602,080
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 27,667,579 $ 26,663,469
Interest-bearing demand 30,927,318 30,087,763
Savings 23,128,522 21,489,855
Time, $100,000 and over 37,349,638 37,433,561
Other time 57,320,919 57,387,901
------------ ------------
$176,393,976 $173,062,549
Accrued interest payable 816,856 1,010,086
Deferred income taxes 28,021 158,269
Accrued expenses and other liabilities 1,668,297 1,101,158
------------ ------------
TOTAL LIABILITIES $178,907,150 $175,332,062
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $1 par value; 5,000,000 shares
authorized; 458,048 shares outstanding $ 458,048 $ 458,048
Capital surplus 3,863,592 3,863,592
Retained earnings 11,844,931 11,267,374
Accumulated other comprehensive income 468,496 681,004
------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 16,635,067 $ 16,270,018
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $195,542,217 $191,602,080
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
3
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------------ ------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $2,369,050 $2,268,127 $4,689,197 $4,478,250
Interest and dividends on securities
U.S. Government agencies and
corporations 335,699 493,769 676,933 1,073,772
Mortgage backed securities 161,108 87,708 322,887 91,990
State and political subdivisions 14,613 9,470 27,725 16,833
Other 7,499 7,331 12,098 15,396
Interest on federal funds sold 5,454 22,737 12,981 36,054
---------- ---------- ---------- ----------
$2,893,423 $2,889,142 $5,741,821 $5,712,295
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on interest bearing demand,
savings and time deposits $1,073,340 $1,343,743 $2,289,608 $2,726,326
Interest on federal funds purchased 124 -- 270 --
---------- ---------- ---------- ----------
$1,073,464 $1,343,743 $2,289,878 $2,726,326
---------- ---------- ---------- ----------
NET INTEREST INCOME $1,819,959 $1,545,399 $3,451,943 $2,985,969
PROVISION FOR LOAN LOSSES 86,000 38,500 137,000 111,500
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $1,733,959 $1,506,899 $3,314,943 $2,874,469
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts $ 247,305 $ 190,973 $ 438,094 $ 339,175
Other service charges, commissions
and fees 95,547 105,497 187,430 172,862
Insurance commissions 26,363 26,053 50,634 51,384
Other operating income 26,542 11,063 45,391 48,016
Net gain on sale of securities 52,497 23,903 97,092 78,028
Income from title company 13,300 19,400 23,550 33,400
Gain on sale of other real estate owned -- 4,127 -- 3,492
---------- ---------- ---------- ----------
$ 461,554 $ 381,016 $ 842,191 $ 726,357
---------- ---------- ---------- ----------
NONINTEREST EXPENSES
Salaries $ 483,439 $ 563,720 $1,162,828 $1,095,392
Employee benefits 216,920 182,250 429,140 370,477
Occupancy of premises 75,801 65,190 147,814 142,956
Furniture and equipment expense 184,898 93,737 302,435 180,828
Other operating expenses 509,738 403,595 912,237 825,752
---------- ---------- ---------- ----------
$1,470,796 $1,308,492 $2,954,454 $2,615,405
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES $ 724,717 $ 579,423 $1,202,680 $ 985,421
PROVISION FOR INCOME TAXES 283,873 212,934 446,484 345,151
---------- ---------- ---------- ----------
NET INCOME $ 440,844 $ 366,489 $ 756,196 $ 640,270
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.96 $ 0.80 $ 1.65 $ 1.40
========== ========== ========== ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Accumulated
Other Total
Common Capital Retained Comprehensive Shareholders'
Stock Surplus Earnings Income Equity
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2001 $ 458,048 $ 3,863,592 $ 10,426,618 $ 177,979 $ 14,926,237
------------
Comprehensive income:
Net income for 2002 -- -- 1,307,965 -- 1,307,965
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $308,306) -- -- -- 503,025 503,025
------------
Total Comprehensive Income -- -- -- -- 1,810,990
------------
Cash dividends ($1.02 per share) -- -- (467,209) -- (467,209)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2002 $ 458,048 $ 3,863,592 $ 11,267,374 $ 681,004 $ 16,270,018
Comprehensive income:
Net income for six months
ended June 30, 2003 -- -- 756,196 -- 756,196
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $12,071) -- -- -- (19,693) (19,693)
------------
Change in minimum pension liability
adjustment (net of tax of $118,177) (192,815) (192,815)
------------
Total Comprehensive Income -- -- -- -- 543,688
------------
Cash dividends ($0.39 per share) -- -- (178,639) -- (178,639)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2003 $ 458,048 $ 3,863,592 $ 11,844,931 $ 468,496 $ 16,635,067
============ ============ ============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
5
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
---------------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 756,196 $ 640,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 265,230 184,146
Provision for loan losses 137,000 111,500
Net (gain) on sale of securities (97,092) (78,028)
(Gain) on sale of real estate owned -- (3,492)
Decrease in accrued interest receivable 90,334 48,426
(Increase) decrease in other assets (344,733) 246,192
(Decrease) in accrued interest payable (193,230) (73,736)
(Increase) in cash surrender value on life insurance in excess
of premiums paid (15,000) (3,408)
Increase in accrued expenses and other liabilities 239,714 109,756
Amortization of deferred loan (fees) cost 14,333 35,713
Amortization (accretion) of premium and discount on investments 77,789 6,126
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 930,541 $ 1,223,465
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans $ (4,418,738) $ (4,760,972)
Proceeds from sales of securities 4,758,799 7,075,471
Proceeds from maturities of securities 15,499,727 11,594,511
Purchases of securities (20,789,848) (20,195,598)
Purchases of premises and equipment (359,550) (448,448)
Proceeds from sales of other real estate owned, net -- 48,390
Net (increase) decrease in federal funds sold 1,905,666 (954,894)
Premiums paid on life insurance (68,566) (49,078)
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES $ (3,472,510) $ (7,690,618)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits $ 3,482,332 $ 8,511,787
Net (decrease) increase in time deposits (150,905) 3,044,326
Cash dividends paid (178,639) (164,897)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 3,152,788 $ 11,391,216
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 610,819 $ 4,924,063
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,832,735 4,229,810
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,443,554 $ 9,153,873
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 2,482,837 $ 2,800,063
Income taxes $ 246,000 $ 264,000
Net transfer to foreclosed real estate, held for sale from loans
receivable $ -- $ 30,000
The Notes to Consolidated Financial Statements are an integral part of these
statements.
