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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-30665
CNB Financial Services, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 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)
Registrant's telephone number, (304) 258 - 1520
Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate value of the common stock of the Registrant that was held by
non-affiliates as of the most recently completed second fiscal quarter (June 30,
2004), was approximately $30.9 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.
As of March 23, 2005, there were 458,048 shares of Common Stock, Par Value $1.00
per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business................................................................................ 4
Item 2. Properties.............................................................................. 7
Item 3. Legal Proceedings....................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders..................................... 8
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities....................................................... 9
Item 6. Selected Financial Data................................................................. 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 27
Item 8. Financial Statements and Supplementary Data............................................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures... 59
Item 9A. Controls and Procedures................................................................. 59
Item 9B. Other Information....................................................................... 59
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 60
Item 11. Executive Compensation.................................................................. 62
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 65
Item 13. Certain Relationships and Related Transactions.......................................... 65
Item 14. Principal Accountant's Fees and Services................................................ 66
PART IV
Item 15. Exhibits and Financial Statement Schedules.............................................. 67
SIGNATURES......................................................................................... 68
2
FORWARD LOOKING STATEMENTS
In our Annual Report and Form 10-K, we include forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products and similar matters. You can
identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate," "plans," "intends," or similar
words or expressions. You should read statements that contain these words
carefully because they discuss our future expectations or state other
"forward-looking" information. We believe that it is important to communicate
our future expectations to our shareholders. However, there may be events in the
future that we are not able to predict accurately or control. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, we must inform you that a variety of factors could cause CNB Financial
Services, Inc.'s actual results and experiences to differ materially from the
anticipated results or other expectations expressed in these forward-looking
statements. Our ability to predict the results of the effect of future plans and
strategies is inherently uncertain. Some of the risks and uncertainties that may
affect the operations, performance, development and results of CNB Financial
Services, Inc.'s business include:
- - Changes in market interest rates;
- - Local and national economic trends and conditions;
- - Competition for products and services among community, regional and
national financial institutions;
- - New services and product offerings by competitors;
- - Changes in customer preferences;
- - Changes in technology;
- - Legislative and regulatory changes;
- - Delinquency rates on loans; and
- - Changes in accounting principles, policies or guidelines;
You should consider these factors in evaluating any forward-looking
statements and not place undue reliance on such statements. We are not obligated
to publicly update any forward looking statements we may make in this Form 10-K
or our Annual Report to reflect the impact of subsequent events.
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATIONAL HISTORY AND SUBSIDIARIES
CNB Financial Services, Inc. (the "Company") was organized under the laws
of West Virginia in March 2000 at the direction of the Board of Directors of
Citizens National Bank (the "Bank" or "Citizens National Bank") for the purpose
of becoming a financial services holding company. The Company and its subsidiary
are collectively referred to herein as "CNB".
A special meeting of the Bank's shareholders was held on August 4, 2000,
and the shareholders approved the Agreement and Plan of Merger between the Bank
and the Company, whereby the Bank became a wholly-owned subsidiary of the
Company and the shareholders of the Bank became shareholders of the Company. The
merger became effective on August 31, 2000. Each Bank shareholder received two
shares of the Company stock for each share of the Bank's common stock. On August
31, 2000, the Company consummated its merger with the Bank and subsidiary, in a
tax-free exchange of stock. Shareholders of the Bank received two shares of CNB
Financial Services, Inc. common stock for each of the 229,024 shares of the
Bank's common stock. The merger was accounted for as a pooling of interests.
CNB became a 50% member of a limited liability company, Morgan County Title
Insurance Agency, LLC in February 2001, for the purpose of selling title
insurance. As of January 2003, CNB's percentage of ownership in Morgan County
Title Insurance Agency, LLC decreased to 33%.
The Bank was organized on June 20, 1934 and has operated as a national
banking association continuously since that time. The Bank formed CNB Insurance
Services, Inc., a wholly owned subsidiary, which is a property and casualty
insurance agency selling primarily personal lines of insurance.
EMPLOYEES
As of December 31, 2004 and 2003, CNB employed 102 and 87 full-time
equivalent employees, respectively.
BUSINESS OF CNB FINANCIAL SERVICES, INC. AND CITIZENS NATIONAL BANK
The Company's primary function is to direct, plan and coordinate the
business activities of the Bank and its subsidiary.
Citizens National Bank is a full-service commercial bank conducting general
banking and trust activities through five full-service offices and five
automated teller machines located in Morgan and Berkeley Counties, West Virginia
and Washington County, Maryland. The Bank exercised an option in December 2003
to purchase a parcel of land in Falling Waters, Berkeley County, West Virginia
and has begun construction of an additional full-service branch on the site. The
expected building completion date is the second quarter of 2005.
On January 26, 2004, CNB entered into an agreement to purchase certain
assets and liabilities associated with the Hancock Branch of Fidelity Bank, a
subsidiary bank of Mercantile Bankshares Corporation (formerly Home Federal).
The purchase, which took place on June 11, 2004, increased the assets and
liabilities of CNB by $14.6 million. CNB assumed responsibility for all the
deposit services including checking, savings and certificate of deposits.
Additionally, CNB acquired loans, equipment and leasehold improvements and
assumed the lease for the real estate located at 333 East Main Street, Hancock,
Maryland.
Citizens National Bank accepts time, demand and savings deposits including
NOW accounts, regular savings accounts, money market accounts, fixed-rate
certificates of deposit and club accounts. In addition, the Bank provides safe
deposit box rentals, wire transfer services and 24-hour ATM services through a
regional network known as STAR. STAR is a participant in the nationwide Cirrus
network.
The Bank offers a full spectrum of lending services to its customers,
including commercial loans and lines of credit, residential real estate loans,
consumer installment loans and other personal loans. Commercial loans are
generally secured by various collateral, including commercial real estate,
accounts receivable and business machinery and equipment. Residential real
estate loans consist primarily of mortgages on the borrower's personal
residence, and are typically secured by a first lien on the subject property.
Consumer and personal loans are generally secured, often by first liens on
automobiles, consumer goods or depository accounts. A special effort is made to
keep loan products as flexible as possible within the guidelines of prudent
banking practices in terms of interest rate risk and credit risk. Bank lending
personnel adhere to established lending limits and authorities based on each
individual's lending expertise and experience.
The Bank's trust department acts as trustee under trusts and wills, as
executor of wills and administrator of estates, as guardian for estates of
minors and incompetents and serves in various corporate trust capacities.
4
COMPETITION
Citizens National Bank faces a high degree of competition for all its
services from local banks. Within its market area of Morgan and Berkeley
Counties in West Virginia and Washington County in Maryland, numerous competing
commercial banks exist.
Nonbank competition has also increased in recent years locally by the
establishment of finance and mortgage companies and the expansion of insurance
operations and credit unions, as well as from mutual funds located throughout
the country.
West Virginia banks are allowed unlimited branch banking throughout the
State. The Interstate Banking and Branch Efficiency Act of 1994 also authorizes
interstate branching by acquisition and consolidation nationwide. These and
similar provisions impacting both the banking and thrift industries may serve to
intensify future competition within the Bank's market.
AVAILABLE INFORMATION
Our Internet address is www.cnbwv.com. The SEC maintains an Internet
website at http://www.sec.gov that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC, and our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available,
free of charge, as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. In addition, any document filed
by the company with the SEC can be read and copied at the SEC's public reference
facilities at 45D Fifth Street, NW, Washington, DC 20549. The public may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. Copies of documents can also be obtained free of charge by any
shareholder by writing to Rebecca S. Stotler, VP/CFO, CNB Financial Services,
Inc., 101 S. Washington Street, Berkeley Springs, WV 25411.
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations
affecting the Company and its subsidiaries and is qualified in its entirety by
reference to such statutes and regulations:
BANK HOLDING COMPANY REGULATION. The Company is a bank holding company
under the Bank Holding Company Act of 1956 ("BHCA"), which restricts the
activities of the Company and any acquisition by the Company of voting stock or
assets of any bank, savings association or other company. The Company is subject
to the reporting requirements of, and examination and regulation by, the Federal
Reserve Board. The Company's subsidiary bank is subject to restrictions imposed
by the Federal Reserve Act on transactions with affiliates, including any loans
or extensions of credit to the Company or its subsidiaries, investments in the
stock or other securities thereof and the taking of such stock or securities as
collateral for loans to any borrower; the issuance of guarantees, acceptances or
letters of credit on behalf of the Company and its subsidiaries; purchases or
sales of securities or other assets; and the payment of money or furnishing of
services to the Company and other subsidiaries. The Bank is prohibited from
acquiring direct or indirect control of more than 5% of any class of voting
stock or substantially all of the assets of any bank holding company without the
prior approval of the Federal Reserve Board. The Company and its subsidiaries
are prohibited from engaging in certain tying arrangements in connection with
extensions of credit and/or the provision of other property or services to a
customer by the Company or its subsidiaries.
The BHCA also permits the Company to purchase or redeem its own
securities. However, Regulation Y provides that prior notice must be given to
the Federal Reserve Board if the gross consideration for such purchase or
consideration, when aggregated with the net consideration paid by the Company
for all such purchases or redemptions during the preceding 12 months, is equal
to 10 percent or more of the Company's consolidated net worth. Prior notice is
not required if (i) both before and immediately after the redemption, the bank
holding company is well-capitalized; (ii) the financial holding company is
well-managed and (iii) the bank holding company is not the subject of any
unresolved supervisory issues.
The Gramm-Leach-Bliley Act (also known as the Financial Services
Modernization Act of 1999) permits bank holding companies to become financial
holding companies. This allows them to affiliate with securities firms and
insurance companies and to engage in other activities that are financial in
nature. A bank holding company may become a financial holding company if each of
its subsidiary banks is well capitalized, is well managed and has at least a
satisfactory rating under the Community Reinvestment Act. No regulatory approval
will be required for a financial holding company to acquire a company, other
than a bank or savings association, engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined
by the Federal Reserve Board.
The Financial Services Modernization Act defines "financial in nature"
to include: securities underwriting, dealing and market making; sponsoring
mutual funds and investment companies; insurance underwriting and agency;
merchant banking activities; and activities that the Federal Reserve Board has
determined to be closely related to banking. A bank also may engage, subject to
limitations on investment, in activities that are financial in nature, other
than insurance underwriting, insurance company portfolio investment, real estate
development and real estate investment, through a financial subsidiary of the
bank, if the bank is well capitalized, well managed and has at least a
satisfactory Community Reinvestment Act rating.
5
BANK SUBSIDIARY REGULATION. The Bank, as a national banking
association, is subject to supervision, examination and regulation by the Office
of the Comptroller of the Currency ("OCC"). It is also a member of the Federal
Reserve System, and as such is subject to applicable provisions of the Federal
Reserve Act and regulations issued thereunder.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC") to the extent provided by law. Accordingly, the Bank is
also subject to regulation by the FDIC. The FDIC may terminate a bank's deposit
insurance upon finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, rule, order or condition enacted or
imposed by the bank's regulatory agency.
CAPITAL REQUIREMENTS
As a bank holding company, the Company is subject to Federal Reserve Board
risk-based capital guidelines. The guidelines establish a systematic framework
that makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet exposures into
account and minimizes disincentives to holding liquid, low-risk assets. Under
the guidelines bank holding companies must maintain capital sufficient to meet
both a risk-based asset ratio test and leverage ratio test on a consolidated
basis. The risk-based ratio is determined by allocating assets and specified
off-balance-sheet commitments into four weighted categories, with higher levels
of capital being required for categories perceived as representing greater risk.
The Bank is subject to substantially similar capital requirements adopted by its
applicable regulatory agencies. In addition, the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") established a regulatory
framework which ties the level of supervisory intervention by bank regulatory
authorities primarily to a depository institution's capital category. Among
other things, FDICIA authorized regulatory authorities to take "prompt
corrective action" with respect to depository institutions that do not meet
minimum capital requirements. FDICIA established five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. The Company is well
capitalized as detailed in Note 22 to the accompanying consolidated financial
statements.
FEDERAL AND STATE LAWS
The Bank is subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity, fair credit reporting and
community reinvestment. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of a bank to open a new
branch or engage in a merger transaction. Community reinvestment regulations
evaluate how well and to what extent a bank lends and invests in its designated
service area, with particular emphasis on low-to-moderate income communities and
borrowers in such areas.
MONETARY POLICY AND ECONOMIC CONDITIONS
The business of financial institutions is affected not only by general
economic conditions, but also by the policies of various governmental regulatory
agencies, including the Federal Reserve Board. The Federal Reserve Board
regulates money and credit conditions and interest rates to influence general
economic conditions primarily through open market operations in U.S. government
securities, changes in the discount rate on bank borrowings and changes in the
reserve requirements against depository institutions' deposits. These policies
and regulations significantly affect the overall growth and distribution of
loans, investments and deposits, and the interest rates charged on loans, as
well as the interest rates paid on deposits and accounts.
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of financial institutions in the past and are
expected to continue to have significant effects in the future. In view of the
changing conditions in the economy and the money markets and the activities of
monetary and fiscal authorities, the Company cannot definitely predict future
changes in interest rates, credit availability or deposit levels.
EFFECT OF ENVIRONMENTAL REGULATION
The Bank's primary exposure to environmental risk is through its lending
activities. In cases when management believes environmental risk potentially
exists, the Bank mitigates its environmental risk exposures by requiring
environmental site assessments at the time of loan origination to confirm
collateral quality as to commercial real estate parcels posing higher than
normal potential for environmental impact, as determined by reference to present
and past uses of the subject property and adjacent sites. Environmental
assessments are typically required prior to any foreclosure activity involving
non-residential real estate collateral.
With regard to residential real estate lending, management reviews those
loans with inherent environmental risk on an individual basis and makes
decisions based on the dollar amount of the loan and the materiality of the
specific credit.
The Company anticipates no material effect on anticipated capital
expenditures, earnings or competitive position as a result of compliance with
federal, state or local environmental protection laws or regulations.
6
INTERNATIONAL MONEY LAUNDERING ABATEMENT AND
ANTI-TERRORIST FINANCING ACT OF 2001 (USA PATRIOT ACT)
The International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001 (the "Patriot Act") was adopted in response to the September 11,
2001 terrorist attacks. The Patriot Act provides law enforcement with greater
powers to investigate terrorism and prevent future terrorist acts. Among the
broad-reaching provisions contained in the Patriot Act are several designed to
deter terrorists' ability to launder money in the United States and provide law
enforcement with additional powers to investigate how terrorists and terrorist
organizations are financed. The Patriot Act creates additional requirements for
banks, which were already subject to similar regulations. The Patriot Act
authorizes the Secretary of the Treasury to require financial institutions to
take certain "special measures" when the Secretary suspects that certain
transactions or accounts are related to money laundering. These special measures
may be ordered when the Secretary suspects that a jurisdiction outside of the
United States, a financial institution operating outside of the United States, a
class of transactions involving a jurisdiction outside of the United States or
certain types of accounts are of "primary money laundering concern." The special
measures include the following: (a) require financial institutions to keep
records and report on the transactions or accounts at issue; (b) require
financial institutions to obtain and retain information related to the
beneficial ownership of any account opened or maintained by foreign persons; (c)
require financial institutions to identify each customer who is permitted to use
a payable-through or correspondent account and obtain certain information from
each customer permitted to use the account; and (d) prohibit or impose
conditions on the opening or maintaining of correspondent or payable-through
accounts.
CRITICAL ACCOUNTING POLICIES
CNB's financial position and results of operations are impacted by
management's application of accounting policies involving judgments made to
arrive at the carrying value of certain assets. Management's greatest challenge
in implementing its policies is the need to make estimates about the effect of
matters that are inherently less than certain. For a detailed discussion of
CNB's significant accounting policies, see Note 1: Summary of Significant
Accounting Policies in the Notes to Consolidated Financial Statements. A
material estimate that is susceptible to significant change is the determination
of the allowance for loan losses. Both the estimates of the amount of the
allowance for loan losses and the placement of loans on non-accrual status
affect the carrying amount of the loan portfolio.
The allowance for loan losses is a subjective judgment that management must
make regarding the loan portfolio, and is established and maintained at levels
that management believes are adequate to cover losses resulting from the
inability of borrowers to make required payments on loans. Where there is a
question as to the impairment of a specific loan, management obtains valuations
of the property or collateral securing the loan, and current financial
information of the borrower, including financial statements, when available.
Since the calculation of appropriate loan loss allowances relies on management's
estimates and judgments relating to inherently uncertain events, actual results
may differ from these estimates. The American Institute of Certified Public
Accountants is preparing further guidance for calculating the allowance for loan
losses. Implementation of that guidance could result in an adjustment to the
allowance. For a more detailed discussion on the allowance for loan losses, see
Nonperforming Loans and Allowance For Loan Losses in this Management's
Discussion and Analysis and Allowance for Loan Losses in Note 1: Summary of
Significant Accounting Policies and Note 5: Loans and Leases Receivable in the
Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
CNB Financial Services, Inc.
CNB's headquarters are located at the main office of Citizens National Bank
located at 101 South Washington Street, Berkeley Springs, West Virginia.
