Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
incorporation or organization) Identification No.)
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 November 13, 2003
CNB FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART 1: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2003 (Unaudited)
and December 31, 2002....................................................................3
Consolidated Statements of Income for the Three and Nine Months
ended September 30, 2003 and 2002 (Unaudited) ...........................................4
Consolidated Statements of Changes in Shareholders' Equity for the Nine
Months Ended September 30, 2003 (Unaudited) and the Year Ended December 31, 2002.........5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 Nine Months ended September 30, 2003............11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................19
Item 4. Controls and Procedures....................................................................20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................................................22
Item 6. Exhibits and Reports on Form 8-K..........................................................22
SIGNATURES................................................................................23
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 indicates that
the disclosure of forward-looking information is desirable for investors and
encourages such disclosure by providing a safe harbor for forward-looking
statements that involve risk and uncertainty. All statements other than
statements of historical fact included in this Form 10-Q including statements in
Management's Discussion and Analysis of Financial Condition and Results of
Operations are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. In order to comply with the terms of the safe
harbor, CNB notes that a variety of factors could cause CNB's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in those forward-looking statements. These factors could
include the following possibilities: (1) competitive pressures among depository
and other financial institutions may increase significantly; (2) changes in the
interest rate environment may reduce margins; (3) general economic conditions
may become unfavorable resulting in reduced credit quality or demand for loans;
(4) legislative or regulatory changes could increase expenses; and (5)
competitors may have greater financial resources and develop products that
enable them to compete more successfully than CNB.
2
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
ASSETS 2003 2002
------------- -------------
(Unaudited)
Cash and due from banks $ 8,063,849 $ 7,832,735
Federal funds sold 565,624 4,127,299
Securities available for sale
(at approximate market value) 42,680,827 43,429,902
Federal Home Loan Bank stock, at cost 858,700 429,000
Federal Reserve Bank stock, at cost 129,650 129,650
Loans and lease receivable, net 140,037,963 128,330,303
Accrued interest receivable 856,486 891,986
Foreclosed real estate (held for sale), net 107,619 1,800
Premises and equipment, net 4,649,673 4,800,135
Cash surrender value of life insurance 1,047,745 964,179
Deferred income taxes 349,799 --
Intangible assets 89,970 96,483
Other assets 881,271 568,608
------------- -------------
TOTAL ASSETS $ 200,319,176 $ 191,602,080
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 26,546,718 $ 26,663,469
Interest-bearing demand 35,588,785 30,087,763
Savings 23,652,063 21,489,855
Time, $100,000 and over 36,458,246 37,433,561
Other time 57,780,450 57,387,901
------------- -------------
$ 180,026,262 $ 173,062,549
Accrued interest payable 827,872 1,010,086
FHLB borrowings 1,250,000 --
Deferred income taxes -- 158,269
Accrued expenses and other liabilities 1,597,894 1,101,158
------------- -------------
TOTAL LIABILITIES $ 183,702,028 $ 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 12,443,457 11,267,374
Accumulated other comprehensive income (147,949) 681,004
------------- -------------
TOTAL SHAREHOLDERS' EQUITY $ 16,617,148 $ 16,270,018
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 200,319,176 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 2,445,543 $ 2,253,727 $ 7,134,740 $ 6,731,977
Interest and dividends on securities
U.S. Government agencies and
corporations 316,991 401,999 993,924 1,475,771
Mortgage backed securities 109,466 158,269 432,353 250,259
State and political subdivisions 16,465 13,113 44,190 29,946
Other 3,499 3,728 15,597 19,124
Interest on federal funds sold 3,500 30,124 16,481 66,178
----------- ----------- ----------- -----------
$ 2,895,464 $ 2,860,960 $ 8,637,285 $ 8,573,255
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on interest bearing demand, $ 969,351 $ 1,334,613 $ 3,258,959 $ 4,060,939
savings and time deposits