6
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
In the opinion of CNB, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of CNB financial
condition as of June 30, 2003 and the results of operations for the
three and six months ended June 30, 2003 and 2002 and cash flows for
the six months ended June 30, 2003 and 2002.
The accompanying unaudited financial statements have been
prepared in accordance with the instructions for Form 10-Q. These
financial statements should be read in conjunction with the
consolidated financial statements and the notes included in the CNB's
Annual Report for the year ended December 31, 2002.
Reclassifications:
Certain 2002 amounts have been reclassified to conform with
2003 classifications. Such reclassifications had no effect on financial
position and results of operations.
Note 2. Securities
The amortized cost and estimated market value of debt
securities at June 30, 2003 and December 31, 2002 by contractual
maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Securities are summarized as follows:
June 30, 2003 Weighted
------------------------------------------------------------------- Average
Gross Gross Estimated Tax
Amortized Unrealized Unrealized Fair Equivalent
Cost Gains Losses Value Yield
----------- ----------- ----------- ------------------------
Available for sale:
U.S. Government agencies
and corporations
Within one year $ 3,750,046 $ 7,804 $ -- $ 3,757,850 4.90%
After 1 but within 5 years 7,876,245 528,212 -- 8,404,457 4.71
After 5 but within 10 years 15,002,028 217,602 -- 15,219,630 4.55
----------- ----------- ----------- -----------
$26,628,319 $ 753,618 $ -- $27,381,937 4.65%
----------- ----------- ----------- -----------
States and political subdivisions
Within one year $ 350,000 $ 4,335 $ -- $ 354,335 6.21%
After 1 but within 5 years 368,364 4,167 -- 372,531 3.44
After 5 but within 10 years 775,000 58,556 -- 833,556 6.22
----------- ----------- ----------- -----------
$ 1,493,364 $ 67,058 $ -- $ 1,560,422 5.53%
----------- ----------- ----------- -----------
Mortgage backed securities $14,542,550 $ 246,135 $ 181 $14,788,504 4.93%
----------- ----------- ----------- -----------
Total securities available for sale $42,664,233 $ 1,066,811 $ 181 $43,730,863 4.77%
=========== =========== =========== ===========
Restricted:
Federal Reserve Bank stock $ 129,650 $ -- $ -- $ 129,650 6.00%
Federal Home Loan Bank stock 646,900 -- -- 646,900 2.25
----------- ----------- ----------- -----------
Total restricted investments $ 776,550 $ -- $ -- $ 776,550 2.92%
=========== =========== =========== ===========
7
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2. Securities (continued)
December 31, 2002 Weighted
------------------------------------------------------------------- Average
Gross Gross Estimated Tax
Amortized Unrealized Unrealized Fair Equivalent
Cost Gains Losses Value Yield
----------- ----------- ----------- ------------------------
Available for sale:
U.S. Government agencies
and corporations
Within one year $ 5,300,481 $ 26,917 $ -- $ 5,327,398 4.75%
After 1 but within 5 years 9,880,564 496,919 -- 10,377,483 4.76
After 5 but within 10 years 12,135,426 187,756 -- 12,323,182 4.99
----------- ----------- ----------- -----------
$27,316,471 $ 711,592 $ -- $28,028,063 4.86%
----------- ----------- ----------- -----------
States and political subdivisions
Within one year $ 350,000 $ 9,747 $ -- $ 359,747 8.27%
After 5 but within 10 years 775,000 21,967 -- 796,967 6.22
----------- ----------- ----------- -----------
$ 1,125,000 $ 31,714 $ -- $ 1,156,714 6.86%
----------- ----------- ----------- -----------
Mortgage backed securities $13,890,037 $ 355,088 $ -- $14,245,125 5.20%
----------- ----------- ----------- -----------
Total securities available for sale $42,331,508 $ 1,098,394 $ -- $43,429,902 5.02%
=========== =========== =========== ===========
Restricted:
Federal Reserve Bank stock $ 129,650 $ -- $ -- $ 129,650 6.00%
Federal Home Loan Bank stock 429,000 -- -- 429,000 3.25
----------- ----------- ----------- -----------
Total restricted investments $ 558,650 $ -- $ -- $ 558,650 3.89%
=========== =========== =========== ===========
The carrying value of securities pledged to secure public
deposits and for other purposes as required or permitted by law totaled
$12,669,665 at June 30, 2003 and $12,864,841 at December 31, 2002.