Citizens National Bank
The principal executive office and main banking office is located at 101
South Washington Street, Berkeley Springs, West Virginia. In addition, the bank
has owned and operated a full service branch bank located at 2450 Valley Road,
Berkeley Springs, West Virginia since 1991. In October 1998, the bank opened a
full service branch located at 2646 Hedgesville Road, Martinsburg, West
Virginia. In March 2002, the bank opened an additional full service branch
located at 14994 Apple Harvest Drive, Martinsburg, West Virginia. The main
banking office and each location in Berkeley County provides ATM services, in
addition to traditional lobby and drive-in services. In December 2003, the Bank
exercised an option to purchase a parcel of land in Falling Waters, Berkeley
County West Virginia and has begun construction of an additional full-service
branch on the site. The expected completion date is the second quarter 2005. On
January 26, 2004, CNB entered into an agreement to purchase certain assets and
liabilities associated with the Hancock Branch of Fidelity Bank, a subsidiary
bank of Mercantile Bankshares Corporation (formerly Home Federal). The purchase,
which took place on June 11, 2004, increased the assets and liabilities of CNB
by $14.6 million. CNB assumed responsibility for all the deposit services
including checking, savings and certificate of deposits. Additionally, CNB
acquired loans, equipment and leasehold improvements and assumed the lease for
the real estate located at 333 East Main Street, Hancock, Maryland. During 1998,
the bank
7
purchased two cash machines and placed them at Cacapon State Park Lodge and the
Woods Resort. In November of 1998, the bank acquired CNB Insurance Services,
Inc. which is operated out of the main office in Berkeley Springs. The main
office and branches are owned free and clear of any indebtedness. The net book
value of the bank's premises and equipment as of December 31, 2004 is $6.0
million.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the company and its subsidiary are
involved in various legal proceedings.
In the opinion of the management of CNB, there are no proceedings pending
to which CNB is a party or to which its property is subject, which, if
determined adversely to CNB, would be material in relation to CNB's financial
condition. There are no proceedings pending other than ordinary routine
litigation incident to the business of CNB. In addition, no material proceedings
are pending or are known to be threatened or contemplated against CNB by
government authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2004.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The price of CNB's common stock ranged from $62.00 to $100.00 in 2004 and
from $67.50 to $100.00 in 2003. The prices listed below represent the high and
low market prices for stock trades reported during each quarter.
PER SHARE
HIGH LOW DIVIDEND
------- ------- ---------
2004
First quarter $ 90.00 $ 71.00
Second quarter $100.00 $ 62.00 $0.39
Third quarter $100.00 $ 62.00
Fourth quarter $ 75.00 $ 68.00 $0.99
2003
First quarter $100.00 $100.00
Second quarter $100.00 $ 70.00 $0.39
Third quarter $ 80.00 $ 67.50
Fourth quarter $ -- $ -- $0.81
CNB's stock is not traded on an established exchange and there are no known
market makers, therefore there is no established public trading market for CNB's
stock. The prices listed above are based upon information available to
management through discussions with shareholders, and to the best of
management's knowledge, accurately represent the amount at which its stock was
traded during the periods indicated. Prices reflect amounts paid by purchasers
of the stock and, therefore, may include commissions or fees. The amounts of
such commissions or fees, if any, are not known to management. No attempt was
made by management to ascertain the prices for every sale made during these
periods.
The ability of CNB to pay dividends is subject to certain limitations
imposed by national banking laws. For a more detailed discussion on the
limitations, see Note 23: Regulatory Restrictions of the Notes to Consolidated
Financial Statements. As of March 4, 2005, the number of record holders was 638.
During the fourth quarter of the fiscal year, CNB did not purchase any of
its own common stock.
9
ITEM 6. SELECTED FINANCIAL DATA
TABLE 1. FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
In thousands except for per share data
AT YEAR-END
Total assets $236,998 $201,056 $191,602 $171,541 $149,982
Securities available for sale 59,740 39,362 43,430 49,668 35,374
Loans and lease, net of
unearned income 154,920 146,273 129,815 111,874 105,220
Deposits 207,729 180,899 173,063 154,381 133,996
Shareholders' equity 18,149 16,569 16,270 14,926 13,864
SIGNIFICANT RATIOS
Return on average assets 1.07% 0.89% 0.71% 0.77% 0.91%
Return on average
shareholders' equity 13.38 10.44 8.38 8.49 10.16
Average shareholders' equity
to average assets 8.03 8.48 8.49 9.12 9.00
Net interest margin 4.11 3.83 3.36 3.73 4.03
SUMMARY OF OPERATIONS
Interest income $ 11,715 $ 11,569 $ 11,489 $ 11,868 $ 11,035
Interest expense 3,169 4,152 5,342 5,937 5,365
Net interest income 8,546 7,417 6,147 5,931 5,670
Provision for loan losses 393 312 261 226 170
Net interest income after
provision for loan losses 8,153 7,105 5,886 5,705 5,500
Non-interest income 1,972 1,728 1,403 1,025 843
Non-interest expense 6,789 6,007 5,300 4,794 4,279
Income before income taxes 3,336 2,826 1,989 1,936 2,064
Income tax expense 992 1,083 681 700 758
Net income 2,344 1,743 1,308 1,236 1,306
PER SHARE DATA (1)
Net income $ 5.12 $ 3.80 $ 2.86 $ 2.70 $ 2.85
Cash dividends 1.38 1.20 1.02 1.02 1.02
Net book value 39.62 36.17 35.52 32.59 30.27
(1) Restated to reflect the formation of CNB Financial Services, Inc. and the
acquisition of Citizens National Bank and subsidiary on August 31, 2000 and
accounted for as a pooling of interests.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis presents the significant changes
in financial condition and results of operations of CNB, for the years ended
December 31, 2004 and 2003. This discussion and analysis should be read in
conjunction with the audited, consolidated financial statements and accompanying
notes. This discussion includes forward-looking statements based upon
management's expectations; actual results may differ. Amounts and percentages
used in this discussion have been rounded. All average balances are based on
monthly averages.
EARNINGS SUMMARY
CNB had net income totaling $2.3 million or $5.12 per share, $1.7 million
or $3.80 per share and $1.3 million or $2.86 per share for fiscal years 2004,
2003 and 2002, respectively. Annualized return on average assets and average
equity were 1.1% and 13.4%, respectively for 2004 compared to .9% and 10.4% for
2003 and .7% and 8.4% for 2002.
Growth in net income for the year 2005 is projected to slow down compared
to the growth in net income for 2004 due to the additional expenses related to
the projected opening of a new branch facility in Falling Waters, West Virginia
in addition to the anticipated cost of complying with the provisions of the
Sarbanes-Oxley Act of 2002. Also, the bank's loan growth, which leveled out in
the latter part of 2004 is not expected to increase appreciably during 2005.
This slower rate of loan growth will impact interest income.
NET INTEREST INCOME
Net interest income represents the primary component of the Bank's
earnings. It is the difference between interest and fee income related to
earning assets and interest expense incurred to carry interest-bearing
liabilities. Net interest income is impacted by changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, as well as by changing
interest rates. In order to manage these changes, their impact on net interest
income and the risk associated with them, the Bank utilizes an ongoing
asset/liability management program. This program includes analysis of the
difference between rate sensitive assets and rate sensitive liabilities,
earnings sensitivity to rate changes, and source and use of funds. A discussion
of net interest income and the factors impacting it is presented below.
Net interest income in 2004 increased by $1.1 million or 15.2% over 2003.
Interest income in 2004 increased by $146,000 or 1.3% compared to 2003, while
interest expense decreased by $983,000 or 23.7% during 2004 as compared to 2003.
Interest income increased during 2004 compared to 2003 as a result of an
increase in the average balances of loans, investment securities and federal
funds sold offset by a decrease in the average rates earned on loans and
investment securities. Interest expense decreased during 2004 compared to 2003
as a result of a decrease in the average balance and average rates paid on time
deposits offset by an increase in the average balances of savings, NOW accounts
and money market accounts and average rates paid on those balances.
Net interest income in 2003 increased by $1.3 million or 20.7% over 2002.
Interest income in 2003 increased by $80,000 or 0.7% compared to 2002, while
interest expense decreased by $1.2 million or 22.3% during 2003 as compared to
2002. Interest income increased during 2003 compared to 2002 as a result of an
increase in the average balances of loans offset by a decrease in the average
rates earned on loans, investment securities and federal funds sold. Interest
expense decreased during 2003 compared to 2002 as a result of a decrease in the
average rates paid on NOW, money market, savings and time deposits offset by an
increase in the average balances of the interest bearing liabilities.
During 2004 and 2003, the Bank used funds generated from deposit account
growth and FHLB borrowings to fund loan commitments.
The net interest margin is impacted by the change in the spread between
yields on earning assets and rates paid on interest bearing liabilities. Net
interest margin increased from 2003 to 2004. See Table 1 - Distribution of
Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest
Differential.
11
TABLE 2. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
---------------------------- ---------------------------- ----------------------------
YTD YTD YTD
AVERAGE YTD YIELD/ AVERAGE YTD YIELD/ AVERAGE YTD YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
In thousands
Interest earning assets:
Federal funds sold $ 2,384 $ 34 1.25% $ 1,521 $ 17 1.02% $ 4,720 $ 82 1.57%
Securities:
Taxable 37,526 1,569 4.18 42,602 1,887 4.43 47,955 2,307 4.81
Tax-exempt (1) 8,070 273 5.13 1,718 59 5.20 695 28 6.10
Loans (net of unearned
interest) (2) (4) (5) 152,984 9,559 6.25 136,658 9,187 6.72 118,530 8,708 7.35
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest
earning assets (1) $200,964 $11,435 5.69% $182,499 $11,150 6.11% $171,900 $11,125 6.47%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Nonearning assets:
Cash and due
from banks $ 9,459 $ 6,934 $ 6,592
Bank premises and
equipment, net 5,494 4,734 4,624
Other assets 3,880 4,193 2,240
Allowance for
loan losses (1,731) (1,543) (1,403)
-------- -------- --------
Total assets $218,066 $196,817 $183,953
======== ======== ========
Interest bearing
liabilities:
Savings deposits $ 28,622 $ 147 0.51% $ 22,876 $ 114 0.50% $ 19,629 $ 117 0.60%
Time deposits 92,959 2,493 2.68 94,497 3,685 3.90 94,889 4,854 5.12
NOW accounts 32,196 436 1.35 25,432 290 1.14 23,242 318 1.37
Money market accounts 9,685 79 0.82 6,836 53 0.78 5,295 52 0.98
Borrowings 873 14 1.60 728 10 1.37 -- -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest
bearing liabilities $164,335 $ 3,169 1.93% $150,369 $ 4,152 2.76% $143,055 $ 5,341 3.73%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Noninterest bearing
liabilities:
Demand deposits $ 33,931 $ 27,319 $ 23,278
Other liabilities 2,287 2,431 2,009
Shareholders' equity 17,513 16,698 15,611
-------- -------- --------
Total liabilities and
shareholders' equity $218,066 $196,817 $183,953
======== ======== ========
------- ------- -------
Net interest income (1) $ 8,266 $ 6,998 $ 5,784
======= ======= =======
Net interest spread (3) 3.76% 3.35% 2.74%
==== ==== ====
Net interest income to
average interest earning
assets (1) 4.11% 3.83% 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) Interest income on loans excludes fees of $280,000 in 2004, $419,000 in
2003 and $365,000 in 2002.
(5) Interest income on loans includes fees of $100,527 in 2004, $155,942 in
2003 and $158,085 in 2002 from the Business Manager Program, student loans
and lease receivables.
12
Table 3 sets forth a summary of the changes in interest earned and interest
expense detailing the amounts attributable to (i) changes in volume (change in
average volume times the prior year's average rate), (ii) changes in rate
(change in the average rate times the prior year's average volume). The changes
in rate/volume (change in the average volume times the change in the average
rate), had been allocated to the changes in volume and changes in rate in
proportion to the relationship of the absolute dollar amounts of the change in
each. During 2004, net interest income increased $835,000 due to changes in
volume and $433,000 due to changes in interest rates. Also, net interest income
was affected by a $139,000 decrease in loan fees. In 2003, net interest income
increased $959,000 due to changes in volume and $255,000 due to changes in
interest rates. Also, net interest income was affected by a $53,000 increase in
loan fees.
TABLE 3. VOLUME AND RATE ANALYSIS OF CHANGES IN INTEREST INCOME
2004 OVER 2003 2003 OVER 2002
-------------------------- --------------------------
CHANGE DUE TO CHANGE DUE TO
---------------- TOTAL ---------------- TOTAL
(Taxable equivalent basis) VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ------- ------- ------ ------- -------
In thousands
Interest earned on:
Federal funds sold $ 12 $ 5 $ 17 $ (43) $ (22) $ (65)
Taxable securities (216) (102) (318) (246) (174) (420)
Tax-exempt securities 215 (1) 214 36 (5) 31
Loans 909 (537) 372 1,263 (784) 479
----- ------- ------- ------ ------- -------
Total interest earned $ 920 $ (635) $ 285 $1,010 $ (985) $ 25
----- ------- ------- ------ ------- -------
Interest expense on:
Savings deposits $ 31 $ 2 $ 33 $ 18 $ (21) $ (3)
Time deposits (58) (1,134) (1,192) (19) (1,150) (1,169)
NOW accounts 87 59 146 29 (57) (28)
Money market accounts 23 3 26 13 (12) 1
Other borrowing 2 2 4 10 -- 10
----- ------- ------- ------ ------- -------
Total interest expense $ 85 $(1,068) $ (983) $ 51 $(1,240) $(1,189)
----- ------- ------- ------ ------- -------
Net interest income $ 835 $ 433 $ 1,268 $ 959 $ 255 $ 1,214
===== ======= ======= ====== ======= =======
Another method of analyzing the change in net interest income is to examine
the changes between interest rate spread and the net interest margin on earning
assets. The interest rate spread as shown in Table 3 is the difference between
the average rate earned on earning assets and the average rate on interest
bearing liabilities. The net interest margin takes into account the benefit
derived from assets funded by interest free sources such as non-interest bearing
demand deposits and capital.
13
TABLE 4. INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS
2004 2003 2002
--------------- --------------- ---------------
AVERAGE AVERAGE AVERAGE
(Taxable equivalent basis) BALANCE RATE BALANCE RATE BALANCE RATE
-------- ---- -------- ---- -------- ----
In thousands
Earning assets $200,964 5.69% $182,499 6.11% $171,900 6.47%
======== ======== ========
Interest bearing liabilities $164,335 1.93% $150,369 2.76% $143,055 3.73%
---- ---- ----
Interest rate spread 3.76% 3.35% 2.74%
Interest free sources used
to fund earning assets(1) 36,629 0.35% 32,130 0.48% 28,845 0.62%
-------- ---- -------- ---- -------- ----
Total sources of funds $200,964 $182,499 $171,900
======== ======== ========
Net interest margin 4.11% 3.83% 3.36%
==== ==== ====
(1) Non-interest bearing liabilities and shareholders' equity less non-interest
earning assets.
The following discussion analyzes changes in the Bank's spreads and margins
in terms of basis points. A basis point is a unit of measure for interest rates
equal to .01%. One hundred basis points equals 1%.
Interest rate spread increased 41 basis points in 2004 while the net
interest margin increased 28 basis points. Both the interest rate spread and
margin were positively impacted by a 83 basis point decrease in interest bearing
liability costs offset by a 42 basis point decrease in earning asset yields.
Interest rate spread increased 61 basis points in 2003 while the net interest
margin increased 47 basis points. Both the interest rate spread and margin were
positively impacted by a 97 basis point decrease in interest bearing liability
costs offset by a 36 basis point decrease in earning asset yields.
Although the prime rate increased 1.25 basis points in the second half of
2004, loan yields decreased 47 basis points while in 2003 the prime rate
decreased only 25 basis points and loan yields decreased 63 basis points. These
variances are due to a significant portion of the loan portfolio repricing at
lower rates through cash out refinancing or variable rate loans. The variable
rate loan portfolio is tied to the long term Treasury rates and these rates
during 2004 leveled off and only showed increases in the last quarter. In both
2004 and 2003, the decrease in liability costs is primarily the result of the
lower cost of funds on savings, NOW, money market and time deposit accounts
during the year.
PROVISION FOR LOAN LOSSES
The amount charged to the 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 by Management of the probable losses which
have been incurred as of the balance sheet date. See Nonperforming Loans and
Allowance for Loan Losses for a comprehensive analysis.
NONINTEREST INCOME
Noninterest income increased $244,000 or 14.1% during 2004 over the prior
comparable period. The increase in 2004 was attributable, in general, to an
increase in service charge fees effective October 1, 2003 the bank assesses its
customers. Specifically, noninterest income increased due to fees generated from
the Bounce Protection program, debit card income, ATM fees, and trust fees.
These increases were offset by a decrease in overdraft fees, travel club fees,
miscellaneous customer service fees and a decrease in gain on sale of investment
securities. Income from CNB's insurance operations increased due to additional
new written business, rate increases by companies and a large group health plan
written in September 2003. Bounce Protection, debit card fees and ATM fees
increased due to the Bank's increased number of checking accounts and volume of
activity on these accounts.
The level of trust assets being managed increased from $24.6 million at
December 31, 2003 to $27.9 million at December 31, 2004 and the fees earned on
these assets increased by $7,000. The fees earned from the settlement of an
estate of $27,000 resulted in the increased trust fees in 2002 which were offset
in 2003 by fees of $10,000 earned from the settlement of an estate.
Noninterest income increased $325,000 or 23.2% during 2003 over the prior
comparable period. The increase in 2003 was attributable to fees generated from
the Bounce Protection program, debit card income and gain on sale of securities.
These increases
14
were offset by a decrease in overdraft fees and trust fees. Income from CNB's
insurance operations increased due to additional new written business, rate
increases by companies and a large group health plan written in September 2003.
Bounce Protection, and debit card fees increased due to the Bank's increased
number of checking accounts and volume of activity on these accounts.
Although the level of trust assets being managed increased from $22.7
million at December 31, 2002 to $24.6 million at December 31, 2003, the fees
earned on these assets decreased in 2003. The decrease in trust fees was a
direct result of the fees of $27,000 earned from the settlement of an estate in
2002 compared to the fees of $10,000 earned from the settlement of another
estate in 2003.