Interest on federal funds purchased 555 -- 825 --
Interest on FHLB borrowings 1,877 -- 1,877 --
----------- ----------- ----------- -----------
$ 971,783 $ 1,334,613 $ 3,261,661 $ 4,060,939
----------- ----------- ----------- -----------
NET INTEREST INCOME $ 1,923,681 $ 1,526,347 $ 5,375,624 $ 4,512,316
PROVISION FOR LOAN LOSSES 57,000 40,500 194,000 152,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 1,866,681 $ 1,485,847 $ 5,181,624 $ 4,360,316
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts $ 255,337 $ 199,188 $ 693,431 $ 538,363
Other service charges, commissions
and fees 90,042 82,333 277,472 255,195
Insurance commissions 29,426 27,331 80,060 78,715
Other operating income 16,290 11,935 61,681 59,951
Net gain on sale of securities 63,981 -- 161,073 78,028
Income from title company 16,500 7,500 40,050 40,900
Gain (loss) on sale of other real estate owned (876) -- (876) 3,492
----------- ----------- ----------- -----------
$ 470,700 $ 328,287 $ 1,312,891 $ 1,054,644
----------- ----------- ----------- -----------
NONINTEREST EXPENSES
Salaries $ 592,531 $ 588,030 $ 1,755,359 $ 1,683,422
Employee benefits 188,652 183,844 617,792 554,321
Occupancy of premises 75,296 62,758 223,110 205,714
Furniture and equipment expense 165,621 90,260 468,056 271,088
Other operating expenses 387,628 432,084 1,299,865 1,257,836
----------- ----------- ----------- -----------
$ 1,409,728 $ 1,356,976 $ 4,364,182 $ 3,972,381
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES $ 927,653 $ 457,158 $ 2,130,333 $ 1,442,579
PROVISION FOR INCOME TAXES 329,127 160,319 775,611 505,470
----------- ----------- ----------- -----------
NET INCOME $ 598,526 $ 296,839 $ 1,354,722 $ 937,109
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 1.31 $ 0.65 $ 2.96 $ 2.05
=========== =========== =========== ===========
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 nine months
ended September 30, 2003 - - 1,354,722 - 1,354,722
Change in unrealized gains
(losses) on securities
available for sale (net of
tax of $389,891) - - - (636,138) (636,138)
Change in minimum pension liability
adjustment (net of tax of $118,177) (192,815) (192,815)
---------------
Total Comprehensive Income - - - - 525,769
---------------
Cash dividends ($0.39 per share) - - (178,639) - (178,639)
-------------- --------------- --------------- --------------- ---------------
BALANCE, SEPTEMBER 30, 2003 $ 458,048 $ 3,863,592 $12,443,457 $ (147,949) $16,617,148
============== =============== =============== =============== ===============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
5
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,354,722 $ 937,109
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 407,785 261,743
Provision for loan losses 194,000 152,000
Net (gain) on sale of securities (161,073) (78,028)
(Gain) loss on sale of real estate owned 876 (3,492)
Decrease in accrued interest receivable 35,500 63,428
(Increase) decrease in other assets (68,716) 274,046
(Decrease) in accrued interest payable (182,214) (177,441)
(Increase) in cash surrender value on life insurance in excess
of premiums paid (15,000) (3,408)
Increase in accrued expenses and other liabilities 169,311 76,419
Amortization of deferred loan (fees) cost 6,349 56,319
Amortization (accretion) of premium and discount on investments 127,613 15,244
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,869,153 $ 1,573,939
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans $(12,015,627) $ (9,649,661)
Proceeds from sales of securities 11,628,314 7,075,471
Proceeds from maturities of securities 23,091,545 28,653,020
Purchases of securities (35,393,053) (34,290,835)
Purchases of premises and equipment (478,324) (1,032,053)
Proceeds from sales of other real estate owned, net 924 48,390
Net (increase) decrease in federal funds sold 3,561,674 (4,973,533)
Premiums paid on life insurance (68,566) (49,078)
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES $ (9,673,113) $(14,218,279)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits $ 7,546,479 $ 14,401,646
Net increase (decrease) in time deposits (582,766) 2,994,160
Net increase in FHLB borrowings 1,250,000 --
Cash dividends paid (178,639) (164,897)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 8,035,074 $ 17,230,909
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 231,114 $ 4,586,569
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,832,735 4,229,810
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,063,849 $ 8,816,379
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 3,443,874 $ 4,238,380
Income taxes $ 582,000 $ 50,200
Net transfer to foreclosed real estate, held for sale from loans
receivable $ 105,528 $ 36,500
The Notes to Consolidated Financial Statements are an integral part of these
statements.