Proceeds from sales of securities available for sale
(excluding maturities) during the six months ended June 30, 2003 and
the year ended December 31, 2002 were $4,758,799 and $7,075,471,
respectively. Gross gains (losses) of $100,243 and $(3,151) during the
six months ended June 30, 2003 and $78,028 and $(-0-) for the year
ended December 31, 2002 were realized on the respective sales.
8
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Loans and Lease Receivable
Major classifications of loans at June 30, 2003 and December
31, 2002, were as follows:
JUNE 30, DECEMBER 31,
2003 2002
------------- -------------
Loans:
Real estate $ 88,971,240 $ 83,239,409
Commercial real estate 18,401,657 13,934,900
Consumer 18,055,574 22,575,379
Commercial 8,281,990 9,684,720
Overdrafts 80,758 72,763
------------- -------------
$ 133,791,219 $ 129,507,171
Lease: 133,059 135,341
------------- -------------
$ 133,924,278 $ 129,642,512
Net deferred loan fees, costs,
premiums and discounts 215,019 172,239
Allowance for loan losses (1,541,589) (1,484,448)
------------- -------------
$ 132,597,708 $ 128,330,303
============= =============
An analysis of the allowance for possible loan losses is as
follows:
JUNE 30, DECEMBER 31,
------------------------------- ------------
2003 2002 2002
----------- ----------- -----------
Balance, Beginning $ 1,484,448 $ 1,336,960 $ 1,336,960
Provision charged to
operations 137,000 111,500 261,000
Recoveries 24,910 25,663 37,230
Loans charged off (104,769) (68,192) (150,742)
----------- ----------- -----------
Balance, Ending $ 1,541,589 $ 1,405,931 $ 1,484,448
=========== =========== ===========
Loans are placed in nonaccrual status when, in the judgement
of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. When interest accruals are
discontinued, interest credited to income is reversed. Nonaccrual loans
are restored to accrual status when all delinquent principal and
interest becomes current or the loan is considered secured and in the
process of collection. Certain loans that are determined to be
sufficiently collateralized may continue to accrue interest after
reaching 90 days past due. A summary of nonperforming loans is as
follows:
JUNE 30, DECEMBER 31,
------------------------ ------------
2003 2002 2002
-------- -------- --------
Nonaccrual loans $420,519 $ 3,693 $ 12,711
Loans past due 90 days or more still accruing interest -- 149,779 553,170
-------- -------- --------
Total $420,519 $153,472 $565,881
======== ======== ========
9
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Loans and Lease Receivable (continued)
Proceeds from sale of loans during the six months ended June
30, 2003 and the year ended December 31, 2002 were $0. There were no
gains or losses on sale of loans.
Note 4. Time Deposits
At June 30, 2003, the scheduled maturities of time deposits
are as follows:
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- ------------
Within 3 months $ 6,152,639 $ 12,344,897
3 months thru 6 months 6,986,440 14,430,282
6 months thru 12 months 5,057,139 11,714,911
Over 12 months 19,153,420 56,180,467
------------ ------------
$ 37,349,638 $ 94,670,557
============ ============
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
CNB Financial Services, Inc. ("CNB" or the "Company") was
organized under the laws of West Virginia in March 2000 at the
direction of the Board of Directors of Citizens National Bank (the
"Bank") for the purpose of becoming a financial services holding
company. The Company's primary function is to direct, plan and
coordinate the business activities for the Bank and its subsidiary. We
refer to the Company and its subsidiary as "CNB".
On August 31, 2000, the Bank, via merger, became a
wholly-owned subsidiary of the Company and the shareholders of the Bank
became shareholders of the Company. Each Bank shareholder received two
shares of the Company stock for each share of the Bank's common stock.
The merger was accounted for as a pooling of interests.
The Bank was organized on June 20, 1934, and has operated in
Berkeley Springs in Morgan County, West Virginia, as a national banking
association continuously since that time. The Bank is a full-service
commercial bank conducting general banking and trust activities through
four full-service offices and three automated teller machines located
in Morgan and Berkeley Counties, West Virginia. The Bank formed CNB
Insurance Services, Inc., a wholly owned subsidiary, which is a
property and casualty insurance agency selling primarily personal lines
of insurance.
The Bank purchased a parcel of land in Berkeley County, West
Virginia on April 20, 2001 for $450,000 to construct a new branch
facility. The Bank leased a parcel of land adjacent to the purchased
land and rented a temporary facility in which to conduct business while
the permanent bank building was under construction. The temporary
facility opened for business in August 2001. Construction on the
permanent facility began in September 2001 and was completed in March
2002. On March 18, 2002, the temporary facility was closed, and the new
branch building opened.
The following discussion and analysis presents the significant
changes in financial condition and results of operations of CNB for the
three and six months ended June 30, 2003 and 2002. This discussion may
include forward-looking statements based upon management's
expectations. Actual results may differ. We have rounded amounts and
percentages used in this discussion and have based all average balances
on daily averages.
EARNINGS SUMMARY
Net income for the three months ended June 30, 2003 was
$441,000 or $0.96 per share compared to $366,000 or $0.80 per share for
the same period in 2002. Annualized return on average assets and
average equity were .91% and 10.63% respectively, for the three months
ended June 30, 2003, compared with .81% and 9.74%, respectively, for
the three months ended June 30, 2002.