NONINTEREST EXPENSES
Noninterest expenses increased $783,000 or 13.0% during 2004 over the prior
comparable period. The increase was primarily due to an increase in occupancy
expense, furniture and equipment expense, salaries and employee benefits and
other operating expenses. Salaries and employee benefits increased due to normal
merit increases, several new hires, one half year of salaries and benefits for
employees of the acquired Hancock branch and additional payroll expenses related
to the conversion of the Hancock branch. Also, salaries increased in the fourth
quarter due to bonuses paid to employees, three officer level positions being
filled and an increase in the number of hours worked by employees. During the
fourth quarter of 2004, employees of the acquired Hancock branch were eligible
for health insurance coverage which caused the Bank's group insurance to
increase. Additional depreciation and amortization related to the new computer
equipment, software and peripherals associated with the upgrade of the Bank's
technology systems caused furniture and equipment expense to increase. Another
factor relating to the increase in furniture and equipment expense was an
increase in the cost and number of equipment maintenance contracts the Bank
entered into primarily due to the 2003 technology system upgrade. Occupancy
expense increased due additional operating expenses related to the acquired
Hancock branch and non-recurring maintenance expenses incurred in the fourth
quarter of 2004.
Components of other operating expense, which significantly increased during
2004, included stationary, supplies and printing, advertising, employee
training, legal fees, master money expense, other loan expense and amortization
of premium purchased. These increases were offset by decreases to Bounce
Protection expense, mortgage servicing rights, business manager expense,
amortization of business assets purchased and outside service fees expense. The
increase in stationary, supplies and printing, advertising, legal fees and
amortization of premium purchased are a direct result of the Bank's acquisition
of the full service branch of Fidelity Bank in Hancock, Maryland. The training
expense increased due to additional staff training on Windows based products and
specialized technical training during the fourth quarter 2004. Debit card
expense increased due to the increased volume of transactions processed on our
increased deposit base. Other loan expense increased due to adjustments made
pertaining to the bank's sold loan portfolio.
Bounce Protection expense decreased due to the expiration of the Bank's
contract with Pinnacle Financial Strategies in February 2004. Outside service
fees decreased due to the lower usage of outside professionals by the bank in
2004. The expense related to mortgage servicing rights and amortization of
business assets purchased decreased due to additional write-off of these
expenses occurring in 2003. Business manager expense decreased as a direct
result of the lower volume of activity in the program.
Additional other noninterest expenses which increased during the fourth
quarter 2004 were postage, director's fees, employees' and officer's travel,
food and entertainment expense and legal fees. Postage expense increased as a
direct result of the Bank's increased customer base. A semi-annual increase in
Director's fees of $12,000 was expensed when paid in the fourth quarter. Due to
the outsourced staff training on Windows based products, employees' and
officer's travel and food and entertainment expenses increased. Legal fees
increased as a direct result of the increased volume of legal services used by
the Bank in the fourth quarter regarding loan collections.
Noninterest expenses increased $706,000 or 13.3% during 2003 over the prior
comparable period. The increase was primarily due to an increase in occupancy
expense, furniture and equipment expense, salaries and employee benefits and
other operating expenses. Normal recurring merit increases and remuneration in
connection with the conversion of the Bank's core processing system accounted
for the additional costs of salaries in 2003. Higher health insurance costs and
pension costs contributed to the increased employee benefit costs in 2003.
Additional depreciation and amortization related to the new computer equipment,
software and peripherals associated with the upgrade of the Bank's technology
systems caused furniture and equipment expense to increase. 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 in
2003. Occupancy expense increased due to the cost of real estate property taxes
and property insurance rising.
Components of other operating expense, which significantly increased during
2003, included stationary, supplies and printing, postage, employee training,
Bounce protection, mortgage servicing rights expense and amortization of
business assets purchased. These increases were offset by decreases to
advertising, data processing expense, telephone, miscellaneous NSF check and
other losses expense. The increase in stationary, supplies and printing and
employee training were a direct result of the Bank's conversion to the new
technology systems. Expenses related to the Bounce Protection Program increased
due to the usage volume continuing to increase.
The Company performed an analysis of the predominant risk characteristics
of the previously capitalized mortgage servicing rights on December 31, 2003.
This analysis indicated prepayment risk for the underlying loans is higher due
to lower current interest
15
rates and thus a write-down of the remaining balance was necessary. Management
recognized a direct write off of $27,674 which was recorded in other expenses on
the income statement.
The Company performs an annual test of impairment of acquired customer
lists. On December 31, 2003, based on the results of these tests, the Company
concluded that there was an impairment of the amortizable intangible assets as a
result of the rate of attrition of the acquired customers. Management determined
the fair value of the intangible assets based on a multiple of commission income
to determine the amount of impairment. The impairment recorded in 2003 was
$64,003, which is included in other expenses on the income statement.
Advertising expense decreased due to the bank canceling their contract with
a third party vendor for certain advertising services in 2003. Telephone expense
decreased in 2003 due to the Bank receiving a credit from the telephone company
for double billing of telephone lines in prior years. There was a decrease in
miscellaneous Nonsufficient Funds (NSF) check and other losses expense for 2003.
INCOME TAXES
Provision for income tax totaled $992,000 in 2004, $1.1 million in 2003 and
$681,000 in 2002. The effective tax rate was 29.7% in 2004 compared to 38.3% and
34.2% in 2003 and 2002, respectively. The Bank's income tax expense differs from
the amount computed at statutory rates primarily due to the tax-exempt earnings
from certain investment securities. See Note 17 of the Notes to Consolidated
Financial Statements for a comprehensive analysis of income tax expense.
FINANCIAL CONDITION
Table 5 examines Citizens National Bank's financial condition in terms of
its sources and uses of funds. Average funding sources and uses increased $18.5
million or 10.1% in 2004 compared with an increase of $10.6 million or 6.2% in
2003.
TABLE 5. SOURCES AND USES OF FUNDS
2004 2003
------------------------------ ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE) 2002
AVERAGE ------------------- AVERAGE ------------------- AVERAGE
BALANCE AMOUNT % BALANCE AMOUNT % BALANCE
-------- ------- ---- -------- ------- ----- --------
In thousands
Funding uses:
Federal funds
sold $ 2,384 $ 863 56.7% $ 1,521 $(3,199) (67.8)% $ 4,720
Securities available
for sale 45,596 1,276 2.9 44,320 (4,330) (8.9) 48,650
Loans 152,984 16,326 11.9 136,658 18,128 15.3 118,530
-------- ------- ---- -------- ------- ----- --------
Total uses $200,964 $18,465 10.1% $182,499 $10,599 6.2% $171,900
======== ======= ==== ======== ======= ===== ========
Funding sources:
Interest-bearing
demand deposits $ 41,881 $ 9,613 29.8% $ 32,268 $ 3,731 13.1% $ 28,537
Savings deposits 28,622 5,746 25.1 22,876 3,247 16.5 19,629
Time deposits 92,959 (1,538) (1.6) 94,497 (392) (0.4) 94,889
Short-term
borrowings 873 145 19.9 728 728 100.0 --
Noninterest bearing
funds, net(1) 36,629 4,499 14.0 32,130 3,285 11.4 28,845
-------- ------- ---- -------- ------- ----- --------
Total sources $200,964 $18,465 10.1% $182,499 $10,599 6.2% $171,900
======== ======= ==== ======== ======= ===== ========
(1) Noninterest bearing liabilities and shareholders' equity less noninterest
earning assets.
Total assets increased $35.9 million or 17.9% to $237.0 million from
December 31, 2003 to December 31, 2004, due in part to the acquisition of the
Hancock branch. In particular, $8.4 million in loans, $324,000 in premises and
equipment were acquired along with $781,000 in core deposit intangible assets.
In addition to the increases previously stated, the Bank's assets also increased
due
16
primarily to a $20.4 million increase in securities available for sale, $2.4
million increase in cash and due from banks, $1.9 million increase in loans, a
$432,000 increase in net premises and equipment and a $519,000 million increase
in other assets.
Total liabilities increased $34.4 million or 18.6% to $218.8 million from
December 31, 2003 to December 31, 2004 substantially due to the increase in
deposits of $26.8 million and the increase in FHLB borrowings of $7.4 million.
The total liabilities assumed were $14.6 million in deposits and $6,600 in other
accrued expenses. Shareholders' equity increased $1.6 million to $18.1 million
at December 31, 2004 primarily due to net income of $2.3 million, offset by a
$132,000 decrease in accumulated other comprehensive income and cash dividends
of $632,000.
The decrease in accumulated other comprehensive income was due to the
unrealized market value depreciation of the available for sale investment
security portfolio and additional minimum pension liability adjustment. The
components of accumulated other comprehensive income at December 31, 2004, were
unrealized gains and losses on available for sale securities, net of deferred
income taxes and additional minimum pension liability, net of deferred income
taxes. The unrealized gains and losses are primarily a function of available
market interest rates relative to the yield being generated on the available for
sale portfolio. No earnings impact results, however, unless the securities are
actually sold. The additional minimum pension liability adjustment results from
the accumulated benefit obligation exceeding the fair value of plan assets.
LOAN PORTFOLIO
At December 31, 2004, total loans increased $10.3 million or 7.1% to $154.9
million from $144.7 million at December 31, 2003. This increase is mainly a
result of the purchase of $8.4 million in loans from the Hancock branch
acquisition. The Bank experienced steady loan growth in the first half of 2004.
The loan growth, especially commercial growth, became flat during the second
half of 2004. The loan mix changed slightly compared with December 31, 2003. The
Bank's real estate loans grew as a direct result of new construction loans and
cash out refinancing of existing loans at lower rates. The Bank's programs
targeting purchases and home construction loans continue to generate additional
growth. The Bank's management believes additional growth in all lending areas is
possible into year 2005. Management's intent is to control the loan volume in a
manner which would produce a loan to deposit ratio between 75% and 80% and
maintain credit quality. The loan to deposit ratio was 74.6% at December 31,
2004 and 80.0% at December 31, 2003. The ratio of net charge-offs to average
loans outstanding was .13% in 2004 and .14% in 2003.
Table 6 sets forth the amount of loans outstanding (net of unearned income)
as of the dates shown:
TABLE 6. LOANS AND LEASES OUTSTANDING
DECEMBER 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
In thousands
Real estate $108,159 $ 98,405 $ 83,239 $ 67,860 $ 65,278
Commercial real estate 22,759 21,521 13,935 12,459 9,944
Consumer 16,405 16,853 22,575 24,198 23,708
Commercial 8,881 8,934 9,685 6,978 6,037
Overdrafts 82 136 73 87 20
-------- -------- -------- -------- --------
$156,286 $145,849 $129,507 $111,582 $104,987
Leases: 166 186 135 139 143
-------- -------- -------- -------- --------
$156,452 $146,035 $129,642 $111,721 $105,130
Net deferred loan fees,
premiums and discounts 275 238 172 153 90
Allowance for loan losses (1,807) (1,608) (1,484) (1,337) (1,216)
-------- -------- -------- -------- --------
$154,920 $144,665 $128,330 $110,537 $104,004
======== ======== ======== ======== ========
The commercial loan portfolio consisting of commercial business and
commercial real estate loans showed an increase in outstanding loans of $1.2
million from $30.4 million at December 31, 2003 to $31.6 million at December 31,
2004. The commercial loan portfolio is approximately 20% of the total loan
portfolio at December 31, 2004 compared to 21% at December 31, 2003. The Bank's
activity in the Berkeley County market expanded significantly after opening a
branch location in 1999. The same also occurred in the Maryland market after
acquiring the Hancock, Maryland branch in June 2004. In addition, the Bank's
loan growth has benefited
17
from significant real estate development activity in Berkeley County, West
Virginia. Management believes additional growth in both commercial business and
commercial real estate loans is possible in 2005.
Real estate mortgage loans comprised mainly of one to four family
residences continued to be the Bank's dominant loan category. Mortgage lending
comprises approximately 69% or $108.2 million of the total loan portfolio at
December 31, 2004 compared to 67% or $98.4 million at December 31, 2003. Most of
the increase in real estate lending is attributable to the assumption of $8.4
million of loans in the Hancock branch acquisition of which a majority were
residential real estate loans.
Table 7 summarizes the approximate contractual maturity and sensitivity of
certain loan types to changes in interest rates as of December 31, 2004:
DECEMBER 31, 2004
----------------------------------------------
ONE YEAR ONE THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- --------
In thousands
Commercial, financial and agricultural:
Floating rate $16,822 $ 7,015 $ -- $ 23,837
Fixed rate 1,474 3,555 2,774 7,803
------- ------- ------- --------
Total $18,296 $10,570 $ 2,774 $ 31,640
======= ======= ======= ========
Real estate - mortgage:
Floating rate $ 8,295 $44,295 $ -- $ 52,590
Fixed rate 2,753 3,713 45,194 51,660
------- ------- ------- --------
Total $11,048 $48,008 $45,194 $104,250
======= ======= ======= ========
Real estate - construction:
Floating rate $ 3,094 $ -- $ -- $ 3,094
Fixed rate 815 -- -- 815
------- ------- ------- --------
Total $ 3,909 $ -- $ -- $ 3,909
======= ======= ======= ========
Consumer:
Floating rate $ 132 $ 85 $ -- $ 217
Fixed rate 1,454 13,670 1,146 16,270
------- ------- ------- --------
Total $ 1,586 $13,755 $ 1,146 $ 16,487
======= ======= ======= ========
Lease financing:
Floating rate $ -- $ -- $ -- $ --
Fixed rate -- 40 126 166
------- ------- ------- --------
Total $ -- $ 40 $ 126 $ 166
======= ======= ======= ========
Demand for the Bank's primary mortgage products, variable rate loans
carrying annual interest rate adjustments based on one, three and five year
Treasury rates, continues to remain attractive to the Bank's customers because
these loans usually have lower rates, lower closing costs and quicker
settlement. The Bank continues to see demand for fixed rate mortgage products,
and for all loan products, as the Bank penetrates the Berkeley County, West
Virginia and the Washington County, Maryland real estate markets. As of December
31, 2004, 57.3% of the Bank's mortgage loans were adjustable rate loans and
42.7% were fixed rate loans. Currently, the Bank has approximately $3.4 million
in fixed rate loans in the portfolio which were originated under terms that
would allow them to be sold on the secondary market, although there is no intent
to sell these loans.
The consumer loan portfolio showed a decrease of $451,000. The primary
factor causing the decrease was a shift by the Bank's customers to consolidate
higher interest consumer loans into lower interest mortgage and home equity
loans and the Bank not being competitive with their indirect auto financing
rates. Economic factors played a role in the decrease, as well, with a marked
decrease in sales of used vehicles and the Bank being unable to compete with the
incentives offered by automakers for new vehicle financing and zero rate
financing.
Bank policy requires those loans which are past due 90 days or more be
placed on nonaccrual status unless they are both well secured and in the process
of collection. As of December 31, 2004 and 2003, nonaccrual loans approximated
..25% and .24% of total loans (net), respectively.
18
TABLE 8. LOANS AND LEASES RECEIVABLE
DECEMBER 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
In thousands
Real estate $108,159 $ 98,405 $ 83,239 $ 67,860 $ 65,278
Commercial real estate 22,759 21,521 13,935 12,459 9,944
Consumer 16,405 16,853 22,575 24,198 23,708
Commercial 8,881 8,934 9,685 6,978 6,037
Overdrafts 82 136 73 87 20
-------- -------- -------- -------- --------
$156,286 $145,849 $129,507 $111,582 $104,987
Leases: 166 186 135 139 143
-------- -------- -------- -------- --------
$156,452 $146,035 $129,642 $111,721 $105,130
Net deferred loan fees,
premiums and discounts 275 238 172 153 90
Allowance for loan losses (1,807) (1,608) (1,484) (1,337) (1,216)
-------- -------- -------- -------- --------
$154,920 $144,665 $128,330 $110,537 $104,004
-------- -------- -------- -------- --------
NONPERFORMING LOANS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming loans consist of loans in nonaccrual status and loans which
are past due 90 days or more and still accruing interest. The Bank has no loans
which are considered to be impaired as of December 31, 2004 and 2003. As of
December 31, 2004, management is aware of three borrowers who have exhibited
weaknesses. Their loans have aggregate uninsured balances of $1.4 million. A
specific allowance of $65,000 related to these loans has been established as
part of the allowance for loan losses. The loans are collateralized primarily by
real estate and management anticipates that any additional potential loss would
be minimal.
Table 9 sets forth the amounts of nonperforming loans as of the dates
indicated:
TABLE 9. NONPERFORMING ASSETS
DECEMBER 31
--------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
In thousands
Nonaccrual loans $381 $349 $ 13 $ 25 $ 22
Loans past due 90 days or more
still accruing interest -- 27 553 450 360
Other real estate -- -- 2 15 --
---- ---- ---- ---- ----
Total $381 $376 $568 $490 $382
==== ==== ==== ==== ====
The allowance for loan losses is the best estimate by management of the
probable losses which have been incurred as of the respective balance sheet
date. Management makes a determination quarterly by analyzing overall loan
quality, changes in the mix and size of the loan portfolio, previous loss
experience, general economic conditions, information about specific borrowers
and other factors. The Bank's methodology for determining the allowance for loan
losses establishes both an allocated and an unallocated component. The allocated
portion of the allowance represents the results of analyses of individual loans
that are being monitored for potential credit problems and pools of loans within
the portfolio. The allocated portion of the allowance for loans is based
principally on current loan risk ratings, historical loan loss rates adjusted to
reflect current conditions, as well as analyses of other factors that may have
affected the collectibility of loans in the portfolio. The Bank analyzes all
commercial loans that are being monitored as potential credit problems to
determine whether such loans are impaired, with impairment measured by reference
to the borrowers' collateral values and cash flows. The unallocated portion of
the allowance for loan losses represents the results of analyses that measure
probable losses inherent in the portfolio that are not adequately captured in
the allocated allowance analyses. These analyses include consideration of
unidentified losses inherent in the portfolio resulting from changing
underwriting criteria, changes in the types and mix of loans originated,
industry concentrations and evaluations, allowance levels relative to selected
overall credit criteria and other economic indicators used to estimate probable
incurred losses. At December 31, 2004 and 2003, the allowance for loan losses
totaled $1.8 million and $1.6 million, respectively. The allowance for loan
losses as a percentage of loans was 1.2% and 1.1% as of December 31, 2004 and
2003, respectively. The provision for loan losses exceeded net charge-offs by
$200,000 and $124,000 in 2004 and 2003, respectively.