6
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
In the opinion of CNB Financial Services, Inc. ("CNB" or the
"Company"), the accompanying unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary for a fair presentation of CNB financial condition as of
September 30, 2003 and the results of operations for the three and nine
months ended September 30, 2003 and 2002 and cash flows for the nine
months ended September 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 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
September 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:
SEPTEMBER 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
After 1 but within 5 years 4,765,118 239,254 - 5,004,372 4.84 %
After 5 but within 10 years 24,417,396 67,507 205,629 24,279,274 4.33
--------------- --------------- --------------- ---------------
$29,182,514 $ 306,761 $ 205,629 $29,283,646 4.42 %
--------------- --------------- --------------- ---------------
States and political subdivisions
Within one year $ 250,000 $ 1,468 $ - $ 251,468 6.00 %
After 1 but within 5 years 368,462 527 376 368,613 2.40
After 5 but within 10 years 2,199,628 35,040 4,827 2,229,841 3.36
--------------- --------------- --------------- ---------------
$ 2,818,090 $ 37,035 $ 5,203 $ 2,849,922 3.47 %
--------------- --------------- --------------- ---------------
Mortgage backed securities $10,607,857 $ 37,733 $ 98,331 $10,547,259 4.47 %
--------------- --------------- --------------- ---------------
Total securities available for sale $42,608,461 $ 381,529 $ 309,163 $42,680,827 4.37 %
=============== =============== =============== ===============
Restricted:
Federal Reserve Bank stock $ 129,650 $ - $ - $ 129,650 6.00 %
Federal Home Loan Bank stock 858,700 - - 858,700 2.00
--------------- --------------- --------------- ---------------
Total restricted investments $ 988,350 $ - $ - $ 988,350 2.52 %
=============== =============== =============== ===============
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
$12,856,529 at September 30, 2003 and $12,864,841 at December 31, 2002.
Proceeds from sales of securities available for sale
(excluding maturities) during the nine months ended September 30, 2003
and the year ended December 31, 2002 were $11,628,314 and $7,075,471,
respectively. Gross gains (losses) of $210,572 and $(49,499) during the
nine months ended September 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 September 30, 2003 and December
31, 2002, were as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
Loans:
Real estate $ 95,125,345 $ 83,239,409
Commercial real estate 19,483,912 13,934,900
Consumer 17,251,767 22,575,379
Commercial 8,745,781 9,684,720
Overdrafts 622,395 72,763
------------- -------------
$ 141,229,200 $ 129,507,171
Lease: 132,083 135,341
------------- -------------
$ 141,361,283 $ 129,642,512
Net deferred loan fees, costs,
premiums and discounts 228,028 172,239
Allowance for loan losses (1,551,348) (1,484,448)
------------- -------------
$ 140,037,963 $ 128,330,303
============= =============
An analysis of the allowance for possible loan losses is as follows:
SEPTEMBER 30, DECEMBER 31,
-------------------------- -----------
2003 2002 2002
----------- ----------- -----------
Balance, Beginning $ 1,484,448 $ 1,336,960 $ 1,336,960
Provision charged to
operations 194,000 152,000 261,000
Recoveries 50,689 31,346 37,230
Loans charged off (177,789) (98,053) (150,742)
----------- ----------- -----------
Balance, Ending $ 1,551,348 $ 1,422,253 $ 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:
SEPTEMBER 30, DECEMBER 31,
--------------------------------------- -----------------
2003 2002 2002
----------------- ----------------- -----------------
Nonaccrual loans $ 625,137 $ 9,338 $ 12,711
Loans past due 90 days or more still accruing interest 81,152 116,145 553,170