Net income for the six months ended June 30, 2003 was $756,000
or $1.65 per share compared to $640,000 or $1.40 per share for the same
period in 2002. Annualized return on average assets and average equity
were .78% and 9.15% respectively, for the six months ended June 30,
2003, compared with .72% and 8.51%, respectively, for the six months
ended June 30, 2002.
NET INTEREST INCOME
Net interest income represents the primary component of CNB's
earnings. It is the difference between interest and fee income related
to earning assets and interest expense incurred to carry
interest-bearing liabilities. Changes in the volume and mix of interest
earning assets and interest bearing liabilities, as well as changing
interest rates impact net interest income. To manage these changes,
their impact on net interest income and the risk associated with them,
CNB utilizes an ongoing asset/liability management program. This
program includes analysis of the difference between rate sensitive
assets and rate sensitive liabilities, earnings sensitivity to rate
changes, and source and use of funds. A discussion of net interest
income and the factors impacting it is presented below.
11
Net interest income for the three months ended June 30, 2003
increased by $274,000 or 17.8% over the same period in 2002. Interest
income for the three months ended June 30, 2003 increased by $4,000 or
0.2% compared to the same period in 2002, while interest expense
decreased by $270,000 or 20.1% during the three months ended June 30,
2003, as compared to the same period in the prior year.
Net interest income for the six months ended June 30, 2003
increased by $466,000 or 15.6% over the same period in 2002. Interest
income for the three months ended June 30, 2003 increased by $30,000 or
0.5% compared to the same period in 2002, while interest expense
decreased by $436,000 or 16.0% during the three months ended June 30,
2003, as compared to the same period in the prior year.
Increased net interest income for the three and six month
periods is attributable to a significantly higher level of net interest
earning assets offset by a decrease in the rates earned thereon. Due to
the higher loan demand, the Bank has experienced a shift in the asset
mix from lower yielding overnight federal funds and investment
securities to higher yielding loans. The decrease in the rates earned
on interest earning assets is due to the current economic conditions.
Although deposit growth remains strong, the substantial deposit growth
the Bank experienced in 2002 has leveled off. The Bank's increased loan
demand and static deposit growth has resulted in an increased loan to
deposit ratio. Although, the average balance on interest bearing
liabilities increased, total interest expense decreased due to a
decrease in the average rates paid on all interest bearing liabilities.
During the second quarter of 2003 compared to the same period
in 2002, average net interest earning assets increased $12.9 million or
7.6% and average net interest bearing liabilities increased $6.1
million or 4.3% resulting in increased net interest income. CNB
experienced a 32 basis point increase in the ratio of net interest
income to average interest earning assets. The 89 basis point decrease
in rates paid on average interest bearing liabilities offset by a 49
basis point decrease in rates earned on average interest earning assets
contributed to the increase in the net interest margin. See Table 1 and
Table 2 - Distribution of Assets, Liabilities, and Shareholders'
Equity; Interest Rates and Interest Differential.
The net interest margin is impacted by the change in the
spread between yields on earning assets and rates paid on interest
bearing liabilities.
12
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
JUNE 30, 2003 JUNE 30, 2002
----------------------------------- -----------------------------------
QTR QTR
AVERAGE QTR YIELD/ AVERAGE QTR YIELD/
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
----------------------------------- -----------------------------------
(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold $ 1,796 $ 5 1.15% $ 4,187 $ 23 1.65%
Securities:
Taxable 45,255 508 4.49 48,878 593 4.85
Tax-exempt (1) 1,164 11 5.73 682 5 4.44
Loans (net of unearned interest) (2)(5)(6) 133,131 2,251 6.76 114,723 2,165 7.55
--------------------------------- ---------------------------------
Total interest earning assets (1) $ 181,346 $ 2,775 6.12% $ 168,470 $ 2,786 6.61%
--------------------------------- ---------------------------------
Nonearning assets:
Cash and due from banks $ 6,401 $ 7,665
Bank premises and equipment, net 4,724 4,508
Other assets 2,951 2,348
Allowance for loan losses (1,531) (1,398)
--------- ---------
Total assets $ 193,891 $ 181,593
========= =========
Interest bearing liabilities:
Savings deposits $ 22,819 $ 28 0.49% $ 19,342 $ 25 0.52%
Time deposits 94,536 961 4.07 95,347 1,229 5.16
NOW accounts 24,574 71 1.16 22,513 77 1.37
Money market accounts 6,485 13 0.80 5,087 12 0.94
--------------------------------- ---------------------------------
Total interest bearing liabilities $ 148,414 $ 1,073 2.89% $ 142,289 $ 1,343 3.78%
--------------------------------- ---------------------------------
Noninterest bearing liabilities:
Demand deposits $ 26,538 $ 22,454
Other liabilities 2,357 1,790
Shareholders' equity 16,582 15,060
--------- ---------
Total liabilities and
shareholders' equity $ 193,891 $ 181,593
========= =========
------- -------
Net interest income (1) $ 1,702 $ 1,443
======= =======
Net interest spread (3) 3.23% 2.83%
====== =====
Net interest income to average
interest earning assets (1) 3.75% 3.43%
====== =====
(1) Yields are expressed on a tax equivalent basis using a 34% tax rate.