Table 10 shows a summary of the Company's loan loss experience:
19
TABLE 10. ALLOWANCE FOR LOAN LOSSES
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
In thousands
Loans outstanding at end of year $154,920 $144,665 $128,330 $110,537 $104,004
======== ======== ======== ======== ========
Daily average balance of loans and leases $152,984 $136,658 $118,530 $108,526 $102,096
======== ======== ======== ======== ========
Balance of allowance for loan losses
at beginning of year $ 1,608 $ 1,484 $ 1,337 $ 1,216 $ 1,148
-------- -------- -------- -------- --------
Loans charged off:
Commercial, financial and agricultural $ 41 $ 7 $ 1 $ 3 $ 6
Real estate - mortgage -- -- 5 -- --
Consumer 311 262 145 132 115
-------- -------- -------- -------- --------
Total loans charged off $ 352 $ 269 $ 151 $ 135 $ 121
-------- -------- -------- -------- --------
Recoveries:
Commercial, financial and agricultural $ 5 $ 2 $ 2 $ 2 $ 1
Consumer 153 79 35 28 18
-------- -------- -------- -------- --------
Total recoveries $ 158 $ 81 $ 37 $ 30 $ 19
-------- -------- -------- -------- --------
Net charge-offs $ 194 $ 188 $ 114 $ 105 $ 102
Provision charged to expense $ 393 $ 312 $ 261 $ 226 $ 170
-------- -------- -------- -------- --------
Balance, end of year $ 1,807 $ 1,608 $ 1,484 $ 1,337 $ 1,216
======== ======== ======== ======== ========
SELECTED ASSET QUALITY RATIOS:
Net charge-offs to average loans 0.13% 0.14% 0.10% 0.10% 0.10%
Allowance for loan losses to loans
outstanding at end of year 1.17% 1.11% 1.16% 1.21% 1.17%
Non-performing assets (1) to total assets 0.16% 0.19% 0.30% 0.29% 0.25%
Non-accrual loans to total loans 0.25% 0.24% 0.01% 0.02% 0.02%
(1) Includes accruing loans past due 90 days or more
20
Table 11 summarizes the allocation of the allowance for loan losses by loan
type:
DECEMBER 31,
-------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------------- ----------------- ----------------- ----------------- -----------------
% OF % OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
In thousands
Commercial, financial
and agriculture $ 810 20% $ 782 21% $ 330 8% $ 363 6% $ 206 6%
Real estate-
construction and
mortgages 467 69 401 67 391 75 294 72 257 72
Consumer, leasing
and other 323 11 274 12 364 17 370 22 351 22
Unallocated 207 N/A 151 N/A 399 N/A 310 N/A 402 N/A
------ --- ------ --- ------ --- ------ --- ------ ---
Total $1,807 100% $1,608 100% $1,484 100% $1,337 100% $1,216 100%
====== === ====== === ====== === ====== === ====== ===
TABLE 11. LOAN LOSS HISTORY
The provision for loan losses is a charge to earnings which is made to
maintain the allowance for loan losses at a sufficient level. In 2004, 2003 and
2002, the provision totaled $393,000, $312,000 and $261,000, respectively. While
loan quality remains good and past due and nonaccrual loans are minimal,
management increased the provision for loan losses in 2004 based on the general
economic conditions as evidenced by the continued slowdown in the economy and an
increased concentration of real estate development lending by the Bank. Also,
the trend of higher interest rates will impact a significant number of bank
customers who have variable rate loans. Having increased the provision for loan
losses, management believes the allowance for loan losses to be adequate and is
not aware of any information relating to the loan portfolio which it expects
will materially impact future operating results, liquidity or capital resources.
In addition, federal regulators may require additional reserves as a result of
their examination of the Bank. The allowance for loan losses reflects what
management currently believes is an adequate level of allowance, although there
can be no assurance that future losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations.
SECURITIES PORTFOLIO AND FEDERAL FUNDS SOLD
The Bank's securities portfolio consists of available for sale securities
and restricted investments. Classifying the securities portfolio as available
for sale provides management with increased ability to manage the balance sheet
structure and address asset/liability management issues when needed. The fair
value of the investment portfolio has increased $20.7 million to $61.0 million
at December 31, 2004 from 2003.
The composition of the portfolio continues to reflect the Bank's
conservative philosophy which places greater importance on safety and liquidity
than on yield. At December 31, 2004, approximately 64.1% of the portfolio is
comprised of US Government and Agency securities, 13.7% in Mortgage Backed
securities, 20.1% in State and Municipal securities and 2.1% in restricted
investments. The term to maturity is limited to seven years for Treasury and
Agency bonds and 10 years for Municipal bonds. Typically, investments in Agency
bonds contain a call feature. These bonds generally have a somewhat higher
yield. The average term to maturity of the portfolio as of December 31, 2004 was
4.7 years.
21
Table 12 sets forth the carrying amount of investment securities as of the
dates shown:
TABLE 12. INVESTMENT SECURITIES
DECEMBER 31
---------------------------
2004 2003 2002
------- ------- -------
In thousands
Available for sale:
US government and agency securities $39,114 $25,219 $28,028
State and municipal securities 12,264 4,655 1,157
Mortgage-backed securities 8,362 9,488 14,245
Restricted securities 1,300 995 559
------- ------- -------
Total $61,040 $40,357 $43,989
======= ======= =======
The Bank generally participates in the overnight federal funds sold market.
Depending upon specific investing or funding strategies and/or normal
fluctuations in loan and deposit balances, the Bank may need, on occasion, to
purchase funds on an overnight basis. In 2004 and 2003, the average balance in
federal funds sold was $2.4 million and $1.5 million, respectively.
See Note 4 of the Notes to Consolidated Financial Statements for a
comprehensive analysis of the securities portfolio.
DEPOSITS AND OTHER FUNDING SOURCES
Total deposits were $207.7 million at December 31, 2004, an increase of
$26.8 million or 14.8% over deposits at December 31, 2003. The increase is, in
part, the result of the assumption of $14.6 million in deposits from the Hancock
acquisition and the opening of a large public fund deposit account. The
breakdown of the assumed deposits are $8.2 million in demand and savings and
$6.4 million in certificates of deposit. Average deposits, however, showed a
$20.4 million, or 11.6% growth, to $197.4 million in 2004. Deposits at the
Hedgesville branch totaled $20.3 million at December 31, 2004, a decrease of
$1.9 million over December 31, 2003. Deposits at the Martinsburg branch totaled
$21.2 million at December 31, 2004, an increase of $12.6 million over December
31, 2003, which is the direct result of the opening of the large public fund
deposit account. The Bank has experienced a change in the deposit account mix
during 2004. A shift from time deposits and jumbo certificates of deposit to
demand, interest bearing demand and savings is a direct result of customers
temporarily placing their money in readily accessible accounts due to customer
concerns with the weak economy and low interest rates. Another factor
contributing to the increase in demand, interest bearing demand and savings
accounts is the continued customer growth in all the Bank's branches. The
36-month Ultimate Certificate of Deposit continues to be the deposit alternative
of choice for customers who are willing to have their money held for one year.
Total deposits were $115,320,000 at December 31, 1998, an increase of
$13,071,000 or 12.8% of deposits at December 31, 1997, which increased
$5,174,000 or 5.3% from 1996. Average deposits, however, showed a $6,586,000, or
6.53% growth, to $107,470,000 in 1998, and $7,074,000 or 7.54% to $100,884,000
in 1997. The growth is partially due to the Bank entering an expanded market
into Berkeley County, West Virginia with the opening of the Hedgesville Branch.
Deposits at the Hedgesville branch totaled $3,833,000 at December 31, 1998.The
Bank's 36-month Ultimate Certificate of Deposit allows the customer to withdraw
all or a portion of the CD on the first or second year anniversary date without
penalty. Deposits may also be made to this CD at any time.
Noninterest-bearing deposits also grew by $7.5 million or 25.4%, during
2004, from $29.5 million at December 31, 2003, to $37.0 million at December 31,
2004. At December 31, 2004, noninterest-bearing deposits represented 17.8% of
total deposits, compared to 16.3% for 2003. Average noninterest-bearing deposits
increased 24.2% from $27.3 million in 2003 to $33.9 million in 2004. The growth
in this deposit product is due in part to the acquisition of $3.0 million
noninterest-bearing deposits from the Hancock branch. The remaining growth is
attributable to continued growth in the noninterest-bearing deposit account with
no minimum balance.
Interest-bearing deposits increased by $19.4 million or 12.8% to $170.8
million at December 31, 2004. Interest-bearing checking deposits increased by
$14.1 million in 2004, although, the average interest-bearing checking deposits
only increased $9.6 million. Included in this category are NOW accounts and
Money Market accounts. The Bank's deposit growth is primarily due to the one
large public fund depositor and the deposits from the Hancock branch
acquisition. The lower average balance increase in deposits is due to the timing
of these events in the latter half of the year. While the average savings
deposits increased $5.7 million or 25.1% to $28.6 million in 2004, actual
savings accounts increased $7.6 million at December 31, 2004 to $32.0 million.
The Bank's largest source of interest-bearing funds is certificates of deposit.
These accounts totaled $90.7 million at December 31, 2004, a decrease of $2.3
million or 2.5%. The continued decrease is primarily due to customers shopping
for the best certificate of deposit rates or temporarily placing their money in
demand, interest bearing demand and savings accounts due to customer concerns
with the weak economy and stock market.
22
Table 13 is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 2004:
TABLE 13. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
AMOUNT PERCENT
------- -------
In thousands
Three months or less $ 4,500 13.13%
Three through six months 1,241 3.62
Six through twelve months 1,529 4.46
Over twelve months 26,995 78.79
------- -----
Total $34,265 100%
======= =====
CONTRACTUAL OBLIGATIONS
Table 14 shows the Company's significant contractual obligations as of
December 31, 2004:
PAYMENTS DUE BY PERIOD
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
---------- --------- --------- --------- ----------
Purchase obligations $ 6,935 $ 6,935 $ -- $ -- $ --
Construction obligations 530,505 530,505 -- -- --
Other long-term liabilities
reflected on the registrant's
balance sheet under GAAP
Supplemental retirement liability 32,641 -- -- -- 32,641
Pension liability 418,757 -- -- -- 418,757
401k liability 54,513 54,513 -- -- --
Deferred compensation 691,089 10,338 16,166 4,780 659,805
Post retirement liability 188,255 26,587 53,566 70,086 38,016
---------- -------- ------- ------- ----------
Total contractual obligations $1,922,695 $628,878 $69,732 $74,866 $1,149,219
========== ======== ======= ======= ==========
See Note 7 of the Notes to Consolidated Financial Statements for additional
information on the purchase and construction obligations.
CAPITAL RESOURCES
The Bank remains well capitalized. Total shareholders' equity at December
31, 2004 of $18.1 million represents 7.7% of total assets. This compares to
$16.6 million or 8.2%, at December 31, 2003. Included in capital at December 31,
2004 is $49,000 of unrealized losses on available for sale securities and
$296,000 minimum pension liability adjustment, both net of deferred income
taxes. At December 31, 2003, the Bank had unrealized gains on available for sale
securities of $57,000 and $270,000 minimum pension liability adjustment, both
net of deferred income taxes. Such unrealized gains and losses are recorded net
of related deferred taxes and are primarily a function of available market
interest rates relative to the yield being generated on the available for sale
portfolio. No earnings impact will result, however, unless the securities are
actually sold.
The stock of CNB Financial Services, Inc., and prior to the formation of
CNB, the Bank, is not listed on an exchange and is not heavily traded. The
trades that have occurred are those that, to management's knowledge, have been
individually arranged. Based on information that management is aware of, the
majority of shares sold during 2004 were at a price that ranged from $62 to $100
per share. During 2003, information available to management indicates that stock
trades ranged from $68 to $100 per share. Book value per share increased from
$36.17 at December 31, 2003 to $39.62 at December 31, 2004.
23
Dividends which have been declared by the Board of Directors semiannually,
increased from $1.20 per share in 2003 to $1.38 per share in 2004, a 15.0%
increase.
The Federal Reserve's risk-based capital guidelines provide for the
relative weighting of both on-balance-sheet and off-balance-sheet items based on
their degree of risk. The Bank continues to exceed all regulatory capital
requirements, and is unaware of any trends or uncertainties, nor do any plans
exist, which may materially impair or alter its capital position.
RETURN ON EQUITY AND ASSETS
Table 15 shows consolidated operating and capital ratios for the periods
indicated:
TABLE 15. OPERATING AND CAPITAL RATIOS
YEARS ENDED DECEMBER 31,
------------------------
2004 2003
----- -----
Return on average assets 1.07% .89%
Return on average equity 13.38 10.44
Dividend payout ratio 26.97 31.54
Average equity to average assets ratio 8.03 8.48
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of the Bank's liquidity management program is to ensure the
continuous availability of funds to meet the withdrawal demands of depositors
and the credit needs of borrowers. The basis of the Bank's liquidity comes from
the stability of its core deposits. Liquidity is also available through the
available for sale securities portfolio and short-term funds such as federal
funds sold. At December 31, 2004, these sources totaled $59.8 million, or 25.3%
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 December 31, 2004, management considered the Bank's ability to satisfy
its anticipated liquidity needs over the next twelve months. Management believes
that the Bank is well positioned and has ample liquidity to satisfy these needs.
The Bank generated $2.2 million of cash from operations in 2004, which compares
to $2.5 million in 2003 and $2.2 million in 2002. Additional cash of $19.2
million, $8.5 million and $18.2 million was generated through net financing
activities in 2004, 2003 and 2002, respectively. These proceeds along with
proceeds from the sales and maturities of investment securities were used to
fund loans and purchase securities during each year. Net cash used in investing
activities totaled $19.1 million in 2004 compared to $11.1 million in 2003 and
$16.8 million 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 that the Bank measures a range of rate scenarios and patterns
of rate movements that are reasonably possible.
In analyzing interest rate sensitivity for policy measurement, the Bank
compares its forecasted earnings in both a "high rate" and "low rate" scenario
to a base-line scenario. The Bank's base-line scenario is that short-term
interest rates over the next 12 months remain at the current rate. The "high
rate" and "low rate" scenarios assume a 200 basis point increase or decrease in
the prime rate from beginning point of the base-line scenario over the most
current 12-month period. The Bank's policy limit for the maximum negative impact
on earnings resulting from "high rate" or "low rate" scenarios is 10 percent.
The policy measurement period is 12 months in length, beginning with the first
month of the forecast.
The Bank's base-line scenario holds the prime rate constant at 5.25 percent
through December 2005. Based on the January 2005 outlook, the model indicates
that earnings during the policy measurement period would be affected by less
than 10 percent, in both an increasing or decreasing interest rate scenario.
One common interest rate risk measure is the gap, or the difference between
rate sensitive assets and rate sensitive liabilities. A positive gap occurs when
rate-sensitive assets exceed rate-sensitive liabilities. This tends to be
beneficial in rising interest rate environments. A negative gap refers to the
opposite situation and tends to be beneficial in declining interest rate
environments.
24
However, the gap does not consider future changes in the volume of rate
sensitive assets or liabilities or the possibility that interest rates of
various products may not change by the same amount or at the same time. In
addition, certain assumptions must be made in constructing the gap. For example,
the Bank considers administered rate deposits, such as savings accounts, to be
immediately rate sensitive although their actual rate sensitivity could differ
from this assumption. The Bank monitors its gap on a quarterly basis.
TABLE 16. INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 2004
INTEREST SENSITIVITY PERIOD
------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 THEREAFTER TOTAL FAIR VALUE
------- -------- -------- ------- ------- ---------- -------- ----------
In thousands
Rate sensitive assets
Loans, net of unearned interest $68,836 $ 19,042 $ 18,742 $ 8,716 $ 8,602 $30,983 $154,920 $155,325
Average interest rate 6.75% 7.00% 7.25% 7.50% 7.75% 7.75% 7.35%
Securities 20,465 1,616 2,110 4,660 4,366 26,523 59,740 59,740
Average interest rate 4.75% 5.00% 5.25% 5.50% 5.50% 5.50% 5.25%
------- -------- -------- ------- ------- ------- --------
Total interest sensitive assets $89,301 $ 20,658 $ 20,852 $13,376 $12,968 $57,506 $214,660
======= ======== ======== ======= ======= ======= ========
Interest sensitive liabilities
Non-interest-bearing deposits $ 3,697 $ 3,697 $ 3,697 $ 3,697 $ 3,697 $18,482 36,965 $ 36,965
Average interest rate --% --% --% --% --% --% --%
Savings and interest-bearing checking 8,004 8,004 8,004 8,004 8,004 40,018 80,037 80,037
Average interest rate 0.94 0.94% 0.94% 0.94% 0.94% 0.94% 0.94%
Time deposits 21,381 31,032 27,603 6,386 4,324 -- 90,726 92,638
Average interest rate 1.75% 2.03% 2.20% 2.85% 3.75% --% 2.52%
------- -------- -------- ------- ------- ------- --------
Total interest sensitive liabilities $33,081 $ 42,732 $ 39,303 $18,086 $16,024 $58,500 $207,727
======= ======== ======== ======= ======= ======= ========
GAP $56,220 $(22,074) $(18,451) $(4,710) $(3,056) $ (994)
Cumulative GAP $56,220 $ 34,146 $ 15,695 $10,985 $ 7,929 $ 6,935
GAP to sensitive assets ratio 26.19% (10.28)% (8.60)% (2.19)% (1.42)% (0.46)%
Cumulative GAP to sensitive
assets ratio 26.19% 15.91% 7.31% 5.12% 3.69% 3.23%
GAP to total assets ratio 23.72% (9.31)% (7.79)% (1.99)% (1.29)% (0.42)%
Cumulative GAP to total assets ratio 23.72% 14.41% 6.62% 4.63% 3.35% 2.93%
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 03-3, "Accounting for Certain Loans or Debt Securities Acquired
in a Transfer." The SOP is effective for loans acquired in fiscal years
beginning after December 15, 2004. The scope of the SOP applies to unhealthy
"problem" loans that have been acquired, either individually in a portfolio, or
in a business acquisition. The SOP addresses accounting for differences between
contractual cash flows and cash flows expected to be collected from an
investor's initial investment in loans or debt securities (loans) acquired in a
transfer if those differences are attributable, at least in part, to credit
quality. The SOP does not apply to loans originated by the Company. The Company
intends to adopt the provisions of SOP 03-3 effective January 1, 2005, and does
not expect the initial implementation to have a significant effect on the
Company's consolidated financial position or consolidated results of operations.