---------------- ---------------- ----------------
Total $ 706,289 $ 125,483 $ 565,881
================ ================ ================
9
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. Time Deposits
At September 30, 2003, the scheduled maturities of time deposits are
as follows:
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- --------
Within 3 months $ 7,965,685 $ 16,030,053
3 months thru 6 months 2,152,162 7,348,274
6 months thru 12 months 4,749,210 11,217,270
Over 12 months 21,591,189 59,643,099
------------ ------------
$ 36,458,246 $ 94,238,696
============ ============
Note 5. Federal Home Loan Bank Borrowings
SEPTEMBER 30, DECEMBER 31,
--------------------------------------- -----------------
2003 2002 2002
----------------- ----------------- -----------------
Federal Home Loan Bank advances $ 1,250,000 $ - $ -
Citizens National Bank is a member of the Federal Home Loan Bank
("FHLB") of Pittsburgh and, as such, can take advantage of the FHLB
program for overnight and term advances at published daily rates. Federal
Home Loan Bank advances mature through October 2003 and carry an interest
rate of 1.3%. Under the terms of a blanket collateral agreement, advances
from the FHLB are collateralized by qualifying mortgages and US government
agencies and mortgage-backed securities. In addition, all of the Bank's
stock in the FHLB is pledged as collateral for such debt. Advances
available under this agreement are limited by available and qualifying
collateral and the amount of FHLB stock held by the borrower.
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 has entered into an option to purchase a parcel of
land in the Spring Mills Development in Berkeley County, West Virginia
on July 22, 2003. The original option was for 90 days and has been
renewed and will expire on December 19, 2003. The bank expects to
exercise the option to purchase the land. Subject to regulatory
approval, the bank further intends to construct a full-service branch
facility. The expected building completion date is during the fourth
quarter of 2004. A $5,000 deposit was paid and will be applied to the
purchase price at closing and the Bank has incurred additional expenses
in connection with the purchase of this parcel of land of $6,705 as of
September 30, 2003.
The following discussion and analysis presents the significant
changes in financial condition and results of operations of CNB for the
three and nine months ended September 30, 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 September 30, 2003 was
$599,000 or $1.31 per share compared to $297,000 or $0.65 per share for
the same period in 2002. Annualized return on average assets and
average equity were 1.2% and 14.2% respectively, for the three months
ended September 30, 2003, compared with .6% and 7.5%, respectively, for
the three months ended September 30, 2002.
Net income for the nine months ended September 30, 2003 was
$1,355,000 or $2.96 per share compared to $937,000 or $2.05 per share
for the same period in 2002. Annualized return on average assets and
average equity were .9% and 10.7% respectively, for the nine months
ended September 30, 2003, compared with .7% and 8.2%, respectively, for
the nine months ended September 30, 2002.
Growth in net income for the year 2004 is projected to slow
down compared to the growth in net income for 2003 due to the
additional expenses related to the projected opening of a new branch
facility and the slowing of the maturities of the higher interest
bearing 36 month Certificate of Deposits causing interest expense to
level out. The steady loan growth is expected to continue through 2004
although not at the level experienced in the recent past. As a result
of lower interest rates and slower loan growth, interest income on
loans will be impacted.