(2) For the purpose of these computations, nonaccruing loans are included in
the amounts of average loans outstanding.
(3) Net interest spread is the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(4) Yields/Rates are expressed on annualized basis.
(5) Interest income on loans excludes fees of $118,000 in 2003 and $103,000 in
2002.
(6) Interest income on loans includes fees of $38,445 in 2003 and $52,960 in
2002 from the Business Manager Program, student loans and lease
receivables.
13
TABLE 2. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
JUNE 30, 2003 JUNE 30, 2002
----------------------------------- -----------------------------------
YTD YTD
AVERAGE YTD YIELD/ AVERAGE YTD YIELD/
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
----------------------------------- -----------------------------------
(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold $ 1,950 $ 13 1.15% $ 3,691 $ 36 1.64%
Securities:
Taxable 45,513 1,019 4.48 48,628 1,189 4.89
Tax-exempt (1) 1,036 20 5.85 489 9 5.58
Loans (net of unearned interest) (2)(5) 132,231 4,483 6.78 113,600 4,305 7.58
--------------------------------- ---------------------------------
Total interest earning assets (1) $ 180,730 $ 5,535 6.13% $ 166,408 $ 5,539 6.66%
--------------------------------- ---------------------------------
Nonearning assets:
Cash and due from banks $ 6,443 $ 6,342
Bank premises and equipment, net 4,761 4,444
Other assets 3,102 2,399
Allowance for loan losses (1,513) (1,383)
--------- ---------
Total assets $ 193,523 $ 178,210
========= =========
Interest bearing liabilities:
Savings deposits $ 22,274 $ 55 0.49% $ 18,682 $ 66 0.71%
Time deposits 95,121 2,070 4.35 94,654 2,477 5.23
NOW accounts 24,396 141 1.16 21,623 155 1.43
Money market accounts 6,322 24 0.76 5,106 28 1.10
--------------------------------- ---------------------------------
Total interest bearing liabilities $ 148,113 $ 2,290 3.09% $ 140,065 $ 2,726 3.89%
--------------------------------- ---------------------------------
Noninterest bearing liabilities:
Demand deposits $ 26,508 $ 21,221
Other liabilities 2,369 1,876
Shareholders' equity 16,533 15,048
--------- ---------
Total liabilities and
shareholders' equity $ 193,523 $ 178,210
========= =========
Net interest income (1) $ 3,245 $ 2,813
======= =======
Net interest spread (3) 3.04% 2.77%
===== =====
Net interest income to average
interest earning assets (1) 3.59% 3.38%
===== =====
(1) Yields are expressed on a tax equivalent basis using a 34% tax rate.
(2) For the purpose of these computations, nonaccruing loans are included in
the amounts of average loans outstanding.
(3) Net interest spread is the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(4) Yields/Rates are expressed on annualized basis.
(5) Interest income on loans excludes fees of $207,000 in 2003 and $173,000 in
2002.
(6) Interest income on loans includes fees of $69,338 in 2003 and $99,411 in
2002 from the Business Manager Program, student loans and lease
receivables.
14
PROVISION FOR LOAN LOSSES
The amount charged to provision for loan losses is based on
management's evaluation of the loan portfolio. Management determines
the adequacy of the allowance for loan losses, based on past loan loss
experience, current economic conditions and composition of the loan
portfolio. The allowance for loan losses is the best estimate of
management of the probable losses which have been incurred as of a
balance sheet date.
The provision for loan losses is a charge to earnings which is
made to maintain the allowance for loan losses at a sufficient level.
The provision for loan losses for the three months ended June 30, 2003,
and June 30, 2002, amounted to $86,000 and $39,000, respectively. The
provision for loan losses for the six months ended June 30, 2003, and
June 30, 2002, amounted to $137,000 and $112,000, respectively. Loan
quality remains stable and past due and nonaccruals are minimal.
Management believes the allowance for loan losses is adequate and is
not aware of any information relating to the loan portfolio which it
expects will materially impact future operating results, liquidity or
capital resources. In addition, federal regulators may require
additional reserves as a result of their examination of the bank. See
"Nonperforming Assets and Allowance for Loan Losses" for further
discussion.
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 2003
increased $81,000 or 21.1% to $462,000 from $381,000 in the second
quarter of 2002. The increase in noninterest income is attributable to
fees generated from the Bounce Protection program, debit cards, gain on
sale of loans and gain on sale of investment securities offset by a
decrease in overdraft fees, title insurance commissions, gain on sale
of other real estate owned and trust fee income. The fees related to
the Bounce Protection program and debit cards have a direct correlation
to the increased deposit base of the bank. The decrease in trust fees
was a direct result of the fees earned from the settlement of an estate
in the second quarter of 2002.
Noninterest income for the six months ended June 30, 2003
increased $116,000 or 16.0 % to $842,000 from $726,000 for the same
period in 2002. The increase in noninterest income was attributable to
fees generated from the Bounce Protection program, debit card income,
gain on sale of loans and gain on sale of investment securities offset
by a decrease in overdraft fees, title insurance commissions, trust fee
income and gain on sale of other real estate owned.
Another factor affecting noninterest income is in March 2002,
one of the Bank's Board of Directors passed away and the Bank was the
beneficiary of a life insurance policy on the director. The Bank
received $43,379 in a death benefit, $21,645 of which was recorded in
assets as cash surrender value. The difference of $21,734 was reflected
in other operating income during the first quarter 2002.