On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105,
"Application of Accounting Principles to Loan Commitments" ("SAB 105"). SAB 105
clarifies existing accounting practices relating to the valuation of issued loan
commitments, including interest rate lock commitments ("IRLC"), subject to SFAS
No. 149 and Derivative Implementation Group Issue C13, "Scope Exceptions: When a
Loan Commitment is included in the Scope of Statement 133." Furthermore, SAB 105
disallows the inclusion of the values of a servicing component and other
internally developed intangible assets in the initial and subsequent IRLC
valuation. The provisions of SAB 105 were effective for loan commitments entered
into after March 31, 2004. The Company has adopted the provisions of SAB 105.
Since the provisions of SAB 105 affect only the timing of the recognition of
mortgage banking income, management does not anticipate that this guidance will
have a material adverse effect on either the Company's consolidated financial
position or consolidated results of operations.
25
Emerging Issues Task Force Issue No. (EITF) 03-1 "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments" was
issued and is effective March 31, 2004. The EITF 03-1 provides guidance for
determining the meaning of "other -than-temporarily impaired" and its
application to certain debt and equity securities within the scope of Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS No. 115") and investments accounted for under
the cost method. The guidance requires that investments which have declined in
value due to credit concerns or solely due to changes in interest rates must be
recorded as other-than-temporarily impaired unless the Company can assert and
demonstrate its intention to hold the security for a period of time sufficient
to allow for a recovery of fair value up to or beyond the cost of the investment
which might mean maturity. This issue also requires disclosures assessing the
ability and intent to hold investments in instances in which an investor
determines that an investment with a fair value less than cost is not
other-than-temporarily impaired. On September 30, 2004, the Financial Accounting
Standards Board decided to delay the effective date for the measurement and
recognition guidance contained in Issue 03-1. This delay does not suspend the
requirement to recognize other-than-temporary impairments as required by
existing authoritative literature. The disclosure guidance in Issue 03-1 was not
delayed.
EITF No. 03-16, "Accounting for Investments in Limited Liability Companies
was issued and is effective for reporting periods beginning after June 15,
2004." APB Opinion No. 18, "The Equity Method of Accounting Investments in
Common Stock," prescribes the accounting for investments in common stock of
corporations that are not consolidated. AICPA Accounting Interpretation 2,
"Investments in Partnerships Ventures," of Opinion 18, indicates that "many of
the provisions of the Opinion would be appropriate in accounting" for
partnerships. In EITF Abstracts, Topic No. D-46, "Accounting for Limited
Partnership Investments," the SEC staff clarified its view that investments of
more than 3 to 5 percent are considered to be more than minor and, therefore,
should be accounted for using the equity method. Limited liability companies
(LLCs) have characteristics of both corporations and partnerships, but are
dissimilar from both in certain respects. Due to those similarities and
differences, diversity in practice exists with respect to accounting for
non-controlling investments in LLCs. The consensus reached was that an LLC
should be viewed as similar to a corporation or similar to a partnership for
purposes of determining whether a non-controlling investment should be accounted
for using the cost method or the equity method of accounting.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment." This Statement
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. The Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. The Statement requires a
public entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award - the
requisite service period (usually the vesting period). The entity will initially
measure the cost of employee services received in exchange for an award of
liability instruments based on its current fair value; the fair value of that
award will be remeasured subsequently at each reporting date through the
settlement date. Changes in fair value during the requisite service period will
be recognized as compensation cost over that period. The grant-date fair value
of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments (unless observable market prices for the same or similar instruments
are available). If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification. This Statement is effective for public
entities that do not file as small business issuers as of the beginning of the
first interim or annual reporting period that begins after June 15, 2005 and for
public companies that file as small business issuers as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
Under the transition method, compensation cost is recognized on or after the
required effective date for the portion of outstanding awards for which the
requisite service has not yet been rendered, based on the grant-date fair value
of those awards calculated under Statement 123 for either recognition or pro
forma disclosures. For periods before the required effective date, entities may
elect to apply a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods by Statement 123.
IMPACT OF INFLATION
The results of operations and financial position of the Bank have been
presented based on historical cost, unadjusted for the effects of inflation,
except for the recording of unrealized gains and losses on securities available
for sale. Inflation could significantly impact the value of the Bank's interest
rate-sensitive assets and liabilities and the cost of noninterest expenses, such
as salaries, benefits and other operating expenses. Management of the money
supply by the Federal Reserve to control the rate of inflation may have an
impact on the earnings of the Bank. Further, changes in interest rates to
control inflation may have a corresponding impact on the ability of certain
borrowers to repay loans granted by the Bank.
As a financial intermediary, the Bank holds a high percentage of interest
rate-sensitive assets and liabilities. Consequently, the estimated fair value of
a significant portion of the Bank's assets and liabilities change more
frequently than those of non-banking entities. The Bank's policies attempt to
structure its mix of financial instruments and manage its interest rate
sensitivity in order to minimize the potential adverse effects of market forces
on its net interest income, earnings and capital.
26
A comparison of the carrying value of the Bank's financial instruments to
their estimated fair value as of December 31, 2004 and December 31, 2003 is
disclosed in Note 24 of the Notes to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Interest Rate Sensitivity" in Item 7
hereof.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements are set forth in
this Annual Report of Form 10-K on the following pages:
CNB Financial Services, Inc. and Subsidiary
Independent Registered Public Accounting Firm Report .................. 29
Consolidated Balance Sheets ........................................... 30
Consolidated Statements of Income ..................................... 31
Consolidated Statements of Stockholders' Equity ....................... 32
Consolidated Statements of Cash Flows ................................. 33
Notes to Consolidated Financial Statements ............................ 34
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
CNB Financial Services, Inc.
Berkeley Springs, West Virginia
We have audited the accompanying consolidated statements of financial
condition of CNB Financial Services, Inc. and subsidiary as of December 31, 2004
and 2003, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of
CNB Financial Services, Inc.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of CNB
Financial Services, Inc. and subsidiary as of December 31, 2004 and 2003, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ SMITH ELLIOTT KEARNS & COMPANY, LLC
Hagerstown, Maryland
February 11, 2005
29
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
ASSETS
Cash and due from banks $ 10,047,939 $ 7,641,280
Federal funds sold 91,000 3,000
Securities available for sale
(at approximate market value) 59,740,291 39,361,934
Federal Home Loan Bank stock, at cost 1,169,800 865,700
Federal Reserve Bank stock, at cost 129,650 129,650
Loans and leases receivable, net 154,919,582 144,665,208
Accrued interest receivable 1,042,573 838,659
Premises and equipment, net 6,044,446 5,288,633
Deferred income taxes 512,224 352,405
Cash surrender value of life insurance 1,168,922 1,065,435
Intangible assets 738,057 23,795
Other assets 1,393,582 820,052
1,393,582 820,052
------------ ------------
TOTAL ASSETS $236,998,066 $201,055,751
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 36,965,406 $ 29,485,097
Interest-bearing demand 48,055,089 34,042,317
Savings 31,981,754 24,360,890
Time, $100,000 and over 34,265,305 36,642,560
Other time 56,460,984 56,367,865
------------ ------------
$207,728,538 $180,898,729
Accrued interest payable 543,551 673,624
FHLB borrowings 8,600,000 1,200,000
Securities sold under repurchase agreement 216,909 --
Accrued expenses and other liabilities 1,760,328 1,714,457
------------ ------------
TOTAL LIABILITIES $218,849,326 $184,486,810
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $1 par value; 5,000,000 shares
authorized; 458,048 shares outstanding $ 458,048 $ 458,048
Capital surplus 3,863,592 3,863,592
Retained earnings 14,172,144 12,460,556
Accumulated other comprehensive income (345,044) (213,255)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 18,148,740 $ 16,568,941
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $236,998,066 $201,055,751
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
30
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 9,839,122 $ 9,605,998 $ 9,072,329
Interest and dividends on securities:
U.S. Government agencies and
corporations 1,191,842 1,306,566 1,856,035
Mortgage backed securities 357,734 545,307 406,958
State and political subdivisions 273,249 72,512 43,058
Other 19,718 22,116 28,802
Interest on federal funds sold 33,817 16,676 82,035
----------- ----------- -----------
$11,715,482 $11,569,175 $11,489,217
----------- ----------- -----------
INTEREST EXPENSE
Interest on interest bearing demand,
savings and time deposits $ 3,154,811 $ 4,142,283 $ 5,341,720
Interest on federal funds purchased -- 825 --
Interest on FHLB borrowings 14,622 9,100 --
----------- ----------- -----------
$ 3,169,433 $ 4,152,208 $ 5,341,720
----------- ----------- -----------
NET INTEREST INCOME $ 8,546,049 $ 7,416,967 $ 6,147,497
PROVISION FOR LOAN LOSSES 393,000 312,000 261,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 8,153,049 $ 7,104,967 $ 5,886,497
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts $ 1,177,252 $ 989,244 $ 747,343
Other service charges, commissions
and fees 434,649 366,004 338,481
Insurance income 135,068 115,883 106,304
Other operating income 54,306 63,547 72,726
Net gain (loss) on sale of securities 135,546 141,450 78,028
Income from title company 35,207 54,550 56,400
Gain (loss) on sale of other real estate owned -- (2,674) 3,492
----------- ----------- -----------
$ 1,972,028 $ 1,728,004 $ 1,402,774
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries $ 2,708,253 $ 2,338,063 $ 2,253,312
Employee benefits 930,597 855,183 752,564
Occupancy of premises 377,322 300,728 295,221
Furniture and equipment expense 790,932 646,528 337,050
Other operating expenses 1,982,363 1,866,176 1,662,288
----------- ----------- -----------
$ 6,789,467 $ 6,006,678 $ 5,300,435
----------- ----------- -----------
INCOME BEFORE INCOME TAXES $ 3,335,610 $ 2,826,293 $ 1,988,836
PROVISION FOR INCOME TAXES 991,917 1,083,453 680,871
----------- ----------- -----------
NET INCOME $ 2,343,693 $ 1,742,840 $ 1,307,965
=========== =========== ===========
BASIC EARNINGS PER SHARE $ 5.12 $ 3.80 $ 2.86
=========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
31
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
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 2003 -- -- 1,742,840 -- 1,742,840
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $382,304) -- -- -- (623,758) (623,758)
Change in minimum pension liability
adjustment (net of tax of $165,792) (270,501) (270,501)
-----------
Total Comprehensive Income -- -- -- -- 848,581
-----------
Cash dividends ($1.20 per share) -- -- (549,658) -- (549,658)
-------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 2003 $458,048 $3,863,592 $12,460,556 $(213,255) $16,568,941
-----------
Comprehensive income:
Net income for 2004 -- -- 2,343,693 -- 2,343,693
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $65,354) -- -- -- (106,630) (106,630)
Change in minimum pension liability
adjustment (net of tax of $15,419) (25,159) (25,159)
-----------
Total Comprehensive Income -- -- -- -- 2,211,904
-----------
Cash dividends ($1.38 per share) -- -- (632,105) -- (632,105)
-------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 2004 $458,048 $3,863,592 $14,172,144 $(345,044) $18,148,740
======== ========== =========== ========= ===========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
32
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,343,693 $ 1,742,840 $ 1,307,965
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 691,928 556,075 340,677
Impairment loss -- 91,677 --
Provision for loan losses 393,000 312,000 261,000
Deferred income taxes (79,046) 37,422 75,857
Net (gain) on sale of securities (135,546) (141,450) (78,028)
(Gain) loss on sale of real estate owned -- 2,674 (3,492)
Loss on disposal and abandonment of fixed assets 273 18,867 8,111
(Increase) decrease in accrued interest receivable (169,388) 53,327 130,713
(Increase) decrease in other assets (713,422) (170,046) 193,704
(Decrease) in accrued interest payable (130,073) (336,462) (138,351)
(Increase) in cash surrender value on life insurance in excess
of premiums paid (44,665) (32,690) (31,568)
Increase in accrued expenses and other liabilities 1,465 174,253 14,928
Amortization of deferred loan (fees) cost 25,490 4,190 72,833
Amortization (accretion) of premium and discount on investments 62,601 151,844 36,889
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,246,310 $ 2,464,521 $ 2,191,238
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) in loans (2,252,891) (16,756,623) (18,159,192)
Proceeds from sales of securities 6,391,436 13,044,280 7,075,471
Proceeds from maturities, repayments and calls of securities 13,152,311 27,017,894 44,889,207
Purchases of securities (40,021,143) (37,010,662) (45,628,781)
Purchases of Federal Home Loan Bank stock (1,146,200) (727,700) (21,400)
Redemptions of Federal Home Loan Bank stock 842,100 291,000 217,900
Purchases of premises and equipment and computer software (917,609) (1,161,939) (1,048,332)
Proceeds from sale of other real estate owned, net -- 104,654 48,390
Investment in (return of capital from) title company (607) 865 --
Net (increase) decrease in federal funds sold (88,000) 4,124,299 (4,127,299)
Premiums paid on life insurance (58,822) (68,566) (49,078)
Cash from acquired branch 5,020,017 -- --
------------ ------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES $(19,079,408) $(11,142,498) $(16,803,114)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits $ 20,904,756 $ 9,647,217 $ 16,336,583
Net increase (decrease) in time deposits (8,649,803) (1,811,037) 2,345,427
Net increase in securities sold under repurchase agreement 216,909 -- --
Net increase in FHLB borrowings 7,400,000 1,200,000 --
Cash dividends paid (632,105) (549,658) (467,209)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 19,239,757 $ 8,486,522 $ 18,214,801
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 2,406,659 $ (191,455) $ 3,602,925
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,641,280 7,832,735 4,229,810
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,047,939 $ 7,641,280 $ 7,832,735
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year:
Interest $ 3,299,506 $ 4,488,670 $ 5,480,071
Income taxes $ 1,169,009 $ 947,000 $ 682,000
Net transfer to foreclosed real estate, held for sale
from loans receivable $ -- $ 105,528 $ 31,800
The Company acquired certain assets and liabilities associated with the
Hancock Branch of Fidelity Bank. In conjunction with the acquisition, the
assets acquired and liabilities assumed were as follows:
Fair value of assets acquired $ 9,561,420
------------
Fair value of liabilities assumed $ 14,581,437
------------
Liabilities assumed in excess of assets acquired (cash received) $ 5,020,017
============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies
of CNB Financial Services, Inc. and its subsidiary.
NATURE OF OPERATIONS:
CNB Financial Services, Inc. ("CNB" or the "Company") is a financial
services holding company incorporated under the laws of West Virginia in
March 2000. It became a bank holding company when it acquired all of the
common stock of Citizens National Bank of Berkeley Springs on August 31,
2000.
Citizens National Bank of Berkeley Springs (the "Bank"), a wholly owned
subsidiary of CNB, provides a variety of banking services to individuals
and businesses through its two locations in Morgan County, West Virginia,
two locations in Berkeley County, West Virginia and its newest location in
Washington County, Maryland. Its primary deposit products are demand
deposits and certificates of deposit, and its primary lending products are
commercial business, real estate mortgage and installment loans.
In February 2001, CNB became a 50% member in a limited liability company,
Morgan County Title Insurance Agency, LLC which sells title insurance. In
January 2003, the other two members in the limited liability corporation
purchased a portion of CNB's 50% membership making each member's share 33%.
CNB Insurance Services, Inc., a wholly owned subsidiary of Citizens
National Bank, is an independent insurance agency selling primarily
personal lines of insurance in Morgan and Berkeley Counties, West Virginia
and Washington County, Maryland.
The accounting policies of the Company and its subsidiary conform to
accounting principles generally accepted in the United States of America
and to general practices within the banking industry.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of CNB Financial Services, Inc.,
include the accounts of the Company and its wholly owned subsidiary,
Citizens National Bank and CNB Insurance Services, Inc., a wholly owned
subsidiary of the Bank. The financial statements of Morgan County Title
Insurance Agency, LLC are not included in these consolidated financial
statements. All significant intercompany transactions and balances have
been eliminated.
USE OF ESTIMATES:
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
34
SECURITIES AND MORTGAGE-BACKED SECURITIES:
Investments in equity securities that have readily determinable fair values
and for all investments in debt securities are classified and accounted for
as follows:
a. Debt securities that management has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
b. Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
c. Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized
gains and losses excluded from earnings and reported in a separate
component of shareholders' equity as accumulated other comprehensive
income.
CNB classifies all investments as available for sale, except for stock in
the Federal Reserve Bank and Federal Home Loan Bank, which are restricted
investments.
Interest and dividends on securities, including amortization of premiums
and accretion of discounts, are included in interest income. Declines in
the fair value of available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized
losses. In estimating other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term prospects of
the issuer, and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Realized gains and losses from the
sales of securities are determined using the specific identification
method.