11
NET INTEREST INCOME
Net interest income represents the primary component of CNB's
earnings. It is the difference between interest and fee income related
to earning assets and interest expense incurred to carry
interest-bearing liabilities. Changes in the volume and mix of interest
earning assets and interest bearing liabilities, as well as changing
interest rates, impact net interest income. To manage these changes,
their impact on net interest income and the risk associated with them,
CNB utilizes an ongoing asset/liability management program. This
program includes analysis of the difference between rate sensitive
assets and rate sensitive liabilities, earnings sensitivity to rate
changes, and source and use of funds. A discussion of net interest
income and the factors impacting it is presented below.
Net interest income for the three months ended September 30,
2003 increased by $397,000 or 26.0% over the same period in 2002.
Interest income for the three months ended September 30, 2003 increased
by $34,000 or 1.2% compared to the same period in 2002, while interest
expense decreased by $363,000 or 23.8% during the three months ended
September 30, 2003, as compared to the same period in the prior year.
Net interest income for the nine months ended September 30,
2003 increased by $863,000 or 19.1% over the same period in 2002.
Interest income for the nine months ended September 30, 2003 increased
by $64,000 or 0.8% compared to the same period in 2002, while interest
expense decreased by $799,000 or 19.7% during the nine months ended
September 30, 2003, as compared to the same period in the prior year.
Increased net interest income for the three and nine month
periods is attributable to a significantly higher level of net interest
earning assets offset by a decrease in the rates earned thereon. The
Bank continues to experience a shift in the asset mix from lower
yielding overnight federal funds and investment securities to higher
yielding loans due to the continued high loan demand. The decrease in
the rates earned on interest earning assets is due to the current
economic conditions. The Bank has continued to experience steady
deposit growth. Although the average balance on interest bearing
liabilities increased, total interest expense decreased due to a
decrease in the average rates paid on all interest bearing liabilities.
The Bank's higher loan demand and steady deposit growth has resulted in
an increased loan to deposit ratio.
During the third quarter of 2003 compared to the same period
in 2002, average net interest earning assets increased $9.6 million or
5.5% and average net interest bearing liabilities increased $5.2
million or 3.6% resulting in increased net interest income. CNB
experienced a 62 basis point increase in the ratio of net interest
income to average interest earning assets. The 109 basis point decrease
in rates paid on average interest bearing liabilities offset by a 33
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
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
----------------------------------------- ----------------------------------
QTR QTR QTR
AVERAGE QTR YIELD/ AVERAGE AVERAGE YIELD/
BALANCE Q INTEREST RATE (4) BALANCE INTEREST RATE (4)
----------------------------------------- ----------------------------------
(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold $ 1,785 $ 3 0.90 % $ 7,167 $ 30 1.65 %
Securities:
Taxable 42,980 434 4.04 46,862 567 4.84
Tax-exempt (1) 1,526 13 5.16 889 10 6.82
Loans (net of unearned interest) (2)(5)(6) 138,341 2,334 6.75 120,081 2,176 7.25
----------------------------------------- ----------------------------------
Total interest earning assets (1) $ 184,632 $ 2,784 6.03 % $ 174,999 $ 2,783 6.36 %
----------------------------------------- ----------------------------------
Nonearning assets:
Cash and due from banks $ 7,193 $ 7,056
Bank premises and equipment, net 4,674 4,759
Other assets 3,061 2,523
Allowance for loan losses (1,553) (1,417)
------------- --------------
Total assets $ 198,007 $ 187,920
============= ==============
Interest bearing liabilities:
Savings deposits $ 23,211 $ 29 0.50 % $ 20,470 $ 25 0.49 %
Time deposits 94,107 854 3.63 95,625 1,217 5.09
NOW accounts 25,775 72 1.12 24,767 81 1.31
Money market accounts 7,276 14 0.77 5,014 12 0.96
Borrowings 747 2 1.07 - -
----------------------------------------- ----------------------------------
Total interest bearing liabilities $ 151,116 $ 971 2.57 % $ 145,876 $ 1,335 3.66 %
----------------------------------------- ----------------------------------
Noninterest bearing liabilities:
Demand deposits $ 27,359 $ 24,092
Other liabilities 2,610 2,062
Shareholders' equity 16,922 15,890
------------- --------------
Total liabilities and
shareholders' equity $ 198,007 $ 187,920
============= ==============
-------------- ------------
Net interest income (1) $ 1,813 $ 1,448
============== ============
Net interest spread (3) 3.46 % 2.70 %
============== ========
Net interest income to average
interest earning assets (1) 3.93 % 3.31 %
============== ========
(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 $111,000 in 2003 and $78,000 in
2002.