NONINTEREST EXPENSES
Noninterest expenses for the three and six months ended June
30, 2003, increased $162,000 or 12.4% and $339,000 or 13.0% primarily
due to increases in employee benefits, occupancy expense, furniture,
fixtures and equipment expenses and other operating expenses. Employee
benefit costs rose due to increased health insurance and pension costs.
The increase in occupancy expense was due to an increase in
depreciation relating to the new south Martinsburg branch facility and
general building repairs and maintenance expenses. The increase in
furniture and equipment expense was due to an increase in depreciation
expense relating to the new computer equipment and peripherals
associated with the upgrade of the Bank's technology systems. Another
factor relating to the increase in furniture and equipment expense was
an increase in the cost of equipment maintenance contracts the Bank
entered into. The increase in other operating expenses was due to an
increase in stationery, supplies & printing, postage, data processing
and debit card expense offset by a decrease in telephone, advertising
and ATM (Automated Teller Machine) expense.
INCOME TAXES
The Bank's provision for income taxes increased $71,000 or
33.3% to $284,000 for the three months ended June 30, 2003 and
increased $101,000 or 29.4% to $446,000 for the six months ended June
30, 2003. The effective tax rates for the second quarter of 2003 and
2002 were 39.2% and 36.8%, respectively and for the first six months of
2003 and 2002 were 37.1% and 35.0%, respectively. The Bank's higher
effective tax rate for the first six months of 2003
15
compared to the first six months of 2002, is due to an decrease in
nontaxable income, principally life insurance proceeds. The increase in
the income tax provision in 2003 is attributable to higher taxable
income. The Bank's income tax expense differs from the amount computed
at statutory rates primarily due to the tax-exempt earnings from
certain investment securities.
FINANCIAL CONDITION
The Bank's total assets at June 30, 2003 increased $4.0
million or 2.1% to $195.5 million from December 31, 2002 due primarily
to a $4.3 million increase in loans, $301,000 increase in investment
securities, a $611,000 increase in cash and due from banks and a
$584,000 increase in other assets offset by a $1.9 million decrease in
federal funds sold. The Bank's total liabilities increased $3.6 million
or 2.0% to $178.9 million at June 30, 2003, consisting mainly of
deposit growth, which increased to $176.4 million. Shareholders' equity
increased $365,000 to $16.6 million at June 30, 2003, primarily due to
net income of $756,000 offset by the semi-annual cash dividend of
$179,000 and a $212,000 decrease in accumulated other comprehensive
income. The components of accumulated other comprehensive income at
June 30, 2003, were unrealized gains and losses on available for sale
securities, net of deferred income taxes and minimum pension liability
adjustment, net of deferred income taxes. The unrealized gains and
losses are primarily a function of available market interest rates
relative to the yield being generated on the available for sale
portfolio. No earnings impact results unless the securities are
actually sold.
LOAN PORTFOLIO
At June 30, 2003, total loans increased $4.3 million or 3.3%
to $132.6 million from $128.3 million at December 31, 2002. The loan
mix showed a slight change compared with December 31, 2002. The loan
portfolio change is primarily due to the reclassification of loans
within the loan portfolio during the Bank's recent mainframe computer
conversion. The Bank feels additional growth in all lending areas is
possible during the remainder of 2003.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of nonaccrual loans, loans which
are past due 90 days or more and still accruing interest, restructured
loans and other real estate owned. The following table summarized the
Bank's nonperforming assets as of the periods shown:
JUNE 30, DECEMBER 31,
------------------------- ------------
2003 2002 2002
-------- -------- --------
Nonaccrual loans $420,519 $ 3,693 $ 12,711
Loans past due 90 days or more
still accruing interest -- 149,779 553,170
-------- -------- --------
Total nonperforming loans $420,519 $153,472 $565,881
-------- -------- --------
Other real estate owned $ 1,800 $ -- $ 1,800
-------- -------- --------
Total nonperforming assets $422,319 $153,472 $567,681
======== ======== ========
Nonperforming loans/Total loans 0.32% 0.13% 0.44%
Nonperforming assets/Total assets 0.22% 0.08% 0.30%
Allowance for loan losses/Total loans 1.16% 1.22% 1.16%
As of June 30, 2003, the Bank has no loans which management
considers to be impaired. Management is aware of two borrowers who have
exhibited weaknesses. Their loans have aggregate uninsured balances of
$705,623. A specific allowance of $37,633 related to these loans has
been established as part of the allowance for loan losses. The loans
are collateralized and management anticipates any additional potential
loss would be minimal.
16
The allowance for loan losses is the best estimate by
management of the probable losses which have been incurred as of a
balance sheet date. Management makes this determination quarterly by
its analysis of overall loan quality, changes in the mix and size of
the loan portfolio, previous loss experience, general economic
conditions, information about specific borrowers and other factors. The
Bank's methodology for determining the allowance for loan losses
established both an allocated and an unallocated component. The
allocated portion of the allowance represents the results of analyses
of individual loans that the Bank monitors for potential credit
problems and pools of loans within the portfolio. Management bases the
allocated portion of the allowance for loans principally on current
loan risk ratings, historical loan loss rates adjusted to reflect
current conditions, as well as analyses of other factors that may have
affected the collectibility of loans in the portfolio. The Bank
analyzes all commercial loans it is monitoring as potential credit
problems to determine whether those loans are impaired, with impairment
measured by reference to the borrowers' collateral values and cash
flows.