IMPAIRED LOANS:
Impaired loans are defined as those loans for which it is probable that
contractual amounts due will not be received. Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, requires that the
measurement of impaired loans is based on the present value of expected
future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. Larger groups of small-balance
loans such as residential mortgage and installment loans that are
considered to be part of homogeneous loan pools are aggregated for the
purpose of measuring impairment, and therefore, are not subject to these
statements. Management has established a dollar-value threshold for
commercial loans. The larger commercial loans are evaluated for impairment.
No loans are considered to be impaired at December 31, 2004 and 2003.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. The allowance is
increased by a provision for loan losses, which is charged to expense and
reduced by charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the provision for
loan losses. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan portfolio and
the related allowance may change in the near term.
LOANS HELD FOR SALE:
Mortgage loans held for sale are recorded at the lower of cost or market
value. Gains and losses realized from the sale of loans and adjustments to
market value are included in non-interest income. Mortgage loans are
sometimes sold to the Federal Home Loan Mortgage Corporation (Freddie Mac)
and other commercial banks.
INTANGIBLE ASSETS:
Intangible assets represent the acquisition of customer lists, contracts
and records in the amount of $66,267 by CNB Insurance Services, Inc. and
the $780,616 premium from the purchase of core deposit relationships as
part of the Hancock branch acquisition. The CNB Insurance Services, Inc.
intangible assets are being amortized over four years on a straight line
basis and the core deposit intangible relationships from the Hancock branch
acquisition are being amortized over seven years on a straight line basis.
35
LOAN SERVICING:
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. For purposes of measuring impairment, the
rights are stratified based on the predominant risk characteristics of the
underlying loans: product type, investor type, interest rate, term and
geographic location. An analysis of the risk characteristics of CNB's loan
servicing portfolio allows for all loans to be defined by one risk
category. See Note 6 for additional discussion.
INTEREST INCOME ON LOANS:
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discontinued at the
time the loan becomes 90 days past due unless in management's judgement
collectibility of interest is assured.
NONPERFORMING/NONACCRUAL ASSETS:
Nonperforming/nonaccrual assets consist of loans on which interest is no
longer accrued, loans which have been restructured in order to allow the
borrower the ability to maintain control of the collateral, real estate
acquired by foreclosure and real estate upon which deeds in lieu of
foreclosure have been accepted. Interest previously accrued but not
collected on nonaccrual loans is reversed against current income when a
loan is placed on a nonaccrual basis. Nonaccrual loans are restored to
accrual status when all delinquent principal and interest become less than
90 days past due.
LOANS AND LEASES RECEIVABLE:
Loans and leases receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are reported at
their outstanding unpaid principal balances reduced by any charge-offs or
specific valuation accounts and net of any deferred fees or costs on
originated loans, or unamortized premiums or discounts on purchased loans.
LOAN ORIGINATION FEES AND COSTS:
Loan origination fees, net of certain direct costs of originating loans are
being deferred and recognized over the contractual life of the loan as an
adjustment of the yield on the related loan.
PREMISES AND EQUIPMENT:
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated on both straight-line and accelerated methods
over the estimated useful lives of 5 to 50 years for buildings and
improvements, 10 to 20 years for land improvements, 5 years for bank owned
automobiles and 3 to 40 years for equipment. Computer software is being
amortized over 3 years. Maintenance and repairs are charged to operating
expenses as incurred.
INCOME TAXES:
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax
expenses or credits are based on the changes in the asset or liability from
period to period.
PENSION PLAN:
Pension plan costs are funded by annual contributions as required by
applicable regulations.
CASH AND CASH EQUIVALENTS:
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents include all highly liquid debt instruments purchased with a
maturity of three months or less except for federal funds sold. Those
amounts are included in the balance sheet captions "Cash and Due From
Banks."
EARNINGS AND DIVIDENDS PER SHARE:
Basic earnings and dividends per share are computed on the basis of the
weighted average number of 458,048 shares of common stock outstanding in
2004, 2003 and 2002.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
In the ordinary course of business, CNB has entered into off-balance sheet
financial instruments consisting of commitments to extend credit,
commercial lines of credit and letters of credit. Such financial
instruments are recorded in the financial statements when they become due
or payable.
36
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS:
Postretirement insurance benefits are provided to selected officers and
employees. During the years that the employee renders the necessary
service, the Bank accrues the cost of providing postretirement health and
life insurance benefits to the employee.
FORECLOSED REAL ESTATE:
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried at
the lower of carrying amount or fair value less estimated cost to sell.
Revenue and expenses from operations and changes in the valuation allowance
are included in loss on foreclosed real estate. The historical average
holding period for such properties is twelve to eighteen months.
TRUST ASSETS:
Assets held by CNB in a fiduciary or agency capacity are not included in
the consolidated financial statements since such assets are not assets of
CNB. In accordance with banking industry practice, income from fiduciary
activities is generally recognized on a cash basis which is not
significantly different from amounts that would have been recognized
accrual basis.
ADVERTISING COSTS:
The Company expenses advertising costs in the period in which they are
incurred. Advertising cost amounted to $160,581, $81,960 and $118,017 for
the years ended December 31, 2004, 2003 and 2002, respectively.
COMPREHENSIVE INCOME:
Comprehensive income is defined as the change in equity from
transactions and other events from nonowner sources. It includes all
changes in equity except those resulting from investments by shareholders
and distributions to shareholders. Comprehensive income includes net income
and certain elements of "other comprehensive income" such as foreign
currency translations; accounting for futures contracts; employers
accounting for pensions; and accounting for certain investments in debt and
equity securities.
CNB has elected to report its comprehensive income in the Consolidated
Statements of Changes in Shareholders' Equity. The elements of "other
comprehensive income" that CNB has are the unrealized gains or losses on
available for sale securities and additional minimum pension liability
adjustment.
The components of the change in "other comprehensive income" were as
follows:
2004 2003 2002
--------- ----------- ---------
Additional minimum pension liability adjustment
arising during the year $ (40,578) $ (436,293) $ --
Unrealized holding gains (losses) arising during
the year (36,438) (864,612) 889,359
Reclassification adjustment for (gains) losses
realized in net income (135,546) (141,450) (78,028)
--------- ----------- ---------
Net unrealized holding gains
(losses) before taxes $(212,562) $(1,442,355) $ 811,331
Tax effect 80,773 548,096 (308,306)
--------- ----------- ---------
Net change $(131,789) $ (894,259) $ 503,025
========= =========== =========
NOTE 2. BUSINESS COMBINATIONS
On June 11, 2004, Citizens National Bank purchased certain assets and
liabilities associated with the Hancock Branch of Fidelity Bank, a
subsidiary bank of Mercantile Bankshares Corporation (formerly Home
Federal). The results of the Hancock Branch's operations have been included
in the consolidated financial statements since that date.
37
The following table provides information concerning the allocations of the
purchase price and the fair vaules of the assets and liabilities acquired
of the Hancock branch:
AT JUNE 11, 2004
Assets acquired:
Loans $ 8,419,973
Accrued interest receivable 34,526
Fixed assets 324,166
Intangible asset-premium on deposits 780,616
Prepaid expenses 2,139
------------
Total assets acquired $ 9,561,420
------------
Liabilities assumed:
Deposit accounts $(14,574,856)
Accrued expenses (6,581)
------------
Total liabilities assumed $(14,581,437)
------------
Cash from acquired branch $ (5,020,017)
============
Citizens National Bank recorded $781,000 of core deposit intangible, which
has a weighted-average useful life of 7 years.
NOTE 3. INVESTMENT IN LIMITED LIABILITY COMPANY
In February 2001, CNB paid $5,000 to become a 50% member in a limited
liability company, Morgan County Title Insurance Agency, LLC for the
purpose of selling title insurance. In January 2003, the other two members
in the limited liability company purchased a portion of CNB's 50%
membership making each member's share 33%. CNB accounts for their
investment in Morgan County Title Insurance Agency, LLC as part of "Other
Assets" using the equity method of accounting.
The following represents the limited liability company's financial
information:
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
DECEMBER 31, 2004 AND 2003
2004 2003
------ ------
ASSETS
Cash $6,082 $5,862
------ ------
TOTAL ASSETS $6,082 $5,862
====== ======
MEMBERS' EQUITY $6,082 $5,862
------ ------
TOTAL MEMBERS' EQUITY $6,082 $5,862
====== ======
38
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF INCOME
(UNAUDITED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
-------- -------- --------
INCOME
Insurance commissions $185,154 $378,172 $241,902
-------- -------- --------
TOTAL INCOME $185,154 $378,172 $241,902
-------- -------- --------
EXPENSES
Management fees $ 72,328 $200,384 $125,789
Other expenses 8,806 12,808 2,693
-------- -------- --------
TOTAL EXPENSES $ 81,134 $213,192 $128,482
-------- -------- --------
NET INCOME $104,020 $164,980 $113,420
======== ======== ========
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 104,020 $ 164,980
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 104,020 $ 164,980
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Profit and capital distributed $(103,800) $(164,309)
--------- ---------
NET CASH (USED IN) FINANCING ACTIVITIES $(103,800) $(164,309)
--------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS $ 220 $ 671
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,862 5,191
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,082 $ 5,862
========= =========
NOTE 4. SECURITIES
The amortized cost and estimated market value of debt securities at
December 31, 2004 and 2003 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
39
Securities are summarized as follows:
2004 WEIGHTED
--------------------------------------------------- AVERAGE
GROSS GROSS ESTIMATED TAX
AMORTIZED UNREALIZED UNREALIZED FAIR EQUIVALENT
COST GAINS LOSSES VALUE YIELD
----------- ---------- ---------- ----------- ----------
Available for sale:
U.S. Government agencies
and corporations
Within one year $11,846,301 $109,738 $ 49,839 $11,906,200 3.81%
After 1 but within 5 years 8,906,924 49,196 35,373 8,920,747 4.14
After 5 but within 10 years 18,454,860 40,148 207,732 18,287,276 4.16
----------- -------- -------- -----------
$39,208,085 $199,082 $292,944 $39,114,223 4.05%
----------- -------- -------- -----------
States and political subdivisions
After 1 but within 5 years $ 1,663,643 $ 4,690 $ 3,714 $ 1,664,619 3.95%
After 5 but within 10 years 10,541,257 106,488 48,389 10,599,356 6.09
----------- -------- -------- -----------
$12,204,900 $111,178 $ 52,103 $12,263,975 5.80%
----------- -------- -------- -----------
Mortgage backed securities $ 8,406,958 $ 17,066 $ 61,931 $ 8,362,093 4.49%
----------- -------- -------- -----------
Total securities available for sale $59,819,943 $327,326 $406,978 $59,740,291 4.38%
=========== ======== ======== ===========
Restricted:
Federal Reserve Bank stock $ 129,650 $ -- $ -- $ 129,650 6.00%
Federal Home Loan Bank stock 1,169,800 -- -- 1,169,800 2.43
----------- -------- -------- -----------
Total restricted investments $ 1,299,450 $ -- $ -- $ 1,299,450 2.79%
=========== ======== ======== ===========
40
2003 WEIGHTED
--------------------------------------------------- AVERAGE
GROSS GROSS ESTIMATED TAX
AMORTIZED UNREALIZED UNREALIZED FAIR EQUIVALENT
COST GAINS LOSSES VALUE YIELD
----------- ---------- ---------- ----------- ----------
Available for sale:
U.S. Government agencies
and corporations
Within one year $ 3,679,936 $ 56,310 $ -- $ 3,736,246 4.41%
After 1 but within 5 years 4,015,285 182,346 21,560 4,176,071 4.76
After 5 but within 10 years 17,436,050 32,346 162,056 17,306,340 4.26
----------- -------- -------- -----------
$25,131,271 $271,002 $183,616 $25,218,657 4.36%
----------- -------- -------- -----------
States and political subdivisions
After 1 but within 5 years $ 468,556 $ 7,274 $ 193 $ 475,637 2.85%
After 5 but within 10 years 4,143,424 42,818 6,904 4,179,338 3.42
----------- -------- -------- -----------
$ 4,611,980 $ 50,092 $ 7,097 $ 4,654,975 3.07%
----------- -------- -------- -----------
Mortgage backed securities $ 9,526,351 $ 42,478 $ 80,527 $ 9,488,302 4.44%
----------- -------- -------- -----------
Total securities available for sale $39,269,602 $363,572 $271,240 $39,361,934 4.25%
=========== ======== ======== ===========
Restricted:
Federal Reserve Bank stock $ 129,650 $ -- $ -- $ 129,650 6.00%
Federal Home Loan Bank stock 865,700 -- -- 865,700 3.52
----------- -------- -------- -----------
Total restricted investments $ 995,350 $ -- $ -- $ 995,350 3.84%
=========== ======== ======== ===========
The carrying value of securities pledged to secure public deposits and for
other purposes as required or permitted by law totaled $32,538,864 at
December 31, 2004 and $15,337,515 at December 31, 2003. Also, a security
with a carrying value of $247,275 is designated for customer repurchase
agreements at December 31, 2004.
Proceeds from sales of securities available for sale (excluding maturities)
for the years ended December 31, 2004, 2003 and 2002 were $6,391,436,
$13,044,280 and $7,075,471, respectively. Gross gains and (losses) of
$135,546 and $(0) in 2004, $210,572 and $(69,122) in 2003, and $78,028 and
$(0) in 2002 were realized on the respective sales.
41
The following table shows our investments' gross unrealized losses and fair
value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at December
31, 2004.
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------ ----------------------- ------------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES
- ------------------------- ----------- ---------- ---------- ---------- ----------- ----------
U.S. government agenices
and corporations $17,999,875 $207,515 $2,412,150 $ 85,429 $20,412,025 $292,944
State and political subdivisions 4,919,844 52,103 -- -- 4,919,844 52,103
Mortgage backed securities 5,913,016 39,117 866,422 22,814 6,779,438 61,931
----------- -------- ---------- -------- ----------- --------
Total temporarily impaired
securities $28,832,735 $298,735 $3,278,572 $108,243 $32,111,307 $406,978
=========== ======== ========== ======== =========== ========
Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market
concerns warrant such evaluation. Consideration is given to (1) the length
of time and the extent to which the fair value has been less than cost, (2)
the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the bank to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value.
At December 31, 2004, there were 62 available for sale securities that have
unrealized losses with aggregate depreciation of 1.3% from the securities
amortized cost basis. The unrealized losses relate principally to
government obligations. In analyzing the issuer's financial condition,
management considers whether the securities are issued by the federal
government or its agencies and whether downgrades by bond rating agencies
have occurred. Since the securities are primarily government bonds or
agency issues and management has the ability to hold the securities until
maturity or until such a time that the market value has recovered the
unrealized losses, management determined that no declines are deemed to be
other-than-temporary.
NOTE 5. LOANS AND LEASES RECEIVABLE
Major classifications of loans at December 31, 2004 and 2003 were as
follows:
2004 2003
------------ ------------
Loans:
Real estate $108,158,901 $ 98,404,610
Commercial real estate 22,758,761 21,521,317
Consumer 16,404,853 16,852,449
Commercial 8,880,771 8,934,099
Overdrafts 82,556 135,958
------------ ------------
$156,285,842 $145,848,433
Leases: 166,389 186,318
------------ ------------
$156,452,231 $146,034,751
Net deferred loan fees, costs,
premiums and discounts 274,800 238,220
Allowance for loan losses (1,807,449) (1,607,763)
------------ ------------
$154,919,582 $144,665,208
============ ============
42
At December 31, 2004, approximately $55,907,000 or 42.7% of the real estate
loans had fixed rates of interest and $75,014,000 or 57.3% had adjustable
rates of interest.
The net investment in the direct financing leases was $166,389 at December
31, 2004.
An analysis of the allowance for loan losses were as follows:
2004 2003 2002
---------- ---------- ----------
Balance, beginning $1,607,763 $1,484,448 $1,336,960
Provision charged to
operations 393,000 312,000 261,000
Recoveries 158,850 80,626 37,230
Loans charged off (352,164) (269,311) (150,742)
---------- ---------- ----------
Balance, ending $1,807,449 $1,607,763 $1,484,448
========== ========== ==========
Loans are placed on nonaccrual status when, at the time the loan becomes 90
days past due or unless in management's judgement collectibility is
assured. A summary of nonperforming loans is follows:
DECEMBER 31,
-------------------
2004 2003
-------- --------
Nonaccrual loans $380,731 $348,660
Loans past due 90 days or more still accruing interest -- 27,045
-------- --------
Total $380,731 $375,705
======== ========
The contractual amount of interest that would have been recorded on
nonaccrual loans during 2004 and 2003 was $35,507 and $34,481,
respectively. The amount of interest income that was recorded on nonaccrual
loans during 2004 and 2003 was $16,980 and $22,618, respectively.
The Bank is not committed to lend additional funds to debtors whose loans
are nonperforming or on nonaccrual status.
The Bank has no loans which are considered to be impaired at December 31,
2004 and 2003.
NOTE 6. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
financial statements. The unpaid principal balances of mortgage loans
serviced for others were $4,465,919 and $6,041,418 at December 31, 2004 and
2003, respectively.
Custodial balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were $70,211 and $57,250 at
December 31, 2004 and 2003, respectively.
The Bank did not capitalize any mortgage servicing rights in 2004, 2003 or
2002. The company performed an analysis of the predominant risk
characteristics of the previously capitalized mortgage servicing rights on
December 31, 2003. This analysis indicated prepayment risk for the
underlying loans is high due to lower current interest rates and thus a
write-down of the remaining balance was necessary. During the year ended
December 31, 2003, management recognized a direct write-off of $27,674
included in other expenses on the income statement. Amortization of
mortgage servicing rights was $0, $2,247 and $2,248 in 2004, 2003 and 2002,
respectively. There were no mortgage servicing rights at December 31, 2004
and 2003.