(6) Interest income on loans includes fees of $41,255 in 2003 and $28,031 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
SEPTEMBER 30, 2003 SEPTEMBER 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 $ 1,894 $ 16 1.07 % $ 4,850 $ 66 1.64 %
Securities:
Taxable 44,660 1,453 4.34 48,039 1,756 4.87
Tax-exempt (1) 1,201 33 5.55 622 19 6.17
Loans (net of unearned interest) (2)(5)(6) 134,290 6,817 6.77 115,760 6,481 7.46
----------------------------------------- ----------------------------------
Total interest earning assets (1) $ 182,045 $ 8,319 6.09 % $ 169,271 $ 8,322 6.56 %
----------------------------------------- ----------------------------------
Nonearning assets:
Cash and due from banks $ 6,695 $ 6,580
Bank premises and equipment, net 4,731 4,549
Other assets 3,090 2,441
Allowance for loan losses (1,527) (1,394)
------------- --------------
Total assets $ 195,034 $ 181,447
============= ==============
Interest bearing liabilities:
Savings deposits $ 22,590 $ 84 0.50 % $ 19,278 $ 91 0.63 %
Time deposits 94,779 2,924 4.11 94,978 3,694 5.19
NOW accounts 24,861 213 1.14 22,671 236 1.39
Money market accounts 6,643 38 0.76 5,076 40 1.05
Borrowings 257 3 1.56 - -
----------------------------------------- ----------------------------------
Total interest bearing liabilities $ 149,130 $ 3,262 2.92 % $ 142,003 $ 4,061 3.81 %
----------------------------------------- ----------------------------------
Noninterest bearing liabilities:
Demand deposits $ 26,794 $ 22,178
Other liabilities 2,446 1,938
Shareholders' equity 16,664 15,328
------------- --------------
Total liabilities and
shareholders' equity $ 195,034 $ 181,447
============= ==============
-------------- -----------
Net interest income (1) $ 5,057 $ 4,261
============== ===========
Net interest spread (3) 3.17 % 2.75 %
============== =========
Net interest income to average
interest earning assets (1) 3.70 % 3.36 %
============== =========
(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 $318,000 in 2003 and $251,000 in
2002.
(6) Interest income on loans includes fees of $110,594 in 2003 and $128,309 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 September 30, 2003, and September 30,
2002, amounted to $57,000 and $41,000, respectively. The provision for loan
losses for the nine months ended September 30, 2003, and September 30, 2002,
amounted to $194,000 and $152,000, respectively. Loan quality remains stable and
past dues are minimal while nonaccruals have shown an increase. Nonaccruals have
increased primarily due to two borrowers one of which has a commercial real
estate loan with a principal balance of $315,000 which the borrower is in the
process of selling the business. The sale should be consummated with the Bank
expecting the loan to be paid in full within the fourth quarter of 2003. The
other borrower has three loans with principal balances totaling $159,000, which
are in the process of being consolidated. Management believes the allowance for
loan losses is adequate and is not aware of any information relating to the loan
portfolio which it expects will materially impact future operating results,
liquidity or capital resources. In addition, federal regulators may require
additional reserves as a result of their examination of the bank. See
"Nonperforming Assets and Allowance for Loan Losses" for further discussion.