The unallocated portion of the allowance for loan losses
represents the results of analyses that measure probable losses
inherent in the portfolio that are not adequately captured in the
allocated allowance analyses. These analyses include consideration of
unidentified losses inherent in the portfolio resulting from changing
underwriting criteria, changes in the types and mix of loans
originated, industry concentrations and evaluations, allowance levels
relative to selected overall credit criteria and other economic
indicators used to estimate probable incurred losses. At June 30, 2003,
and December 31, 2002, the allowance for loans losses totaled $1.5
million. The allowance for loans losses as a percentage of loans was
1.16% as of June 30, 2003 and December 31, 2002.
An analysis of the allowance for loan losses is summarized
below:
In thousands JUNE 30, DECEMBER 31,
------------------------------ ------------------------------
2003 2002
------------------------------ ------------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ -------------- ------ --------------
Commercial, financial
and agriculture $ 531 20% $ 330 18%
Real estate - residential
mortgage 338 66 391 65
Installment and other 263 14 364 17
Unallocated 410 N/A 399 N/A
------ ----- ------ -----
Total $1,542 100% $1,484 100%
====== ===== ====== =====
DEPOSITS
The Bank's deposits increased $3.3 million or 1.9% during the
six months ended June 30, 2003. The Bank has experienced a slight
change in the deposit account mix during the first six months of 2003.
Steady growth continues in interest-bearing demand and savings
deposits. The increase is primarily due to the maturity of rate
sensitive certificate of deposits and customers temporarily placing
their money in demand or savings accounts. The Bank has experienced a
slight decrease in other time deposits and rate sensitive jumbo
certificate of deposits during the first six months of 2003. The
decrease is primarily due to the maturity of the 36-month Ultimate
Certificate of Deposit. These maturities are offset by an increase in
other time deposits. Deposits, in general, have experienced an increase
due to customer's concerns with the weak economy and stock market.
17
CAPITAL RESOURCES
Shareholders' equity increased $365,000 or 2.2% during the
first six months of 2003 due to $756,000 in net income offset by the
semi-annual cash dividend of $179,000 and a $212,000 decrease in
accumulated other comprehensive income. The Bank is subject to
regulations of the Office of the Comptroller of the Currency that
impose certain minimum regulatory capital requirements. Under each
measure, the Bank was substantially in excess of the minimum regulatory
requirements, and, by definition was "well capitalized" at June 30,
2003. The following table summarized, as of June 30, 2003, the Bank's
capital ratios.
Components Actual Required
of Capital Ratio Ratio
---------- ------ --------
Tier 1 Capital $16,160 8.3% 4.0%
Total Risk Based Capital $17,592 15.4% 8.0%
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. This
Statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives)
and for hedging activities under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement should be applied prospectively for
contracts entered into or modified after June 30, 2003.
In May 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities
and Equity. This Statement established standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This Statement is
effective at the beginning of the first interim period beginning after
June 15, 2003.
Adoption of Statements 149 and 150 are not expected to have a
material impact on CNB Financial Services, Inc.'s financial condition
or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to economic loss that arises from
changes in the values of certain financial instruments. The types of
market risk exposures generally faced by banking entities include
interest rate risk, equity market price risk, foreign currency risk and
commodity price risk. Due to the nature of its operations, only equity
market price risk and interest rate risk are significant to the Bank.
The objective of the Bank's liquidity management program is
to ensure the continuous availability of funds to meet the withdrawal
demands of depositors and the credit needs of borrowers. The basis of
the Bank's liquidity comes from the stability of its core deposits.
Liquidity is also available through the available for sale securities
portfolio and short-term funds such as federal funds sold. At June 30,
2003, these totaled $46.0 million, or 23.5% 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 June 30, 2003, 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 $931,000 of cash
from operations in the first six months of 2003, which compares to $1.2
million during the same time period in 2002. Additional cash of $3.2
million was generated through net financing activities through June 30,
2003, which compares to $11.4 million for the first six months of 2002.
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 $3.5
million during the first six months of 2003 compared to $7.7 million
during the same time period in 2002. Details on both the sources and
uses of cash are presented in the Consolidated Statements of Cash Flows
contained in the financial statements.
18
The objective of the Bank's interest rate sensitivity
management program, also known as asset/liability management, is to
maximize net interest income while minimizing the risk of adverse
effects from changing interest rates. This is done by controlling the
mix and maturities of interest sensitive assets and liabilities. The
Bank has established an asset/liability committee for this purpose.
Daily management of the Bank's sensitivity of earnings to changes in
interest rates within the Bank's policy guidelines are monitored by
using a combination of off-balance sheet and on-balance sheet financial
instruments. The Bank's Chief Executive Officer, Senior Lending
Officer, Chief Financial Officer and the Chief Operations Officer
monitor day to day deposit flows, lending requirements and the
competitive environment. Rate changes occur within policy guidelines if
necessary to minimize adverse effects. Also, the Bank's policy is
intended to ensure the Bank measures a range of rate scenarios and
patterns of rate movements that are reasonably possible. The Bank
measures the impact that 200 basis point changes in rates would have on
earnings over the next twelve months.