43
NOTE 7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 were as
follows:
2004 2003
---------- ----------
Land and land improvements $1,942,910 $1,939,761
Banking house - Main 1,484,500 1,493,700
Banking house - Valley Road branch 547,936 547,936
Banking house - Hedgesville branch 766,743 766,743
Banking house - Martinsburg branch 697,006 697,006
Banking house - Hancock branch 230,999 --
Bank owned automobiles 31,580 31,580
Furniture, fixtures and equipment 2,328,129 2,089,114
---------- ----------
$8,029,803 $7,565,840
Less accumulated depreciation 2,583,405 2,293,668
---------- ----------
$5,446,398 $5,272,172
Construction in progress 598,048 16,461
---------- ----------
$6,044,446 $5,288,633
========== ==========
Depreciation expense amounted to $370,056, $338,062 and $293,787 in 2004,
2003 and 2002, respectively.
The Bank exercised an option to purchase a parcel of land in Falling
Waters, Berkeley County West Virginia and has begun construction of a
full-service branch on the site. The construction of the branch is expected
to be completed during the second quarter 2005.
Computer software included in the statement of financial condition caption
"Other Assets" amounted to $368,040 and $507,926 at December 31, 2004 and
2003, respectively. Amortization expense on computer software amounted to
$255,518, $209,328 and $38,205 in 2004, 2003 and 2002, respectively.
The Bank's total commitment to construct the new branch location in Falling
Waters, Berkeley County, West Virginia totaled $966,005 of which $530,505
has been spent as of December 31, 2004. In addition, the Bank entered into
a commitment to install an ATM at a different branch location totaling
$36,005 of which $29,070 has been spent as of December 31, 2004.
NOTE 8. INTANGIBLE ASSETS
Amortized intangible assets representing customer lists, contracts and
records acquired by CNB Insurance Services, Inc. have a carrying amount of
$66,267 and accumulated amortization of $48,421 and $42,472 at December 31,
2004 and 2003, respectively. These intangibles are amortized over four
years on a straight line basis. Amortized intangible asset representing the
$780,616 premium from the purchase of core deposit relationships as part of
the Hancock branch acquisition has accumulated amortization of $60,405 at
December 31, 2004. The CNB Insurance Services, Inc. intangible assets are
being amortized over four years on a straight line basis and the core
deposit intangible asset from the Hancock branch acquisition is being
amortized over seven years on a straight line basis.
Amortization expense on intangible assets amounted to $66,354, $8,685 and
$8,685 in 2004, 2003 and 2002, respectively.
The estimated amortization expense for the next five succeeding years will
be:
2005 $117,466
2006 $117,466
2007 $117,466
2008 $111,517
2009 $111,517
44
NOTE 9. TIME DEPOSITS
At December 31, 2004, the scheduled maturities of time deposits are as
follows:
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- -----------
2005 $ 7,269,671 21,381,242
2006 12,756,076 31,031,835
2007 11,446,888 27,603,347
2008 1,485,428 6,386,285
2009 1,307,242 4,323,580
----------- -----------
$34,265,305 $90,726,289
=========== ===========
NOTE 10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, which are classified as
secured borrowings, generally mature within one to four days from the
transaction date. Securities sold under agreements to repurchase are
reflected at the amount of cash received in connection with the
transaction. The bank may be required to provide additional collateral
based on the fair value of the underlying securities. The only repurchase
agreement the bank has entered into is a retail repurchase agreement with a
customer.
NOTE 11. FEDERAL HOME LOAN BANK BORROWINGS
DECEMBER 31,
-----------------------
2004 2003
---------- ----------
Federal Home Loan Bank advances $8,600,000 $1,200,000
Citizens National Bank is a member of the Federal Home Loan Bank of
Pittsburgh ("FHLB") and, as such, can take advantage of the FHLB program
for overnight and term advances at published daily rates. At December 31,
2004, the Bank only has overnight advances with FHLB. FHLB advances mature
in January 2005 and carry an interest rate of 2.2%. 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.
2004 2003
---------- ----------
Maximum balance (outstanding and pledged) $8,600,000 $2,900,000
at any month-end during the year
Average balance for the year 2,904,286 1,487,736
Weighted average rate for the year 1.90% 1.26%
Weighted average rate at year-end 2.24% 1.06%
45
NOTE 12. UNUSED LINES OF CREDIT
The Bank entered into an open-ended unsecured line of credit with
Mercantile Safe Deposit and Trust Company for $3,000,000 for federal fund
purchases. Funds issued under this agreement are at the Mercantile Safe
Deposit and Trust Company federal funds rate effective at the time of
borrowing. The line matures September 22, 2005 and has a compensating
balance requirement of $250,000. The Bank had not drawn on these funds at
December 31, 2004.
NOTE 13. OPERATING LEASES
The Bank entered into two lease agreements in 2001, which were terminated
in March 2002. A lease for a parcel of land to locate a temporary banking
unit required a monthly payment of $1,500. The additional lease was for the
temporary banking unit which required a monthly payment of $3,575. Both
leases were classified as operating leases.
Lease expense under operating leases for the year ended December 31, 2002
amounted to $15,019.
NOTE 14. PENSION PLAN
The Bank is a member of The West Virginia Bankers Association Retirement
Plan, a multi-employer, defined benefit pension plan. All employees
participate in the plan after completing one year of service and attaining
the age of 21. The benefits are based on years of service and the highest
average earnings during any five consecutive calendar years. Plan assets
are invested primarily in corporate bonds, common stocks and U.S.
Government and Agency Securities.
46
The following table sets forth information about the Bank's plan as of
October 31:
2004 2003 2002
---------- ----------- -----------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at
beginning of year $3,269,219 $ 2,917,840 $ 2,711,735
Service cost 144,323 115,397 116,959
Interest cost 200,152 201,998 189,547
Actuarial (gain) loss 47,693 181,139 25,890
Benefits paid (237,653) (147,155) (126,291)
---------- ----------- -----------
Benefit obligation at end of year $3,423,734 $ 3,269,219 $ 2,917,840
---------- ----------- -----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of year $2,246,999 $ 1,904,046 $ 2,116,828
Actual return on plan assets 198,364 244,353 (274,542)
Employer contribution 249,348 245,755 188,051
Administrative expenses (29,418) -- --
Benefits paid (237,653) (147,155) (126,291)
---------- ----------- -----------
Fair value of plan assets
at end of year $2,427,640 $ 2,246,999 $ 1,904,046
---------- ----------- -----------
Funded status $ (996,094) $(1,022,220) $(1,013,794)
Unrecognized net actuarial
(gain) loss 1,054,208 968,629 821,797
Unrecognized prior service
cost -- 2,753 23,804
Unrecognized net transition
(asset) -- -- (7,371)
---------- ----------- -----------
Prepaid (accrued) benefit cost $ 58,114 $ (50,838) $ (175,564)
========== =========== ===========
ADDITIONAL INFORMATION
Increase in minimum liability included
in other comprehensive income $ 40,578 $ 436,293 $ --
47
2004 2003 2002
--------- --------- ---------
WEIGHTED AVERAGE ASSUMPTIONS USED TO
DETERMINE BENEFIT OBLIGATIONS AS OF OCTOBER 31:
Discount rate 6.5% 6.5% 7.0%
Expected return on plan assets 8.5% 8.5% 8.5%
Rate of compensation increase 3.5% 3.5% 4.0%
WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE
NET PERIODIC BENEFIT COST FOR YEARS ENDED OCTOBER 31:
Discount rate 6.5% 7.0% 7.3%
Expected return on plan assets 8.5% 8.5% 8.5%
Rate of compensation increase 3.5% 4.0% 4.3%
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit cost $(418,757) $(489,884) $(175,564)
Intangible assets -- 2,753 --
Accumulated other comprehensive income 476,871 436,293 --
--------- --------- ---------
Net amount recognized $ 58,114 $ (50,838) $(175,564)
========= ========= =========
The accumulated benefit obligation for the defined benefit pension plan was
$2,846,397 and $2,736,883 at October 31, 2004 and October 31, 2003,
respectively.
COMPONENTS OF NET PERIODIC COST:
Service cost $ 136,170 $ 115,397 $ 116,959
Interest cost 207,304 201,998 189,547
Expected return on plan assets (224,567) (210,046) (200,038)
Amortization of prior service costs 2,753 21,051 21,051
Recognized net actuarial loss 18,736 -- --
Amortization of transition obligation/(asset) -- (7,371) (9,570)
--------- --------- ---------
Net periodic plan cost $ 140,396 $ 121,029 $ 117,949
========= ========= =========
PLAN ASSETS
PERCENTAGE OF PLAN
TARGET ALLOWABLE ASSETS AT OCTOBER 31,
ALLOCATION ALLOCATION ---------------------
2004 RANGE 2004 2003
---------- ---------- ---- ----
(1) Plan assets
(a) Equity securities 70% 40 - 80% 72% 70%
(b) Debt securities 25% 20 - 40% 23% 26%
(c) Real estate 0% 0% 0% 0%
(d) Other 5% 3 - 10% 5% 5%
--- ---
(e) Total 100% 100%
=== ===
48
INVESTMENT POLICY AND STRATEGY
The policy, as established by the Pension Committee, is to invest assets
per the target allocations stated above. The assets will be reallocated
periodically to meet the above target allocations. The investment policy
will be reviewed periodically, under the advisement of a certified
investment advisor, to determine if the policy should be changed.
The overall investment return goal is to achieve a return greater than a
blended mix of stated indices tailored to the same asset mix of the plan
assets by 0.5% after fees over a rolling 5-year moving average basis.
Allowable assets include cash equivalents, fixed income securities, equity
securities, exchange traded index funds and GICs. Prohibited investments
include, but are not limited to, commodities and future contracts, private
placements, options, limited partnerships, venture capital investments,
real estate and IO, PO, and residual tranche CMOs. Unless a specific
derivative security is allowed per the plan document, permission must be
sought from the Pension Committee to include such investments.
In order to achieve a prudent level of portfolio diversification, the
securities of any one company should not exceed more than 10% of the total
plan assets, and no more than the 25% of total plan assets should be
invested in any one industry (other than securities of US Government or
Agencies). Additionally, no more than 20% of the plan assets shall be
invested in foreign securities (both equity and fixed).
DETERMINATION OF EXPECTED LONG-TERM RATE OF RETURN
The expected long-term rate of return for the plan's total assets is based
on the expected return of each of the above categories, weighted based on
the median of the target allocation for each class.
CASH FLOWS
(1) Expected contributions for fiscal year ending October 31, 2005
(a) Expected employer contributions $ 233,988
(b) Expected employee contributions $ --
(2) Estimated future benefit payments reflecting expected future
service for the fiscal year(s) ending
(a) 10/31/2005 $ 152,338
(b) 10/31/2006 $ 154,091
(c) 10/31/2007 $ 158,941
(d) 10/31/2008 $ 168,501
(e) 10/31/2009 $ 181,558
(f) 10/31/2010 - 10/31/2014 $1,129,868
NOTE 15. 401(K) PROFIT SHARING PLAN
All employees are eligible to participate in the Bank's 401(k) Profit
Sharing Plan after completing one year of service. Employees may defer up
to 15% of their salary in 2004, 2003 and 2002. The Bank may, at the
discretion of the Board of Directors, match all or part of the employee
deferrals. For 2004 and 2003, the Bank matched 75% of employee deferrals up
to 5% of salary. For 2002, the Bank matched 50% of employee deferrals up to
5% of salary. The percentage of match varies based on the Bank's profit
level. The assets of 401(k) Profit Sharing Plan are managed by the Bank's
trust department.
The Bank's contribution charged to income during 2004, 2003 and 2002 was
$53,783, $49,287 and $25,600, respectively.
NOTE 16. DEFERRED COMPENSATION PLAN
The Bank has a plan pursuant to which a director may elect to waive receipt
of all or a portion of his fees for Board of Directors' meetings or
committee meetings in exchange for a retirement benefit to be received
during a ten-year period after attaining a certain age. The Bank has
acquired life insurance on the lives of participating directors to fund its
obligation under the plan. The cash surrender value of these life insurance
policies has been recorded as an asset. The present value of payments to be
paid to directors or their beneficiaries for services rendered to date has
been recorded as a liability. The net expense for these benefits were
$17,702, $22,405 and $(2,967) for 2004, 2003 and 2002, respectively.
49
NOTE 17. INCOME TAXES
Income taxes reflected in the statements of income are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
-------- ---------- --------
Federal:
Current $942,169 $ 921,863 $554,466
Deferred (67,864) 35,600 69,195
State:
Current 128,886 124,169 50,548
Deferred (11,274) 1,821 6,662
-------- ---------- --------
Provision for income taxes $991,917 $1,083,453 $680,871
======== ========== ========
Deferred income taxes reflect the impact of "temporary differences" between
the amount of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws and regulations.
The following is a reconciliation of the statutory federal income tax rate
applied to pre-tax accounting income, with the income tax provisions in the
statements of income.
YEARS ENDED DECEMBER 31,
----------------------------------
2004 2003 2002
---------- ---------- --------
Income tax expense at the
statutory rate (34%) $1,134,107 $ 960,940 $676,204
Increases (decreases) resulting from:
Nontaxable interest income,
net of non-deductible interest
expense (121,892) (58,527) (35,750)
State income taxes, net of
federal income tax benefit 83,217 125,990 57,210
Other (103,515) 55,050 (16,793)
---------- ---------- --------
Provision for income taxes $ 991,917 $1,083,453 $680,871
========== ========== ========
Federal and state income taxes receivable included in the balance sheet as
other assets were $157,183 and $54,269 at December 31, 2004 and 2003,
respectively.
50
The components of deferred taxes included in the statement of financial
condition as of December 31 are as follows:
2004 2003
---------- ----------
Deferred tax assets:
Provision for loan losses $ 585,959 $ 514,433
Deferred compensation plan 248,792 228,112
Postretirement benefits 69,236 65,923
Defined benefit plan 19,625 20,348
Organizational costs 602 1,500
Intangible asset 33,653 23,041
Minimum pension liability adjustment 181,211 165,792
Net unrealized loss on securities
available for sale 30,268 --
---------- ----------
$1,169,346 $1,019,149
---------- ----------
Deferred tax liabilities:
CSV life insurance $ (233,784) $ (213,087)
Net unrealized gain on securities
available for sale -- (35,086)
Depreciation (423,338) (418,571)
---------- ----------
$ (657,122) $ (666,744)
---------- ----------
Net deferred tax asset (liability) $ 512,224 $ 352,405
========== ==========
Generally accepted accounting principles require a valuation allowance
against deferred tax assets if, based on the weight of available evidence,
it is more likely than not that some or all of the deferred tax assets will
not be realized. The Bank believes that the deferred tax assets will be
realized and therefore no valuation allowance was established.
NOTE 18. OTHER OPERATING EXPENSES
YEARS ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Stationery, supplies and printing $ 240,711 $ 197,000 $ 144,511
Data processing 134,100 180,353 202,755
Director's fees 178,650 149,733 144,262
Postage 129,122 121,285 101,399
Telephone 88,985 70,288 87,972
Professional fees 252,160 295,259 212,758
ATM and debit card fees 188,147 168,136 159,768
Advertising and public relations 200,272 105,995 146,314
Other 570,216 578,127 462,549
---------- ---------- ----------
Total other operating expenses $1,982,363 $1,866,176 $1,662,288
========== ========== ==========
NOTE 19. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
CNB is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk which are not reflected in the
statements of financial condition. The contractual amounts of those
instruments reflect the extent of involvement CNB has in particular classes
of financial instruments.
51
CNB's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount
of those instruments. CNB uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend funds as long as there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses.
Commercial line of credit arrangements usually require payment of a fee.
CNB evaluates each customer's creditworthiness and related collateral on a
case-by-case basis. The amount of collateral obtained if deemed necessary
by CNB upon extension of credit is based on management's credit evaluation
of the customer. Collateral held varies but may include accounts
receivable, inventory, real estate, equipment and income-producing
commercial properties.
Standby letters of credit written are conditional commitments issued by CNB
to guarantee the performance of a customer to a third party. Those
guarantees are issued to support public and private borrowing arrangements,
bond financing and similar transactions. The credit risk involved in
issuing a letter of credit is essentially the same as that involved in
extending loan facilities to customers.
A summary of off-balance sheet instruments as of December 31 is as follows:
2004 2003
----------- -----------
Commitments to originate:
Fixed rate loans $ 2,702,708 $ 341,390
Adjustable rate loans 2,542,317 3,669,983
----------- -----------
$ 5,245,025 $ 4,011,373
Letters of credit 1,341,186 313,831
Undisbursed portion of construction loans 4,801,629 3,940,359
Available credit granted on commercial loans 9,619,306 11,010,725
Available credit on personal lines of credit 439,713 530,126
Undisbursed portion of home equity loans 6,212,908 4,381,549
----------- -----------
$27,659,767 $24,187,963
=========== ===========
NOTE 20. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
CNB's primary business is mortgage loans, which consists of originating
residential, construction, multi-family and commercial real estate loans
and consumer and commercial loans. CNB's primary lending area is Morgan and
Berkeley Counties, West Virginia and Washington County, Maryland. Loans are
occasionally made in surrounding counties in West Virginia, Maryland,
Virginia and Pennsylvania.
CNB evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by CNB upon the extension
of credit is based on management's credit evaluation of the customer.
Collateral held varies but generally includes vehicles, equipment and real
estate.
The Company maintains substantial balances of cash on hand, federal funds
sold and investments held in safekeeping at corresponding banks. The
balances held at the correspondent banks are in excess of the Federal
Deposit Insurance Corporation insurance limit. Management considers this to
be a normal business risk.
NOTE 21. LEGAL CONTINGENCIES
Various legal claims arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect
on the bank's consolidated financial statements.
52
NOTE 22. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of
December 31, 2004, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 2004 and 2003, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as
well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well-capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the table.
There were no deductions from capital for interest-rate risk in 2004 and
2003.