NONINTEREST INCOME
Noninterest income for the three months ended September 30, 2003 increased
$142,000 or 43.4% to $471,000 from $328,000 in the third 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 and ATM fees. The
fees related to the Bounce Protection program and debit cards have a direct
correlation to the increased deposit base of the bank.
Noninterest income for the nine months ended September 30, 2003 increased
$258,000 or 24.5 % to $1.3 million from $1.1 million 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, trust
fee income and gain on sale of other real estate owned. 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.
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 nine months ended September 30,
2003, increased $53,000 or 3.9% and $392,000 or 9.9% primarily due to increases
in salaries and employee benefits, occupancy expense, furniture, fixtures and
equipment expenses and other operating expenses. Salaries increased due to
normal recurring merit increases and remuneration in connection with the
conversion of the Bank's core processing system. 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, software 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 and number 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
15
processing, bounce protection expense 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 $169,000 or 105.3% to
$329,000 for the three months ended September 30, 2003 and increased $270,000 or
53.4% to $776,000 for the nine months ended September 30, 2003. The effective
tax rates for the third quarter of 2003 and 2002 were 35.5% and 35.1%,
respectively and for the first nine months of 2003 and 2002 were 36.4% and
35.0%, respectively. The Bank's income tax expense differs from the amount
computed at statutory rates primarily due to the tax-exempt earnings from
certain investment securities.
FINANCIAL CONDITION
The Bank's total assets at September 30, 2003 increased $8.7 million or
4.6% to $200.3 million from December 31, 2002 due primarily to a $11.7 million
increase in loans, $231,000 increase in cash and due from banks, $430,000
increase in Federal Home Loan Bank stock, $350,000 increase in deferred income
taxes and a $312,000 increase in other assets offset by a $3.6 million decrease
in federal funds sold and a $749,000 decrease in investment securities. The
Bank's total liabilities increased $8.4 million or 4.8% to $183.7 million at
September 30, 2003, consisting of deposit growth, which increased to $180.0
million and an increase of $1.3 million in borrowings and an increase of
$497,000 in accrued expenses and other liabilities. Shareholders' equity
increased $347,000 to $16.6 million at September 30, 2003, primarily due to net
income of $1.4 million offset by the semi-annual cash dividend of $179,000 and a
$829,000 decrease in accumulated other comprehensive income. The components of
accumulated other comprehensive income at September 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 September 30, 2003, total loans increased $11.7 million or 9.1% to
$140.0 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.
16
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of nonaccrual loans, loans which are past due
90 days or more and still accruing interest, restructured loans and other real
estate owned. The following table summarized the Bank's nonperforming assets as
of the periods shown:
SEPTEMBER 30, DECEMBER 31,
------------------------------------ ----------------
2003 2002 2002
---------------- ---------------- ----------------
Nonaccrual loans $ 625,137 $ 9,338 $ 12,711
Loans past due 90 days or more
still accruing interest 81,152 116,145 553,170
---------------- ---------------- ----------------
Total nonperforming loans $ 706,289 $ 125,483 $ 565,881
---------------- ---------------- ----------------
Other real estate owned $ 107,619 $ 6,500 $ 1,800
---------------- ---------------- ----------------
Total nonperforming assets $ 813,908 $ 131,983 $ 567,681
================ ================ ================
Nonperforming loans/Total loans 0.50% 0.10% 0.44%
Nonperforming assets/Total assets 0.41% 0.07% 0.30%
Allowance for loan losses/Total loans 1.11% 1.19% 1.16%
As of September 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 $700,251. A
specific allowance of $57,633 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.