In analyzing interest rate sensitivity for policy measurement,
the Bank compares its forecasted earnings in both a "high rate" and
"low rate" scenario to a base-line scenario. The Bank's base-line
scenario is its estimated most likely path for future short-term
interest rates over the next 12 months. The "high rate" and "low rate"
scenarios assumes a 100 and 200 basis point increases or decreases in
the prime rate from the beginning point of the base-line scenario over
the most current 12-month period. The Bank's policy limit for the
maximum negative impact on earnings resulting from "high rate" or "low
rate" scenarios is 10 percent. The policy measurement period is 12
months in length, beginning with the first month of the forecast.
The Bank's base-line scenario holds the prime rate constant at
4.00 percent through June 2004. Based on the July 2003 outlook, if
interest rates increased or decreased by 200 basis points, the model
indicates that net interest income during the policy measurement period
would be affected by less than 10 percent, in both an increasing or
decreasing interest rate scenario.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial
officer, based on their evaluation as of the end of the reporting
period of this quarterly report of the Company's disclosure controls
and procedures (as defined in Rule 13 (a) - 14 (c) of the Securities
Exchange Act of 1934), have concluded that the Company's disclosure
controls and procedures are adequate and effective for purposes of Rule
13 (a) - 14 (c) and timely, alerting them to material information
relating to the Company required to be included in the Company's
filings with the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation with the exception
of the Company converting to the use of new software for its core
processing system on February 14, 2003. The conversion significantly
affected the Company's accounting systems as well as the loan and
deposit processing. The conversion resulted in changes to procedures
and controls, both manual and through electronic data processing.
Throughout the preparation for the conversion, the new procedures and
controls were reviewed and planned for and are in the implementation
stage. Although, the Company's procedures and controls have changed
with the conversion, management's conclusion that the controls are
adequate and effective has not changed.
As exhibits to this quarterly report on Form 10-Q,
certificates of the chief executive officer and chief financial officer
appear. This form of certification is required in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002. This section of the
quarterly report on Form 10-Q is the information concerning the
controls evaluation referred to in the Section 302 certifications. This
information should be read in conjunction with those certifications for
a more complete understanding of the topics presented.
Disclosure controls are procedures that a company designs with
the objective of ensuring that information required to be disclosed in
their reports filed under the Securities Exchange Act of 1934 (such as
this Form 10-Q), is recorded, processed, summarized and reported within
the time period specified under the SEC's rules and forms. Disclosure
controls are also designed with the objective of ensuring that such
information is accumulated and communicated to management, including
the CEO and CFO, as appropriate, to allow timely decisions regarding
required disclosure. Internal controls are procedures that a company
designs with the objective of providing reasonable assurance that
transactions are properly authorized, assets are safeguarded against
unauthorized or improper use and transactions are properly recorded and
reported all to
19
permit the preparation of a company's financial statements in
conformity with generally accepted accounting principles.
The Company's management, including the CEO and CFO, does not
expect that our disclosure controls or internal controls will prevent
all error and fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a
control system must reflect that fact that there are resource
constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company
have been detected. These inherent limitations include the realities
that judgments and decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the
control. The design of any system of control also is based in part upon
certain assumptions about the likelihood of future events and there can
be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate.
Based upon the controls evaluation conducted by our CEO and
CFO, they have concluded that, subject to the limitations noted above,
the company's disclosure controls are effective to ensure that material
information relating to CNB Financial Services and its subsidiaries is
made known to management, including the CEO and CFO, particularly
during that period when our periodic reports are being prepared, and
that our internal controls are effective to provide reasonable
assurance that our financial statements are fairly presented in
conformity with generally accepted accounting principles.
20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None; however, CNB is involved in various legal proceedings
occurring in the ordinary course of business. There are no
material legal proceedings to which CNB or its subsidiary is a
part, or to which any of their property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
a.) The annual meeting of stockholders of CNB Financial Services,
Inc. was held April 2, 2003.
b.) Proxies for the annual meeting were solicited pursuant to
Regulation 14A under the Securities and Exchange Act of 1934.
There was no solicitation in opposition to management's
nominees as listed in the proxy statement, and all such
nominees were reelected.
c.) (1) Election of Directors
Elected to serve as directors until the 2004 annual meeting of
stockholders:
Without
For Authority
--- ---------
J. Robert Ayers 249,900 296
John E. Barker 249,900 296
Margaret S. Bartles 249,900 296
Jay E. Dick 249,900 296
Herbert L. Eppinger 249,900 296
Robert L. Hawvermale 249,900 296
J. Philip Kesecker 249,900 296
Jerald McGraw 249,900 296
Martha H. Quarantillo 249,900 296
Thomas F. Rokisky 249,900 296
Charles S. Trump, IV 249,900 296
Arlie R. Yost 249,900 296
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits:
31.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
b.) Reports on Form 8-K:
Date of Report Item Description
-------------- ---- -----------
August 8, 2003 12 The Company issued a press
release that announced
operating results of its first
six months ended June 30, 2003
21
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CNB Financial Services, Inc.
----------------------------
(Registrant)
Date August 8, 2003 /s/ Thomas F. Rokisky, President/CEO
-------------- ------------------------------------
Date August 8, 2003 /s/ Rebecca S. Stotler, Vice President/CFO
-------------- ------------------------------------------
22