The allowance for loan losses is the best estimate by management of the
probable losses which have been incurred as of a balance sheet date. Management
makes this determination quarterly by its analysis of overall loan quality,
changes in the mix and size of the loan portfolio, previous loss experience,
general economic conditions, information about specific borrowers and other
factors. The Bank's methodology for determining the allowance for loan losses
established both an allocated and an unallocated component. The allocated
portion of the allowance represents the results of analyses of individual loans
that the Bank monitors for potential credit problems and pools of loans within
the portfolio. Management bases the allocated portion of the allowance for loans
principally on current loan risk ratings, historical loan loss rates adjusted to
reflect current conditions, as well as analyses of other factors that may have
affected the collectibility of loans in the portfolio. The Bank analyzes all
commercial loans it is monitoring as potential credit problems to determine
whether those loans are impaired, with impairment measured by reference to the
borrowers' collateral values and cash flows.
The unallocated portion of the allowance for loan losses represents the
results of analyses that measure probable losses inherent in the portfolio that
are not adequately captured in the allocated allowance analyses. These analyses
include consideration of unidentified losses inherent in the portfolio resulting
from changing underwriting criteria, changes in the types and mix of loans
originated, industry concentrations and evaluations, allowance levels relative
to selected overall credit criteria and other economic indicators used to
estimate probable incurred losses. At September 30, 2003, the allowance for
loans losses totaled $1.6 million compared to $1.5 million at December 31, 2002.
The allowance for loans losses as a percentage of loans was 1.1% as of September
30, 2003 compared to 1.2% as of December 31, 2002.
17
An analysis of the allowance for loan losses is summarized below:
In thousands SEPTEMBER 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 $ 569 20 % $ 330 18 %
and agriculture
Real estate - residential 375 67 391 65
mortgage
Installment and other 247 13 364 17
Unallocated 360 N/A 399 N/A
------------------ -------------------- ------------------ ---------------------
Total $ 1,551 100 % $ 1,484 100 %
================== ==================== ================== =====================
DEPOSITS
The Bank's deposits increased $7.0 million or 4.0% during the
nine months ended September 30, 2003. The Bank has experienced a slight
change in the deposit account mix during the first nine months of 2003.
Steady growth continues in interest-bearing demand and savings
deposits. The increase is primarily due to the continued customer
growth in the Bank's market area of Morgan and Berkeley Counties, West
Virginia and also 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 rate
sensitive jumbo certificate of deposits during the first nine 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.
CAPITAL RESOURCES
Shareholders' equity increased $347,000 or 2.1% during the
first nine months of 2003 due to $1.4 million in net income offset by
the semi-annual cash dividend of $179,000 and a $829,000 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 September
30, 2003. The following table summarized, as of September 30, 2003, the
Bank's capital ratios.
Components Actual Required
of Capital Ratio Ratio
---------- ----- -----
Tier 1 Capital $16,573 8.4% 4.0%
Total Risk Based Capital $18,068 15.1% 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 September 30, 2003.
18
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 September
30, 2003, these totaled $43.2 million, or 21.6% of total assets. In
addition, liquidity may be generated through loan repayments and over
$3.0 million of available borrowing arrangements with correspondent
banks. At September 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 $1.9 million of
cash from operations in the first nine months of 2003, which compares
to $1.6 million during the same time period in 2002. Additional cash of
$8.0 million was generated through net financing activities through
September 30, 2003, which compares to $17.2 million for the first nine
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 $9.7 million during the first nine months of 2003
compared to $14.2 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.
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.
19
The Bank's base-line scenario holds the prime rate constant at 4.00
percent through September 2004. Based on the October 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. The Company
converted 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 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.
20
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.
21
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None; however, CNB is involved in various legal proceedings
occurring in the ordinary course of business. There are no
material legal proceedings to which CNB or its subsidiary is a
part, or to which any of their property is subject.
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits:
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
-------------- ---- -----------
November 7, 2003 12 The Company issued a press
release that announced
operating results of its
first nine months
ended September 30, 2003
22
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CNB Financial Services, Inc.
----------------------------
(Registrant)
Date November 13, 2003 /s/ Thomas F. Rokisky, President/CEO
----------------- ------------------------------------
Date November 13, 2003 /s/ Rebecca S. Stotler, Vice President/CFO
------------------ ------------------------------------------
23