RATIO
-------------------------------------
ACTUAL FOR TO BE WELL
AMOUNT CAPITAL CAPITALIZED UNDER
IN ADEQUACY PROMPT CORRECTIVE
THOUSANDS ACTUAL PURPOSES ACTION PROVISIONS
--------- ------ -------- -----------------
As of December 31, 2004:
Total Capital
(to Risk Weighted Assets) $19,898 14.42% 8.0% 10.0%
Tier I Capital
(to Risk Weighted Assets) $18,172 13.17% 4.0% 6.0%
Tier I Capital
(to Average Assets) $18,172 7.74% 4.0% 5.0%
As of December 31, 2003:
Total Capital
(to Risk Weighted Assets) $18,108 14.81% 8.0% 10.0%
Tier I Capital
(to Risk Weighted Assets) $16,579 13.56% 4.0% 6.0%
Tier I Capital
(to Average Assets) $16,579 8.20% 4.0% 5.0%
NOTE 23. REGULATORY RESTRICTIONS
Included in Cash and Due From Banks are average daily reserve balances the
Bank is required to maintain with the Federal Reserve Bank. The amount of
these required reserves, calculated based on percentages of certain deposit
balances was $7.8 million at December 31, 2004.
Certain restrictions exist regarding the ability of the Bank subsidiary to
transfer funds to CNB in the form of cash dividends, which in turn impact
the ability of CNB to declare dividends to its shareholders. The approval
of the Comptroller of the
53
Currency is required if the total dividends declared by a national bank in
any calendar year exceed the bank's net profits (as defined) for that year
combined with its retained net profits for the preceding two calendar
years.
Certain regulations prohibit the transfer of funds from the Bank to
affiliates in the form of loans or advances exceeding 10% of its capital
stock and surplus. In addition, all loans or advances to nonbank affiliates
must be secured by specific collateral. Based on this limitation, there was
approximately $1,849,000 available for loans or advances to affiliates of
the Bank as of December 31, 2004, at which time there were no material
loans or advances outstanding.
NOTE 24. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the asset or
obligation could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Fair value estimates
are made at a specific point in time based on relevant market information
and information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at
one time the entire holdings of a particular financial instrument. Because
no market value exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics
of various financial instruments, and other factors. These estimates are
subjective in nature, involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated
future business, and the value of assets and liabilities that are not
considered financial instruments. Additionally, tax consequences related to
the realization of the unrealized gains and losses can have a potential
effect on fair value estimates and have not been considered in many of the
estimates.
The following methods and assumptions were used to estimate the fair value
of significant financial instruments:
Financial Assets:
The carrying amounts of cash, due from Banks and federal funds sold
are considered to approximate fair value. The fair value of investment
securities, including available for sale, are generally based on
quoted market prices. The fair value of loans is estimated using a
combination of techniques, including discounting estimated future cash
flows and quoted market prices of similar instruments where available.
Financial Liabilities:
The carrying amounts of deposit liabilities payable on demand are
considered to approximate fair value. For fixed maturity (time)
deposits, fair value is estimated by discounting estimated future cash
flows using currently offered rates for deposits of similar remaining
maturities.
Off-Balance-Sheet-Financial Instruments:
The fair value of commitments to extend credit and standby letters of
credit is estimated using the fees currently charged to enter into
similar agreements.
54
The estimated fair value of financial instruments at December 31, is
summarized as follows:
2004 2003
--------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Financial Assets:
Cash, due from banks and federal funds sold $ 10,138,939 $ 10,138,939 $ 7,644,280 $ 7,644,280
Securities available for sale 59,740,291 59,740,291 39,361,934 39,361,934
Loans 154,919,582 155,324,574 144,665,208 145,075,097
Accrued interest receivable 1,042,573 1,042,573 838,659 838,659
Financial Liabilities:
Demand deposits $117,002,249 $117,002,249 $ 87,888,304 $ 87,888,304
Time deposits 90,726,289 92,637,563 93,010,425 95,057,048
Accrued interest payable 543,551 543,551 673,624 673,624
FHLB borrowings 8,600,000 8,600,000 1,200,000 1,200,000
Securities sold under repurchase agreements 216,909 216,909 -- --
Off Balance - Sheet
Financial Instruments:
Letters of credit $ -- $ 10,338 $ -- $ 776
NOTE 25. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to officers,
directors, and their affiliates amounting to $1,915,773 and $1,449,821 at
December 31, 2004 and 2003, respectively. During 2004, $1,337,629 of new
loans were made, or became reportable, and repayments and other decreases
totaled $871,677. Deposits from related parties held by the Bank at
December 31, 2004 and 2003 amounted to $5,264,183 and $4,026,740,
respectively.
55
NOTE 26. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following represents parent company only financial information:
STATEMENTS OF FINANCIAL CONDITION (PARENT ONLY)
DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
ASSETS
Cash $ 22,098 $ 5,456
Investment in Citizens National Bank 18,123,499 16,558,465
Investment in Morgan County Title Insurance Agency, LLC 2,027 1,420
Deferred income taxes 602 1,500
Other assets 594 2,100
----------- -----------
TOTAL ASSETS $18,148,820 $16,568,941
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities $ 80 $ --
----------- -----------
TOTAL LIABILITIES $ 80 $ --
----------- -----------
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 14,172,144 12,460,556
Accumulated other comprehensive income (345,044) (213,255)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY $18,148,740 $16,568,941
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $18,148,820 $16,568,941
=========== ===========
56
STATEMENTS OF INCOME (PARENT ONLY)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
---------- ---------- ----------
Dividend income $ 662,106 $ 549,658 $ 467,209
Income from title company 35,207 54,550 56,400
Noninterest expense (58,038) (56,422) (36,340)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF CITIZENS NATIONAL BANK $ 639,275 $ 547,786 $ 487,269
Income tax (expense) benefit 7,595 (774) (8,938)
---------- ---------- ----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
CITIZENS NATIONAL BANK $ 646,870 $ 547,012 $ 478,331
Equity in undistributed earnings of Citizens National Bank 1,696,823 1,195,828 829,634
---------- ---------- ----------
NET INCOME $2,343,693 $1,742,840 $1,307,965
========== ========== ==========
STATEMENTS OF CASH FLOWS (PARENT ONLY)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,343,693 $ 1,742,840 $1,307,965
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 898 774 1,363
(Increase) decrease in other assets 1,507 -- 1,400
Increase (decrease) in accrued expenses and other liabilities 80 (52,528) 42,515
Equity in undistributed earnings of Citizens National Bank (1,696,823) (1,195,828) (829,634)
----------- ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 649,355 $ 495,258 $ 523,609
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in title company $ (607) $ 865 $ --
----------- ----------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ (607) $ 865 $ --
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid $ (632,106) $ (549,658) $ (467,209)
----------- ----------- ----------
NET CASH (USED IN) FINANCING ACTIVITIES $ (632,106) $ (549,658) $ (467,209)
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 16,642 $ (53,535) $ 56,400
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 5,456 $ 58,991 $ 2,591
----------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 22,098 $ 5,456 $ 58,991
=========== =========== ==========
57
NOTE 27. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2004
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
In thousands
Interest income $2,768 $2,827 $3,031 $3,089
Interest expense 782 747 807 833
------ ------ ------ ------
Net interest income 1,986 2,080 2,224 2,256
Provision for loan losses 87 94 102 110
Noninterest income 407 453 489 487
Noninterest expense 1,510 1,670 1,685 1,924
Securities gains (losses) 50 86 -- --
------ ------ ------ ------
Income before income taxes 846 855 926 709
Provision for income taxes 277 267 291 157
------ ------ ------ ------
Net income $ 569 $ 588 $ 635 $ 552
====== ====== ====== ======
Basic earnings per share $ 1.24 $ 1.28 $ 1.39 $ 1.21
====== ====== ====== ======
2003
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
In thousands
Interest income $2,848 $2,893 $2,896 $2,904
Interest expense 1,216 1,073 972 891
------ ------ ------ ------
Net interest income 1,632 1,820 1,924 2,013
Provision for loan losses 51 86 57 118
Noninterest income 381 462 471 414
Noninterest expense 1,484 1,471 1,410 1,614
------ ------ ------ ------
Income before income taxes 478 725 928 695
Provision for income taxes 163 284 329 307
------ ------ ------ ------
Net income $ 315 $ 441 $ 599 $ 388
====== ====== ====== ======
Basic earnings per share $ 0.69 $ 0.96 $ 1.31 $ 0.84
====== ====== ====== ======
58
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There were no changes in or disagreements with accountants in accounting
and financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer have
concluded that as of December 31, 2004, which is the end of the period
covered by this Annual Report on Form 10-K, the Company's disclosure
controls and procedures are adequate and effective for purposes of Rule
13(a)-15(e) and timely, alerting them to material information relating to
the Company required to be included in the Company's filings with the
Securities and Exchange Commission under the Securities Exchange Act of
1934.
There have been no changes in the Company's internal controls over
financial reporting in the fiscal quarter ended December 31, 2004, that
have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table contains certain information, as of March 21, 2005,
with respect to current directors, nominees for directors and certain
officers of CNB.
DIRECTOR PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
NAME AGE SINCE AND POSITION HELD WITH CNB
- --------------------- --- -------- -------------------------------------------
Kenneth W. Apple 48 2003 Certified Public Accountant
J. Robert Ayers 76 1974 Retired - President, Citizens National Bank
John E. Barker 76 1972 Auto Sales - Service
Margaret S. Bartles 50 2002 Realtor
Jay E. Dick 52 1983 Retired - Manager-Hunters' Hardware, Inc.
Herbert L. Eppinger 72 1979 Retired - Agriculture
Robert L. Hawvermale 75 1967 Retired - Professional Engineer
J. Philip Kesecker 75 1965 Real Estate Development
Jerry McGraw 58 1988 Insurance
Martha H. Quarantillo 45 1999 Pharmacist
Thomas F. Rokisky 58 1993 President and Chief Executive Officer,
CNB and Citizens National Bank
Charles S. Trump IV 44 1986 Attorney at Law
Arlie R. Yost 57 1988 Licensed Residential Appraiser
All nominees are incumbent directors of CNB Financial Services, Inc.
CNB's bylaws provide that the board of directors can set the number of
directors but also provide that the board of directors must have no less
than five nor more than 25 directors. The board of directors has set the
number of directors to serve in 2005 at 13, which means that 13 directors
will be elected at the 2005 Annual Meeting and will serve a term expiring
at the next Annual Meeting or until a successor is selected.
60
The names, ages and position of each executive officer of the company are
listed below along with the positions with Citizens National Bank held by
each of them during the last five years. Officers are appointed annually by
the Board of Directors at the meeting of directors immediately following
the annual meeting.
AGE AS OF
MARCH
NAME 21, 2005 POSITION AND EXPERIENCE DURING THE PAST 5 YEARS
- ---------------------- --------- ----------------------------------------------------------------------------
J. Philip Kesecker (1) 75 2000 to present - Chairman of the Board, CNB Financial Services, Inc.
1987 to present - Chairman of the Board, Citizens National Bank
Thomas F. Rokisky 58 2000 to present - President/CEO, CNB Financial Services, Inc.
1996 to present - President/CEO, Citizens National Bank
1990 to 1996 - Executive Vice President/COO, Citizens National Bank
Rebecca S. Stotler 44 2000 to present - Vice President/CFO, CNB Financial Services, Inc.
1999 to present - Vice President/CFO, Citizens National Bank
1996 to 1999 - Vice President of Finance/Cashier, Citizens National Bank
Patricia C. Muldoon 44 2003 to present - Senior Vice President/COO, Citizens National Bank
2001 to 2003 - Vice President/COO, Citizens National Bank
1999 to 2001 - Consultant/Audit Staff, Smith Elliott Kearns & Company, LLC
1997 to 1999 - VP/Mgr of Accounting Operations and Financial Reporting
Farmers and Mechanics National Bank
(1) Mr. Kesecker is not an employee of CNB.
CNB's board of directors has determined that Kenneth W. Apple, CPA, meets
the requirements of an audit committee financial expert as defined by the
Securities and Exchange Commission. The board of directors believes that
Mr. Apple has the following five attributes that qualify him as an audit
committee financial expert. This director, through education and
experience, has:
- An understanding of financial statements and generally accepted
accounting principles;
- An ability to assess the general application of generally
accepted accounting principles in connection with accounting for
estimates, accruals and reserves;
- Some experience in preparing, auditing, analyzing and evaluating
financial statements that present a level of complexity of
accounting issues comparable to the breadth of issues that could
reasonably be expected to be presented by CNB's financial
statements;
- An understanding of internal controls; and
- An understanding of audit committee functions.
Mr. Apple acquired these attributes through his Bachelor of Science degree
from Shepherd College in Shepherdstown, West Virginia, and over 20 years of
experience in public accounting, including auditing.
Section 16 (a) of the Securities Exchange Act of 1934 requires CNB's
directors and executive officers, and persons who own more than 10% of the
registered class of CNB's equity securities, to make stock ownership and
transaction filings with the Securities and Exchange Commission and to
provide copies to CNB. Based solely on a review of the reports furnished to
CNB and written statements that no other reports were required, all Section
16(a) filing requirements applicable to its officers and directors were met
except for J. Philip Kesecker, who filed two reports late representing one
transaction each. CNB is required to report late filings.
61
CODES OF ETHICS
Both CNB and the Bank have adopted Codes of Ethics as defined by the rules
of the SEC. The Code of Ethics applies to all of CNB's and the Bank's
directors, officers, including the Bank's Chief Executive Officer and Chief
Financial Officer, and employees. Additionally, CNB and the Bank have
adopted a Code of Ethics for Senior Financial Officers. The codes of ethics
for all employees and for senior financial officers of CNB and the Bank
have been filed as an exhibit to this Annual Report on Form 10-K. If CNB or
the Bank makes substantive amendments to the Code of Ethics or the Code of
Ethics for Senior Financial Officers or grants any waiver, including any
implicit waiver, that applies to any director or executive officer of CNB
or the Bank, it will disclose the nature of such amendment or waiver on the
website or in a report on Form 8-K in accordance with applicable SEC rules.
ITEM 11. EXECUTIVE COMPENSATION
The table below reflects information concerning the annual compensation for
services in all capacities to the corporation for the fiscal years ended
December 31, 2004, 2003 and 2002, of those persons who were, as of December
31, 2004, (a) the chief executive officer, and (b) the four other most
highly compensated executive officers to the extent that such persons,
total annual salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- ---- -------- ----- --------------
Thomas F. Rokisky, President/CEO 2004 $121,380 $-0- $22,071 (1)(2)
2003 $108,330 $-0- $20,172 (1)(2)
2002 $103,420 $-0- $16,424 (1)(2)
(1) CNB's group life and health insurance program, which is paid for by CNB, is
made available to all full-time employees. Effective January 1, 2005, the
bank changed its health insurance program to a high deductible plan and
concurrently established health reimbursement accounts for each employee on
the plan. The bank has committed for 2005 to fund $750 for each
participant. In accordance with IRS Code Section 79, the cost of group life
insurance coverage for an individual in excess of $50,000 is added to the
individual's earnings and is included in salary. Also included in this
figure are board fees earned and the corporation's contributions to the
individual's 401(k) retirement savings program to which the individual has
a vested interest.
(2) CNB's contributions to the pension plan, a defined benefit plan, are not
and cannot be calculated separately for specific participants.
Contributions for the plan year of $249,348, $245,755 and $168,151 were
made by CNB in 2004, 2003 and 2002, respectively.
CNB does not maintain any form of stock option, stock appreciation rights,
or other long-term compensation plans.
Directors receive $150 for each board meeting of the bank they attend, $150
for each discount committee meeting and $75 for other committee meetings
they attend. There is no compensation for attendance at CNB board meetings.
In addition, each director receives a fee of $6,000 per year. The chairman
of the board receives an additional $3,500 per year and the vice chairman
receives an additional $1,000 per year. Other than the deferred
compensation/supplemental insurance plan described below, there are no
other special arrangements with any directors. In 2004, the board of
directors of CNB received $178,650, in the aggregate, for all board of
directors' meetings attended and all fees paid.
CNB maintains a deferred compensation/supplemental insurance plan for
directors pursuant to which a director may elect to defer receipt of a
portion of fees for board meetings for at least four years or until he
reaches age 65, whichever is later. An amount equal to fees waived in
addition to interest at an annual rate of 10% per year will be paid to each
participating director or his designated beneficiary during a period of 10
years after the director reaches age 65. The payments after retirement will
be paid from the general funds of CNB. CNB purchases and is the beneficiary
of insurance on the lives of participants, the proceeds of which are used
to help recover the net after-tax cost of the benefits and insurance
premiums paid. Funds from the deferred fees of a participating director
will be used to reimburse CNB for the costs of the premium for the
insurance policies. The cost of the insurance premiums in 2004 was $58,822.
At December 31, 2004, these policies had a net accumulated cash value of
$1,168,922.
Effective January 2, 2004, CNB entered into a nonqualified supplemental
retirement benefit agreement with the President which when fully vested
would pay the President or his beneficiary an amount of $30,000 per year
for 10
62
years beginning June 11, 2011, if he retires on or after May 29, 2011.
Termination of employment prior to that date other than by reasons of death
or disability will result in a reduced benefit. Contributions to the plan
charged to operations during 2004 amounted to $32,641. The benefits to be
provided by this plan are not being funded by current resources.
The personnel (compensation) committee of the board of directors has
furnished the following report on executive compensation.
The committee establishes the compensation for the Chief Executive
Officer of CNB and the bank and reviews all personnel related issues
including salary administration related to other employees and benefit
programs. The CEO establishes compensation levels for all other
personnel which is reviewed by the personnel committee. Committee
objectives include administration of a total compensation package that
allows CNB to attract and retain qualified persons to fill key
executive positions and to utilize effective compensation programs
which are directly related to executive officers accomplishing
corporate goals and objectives, both operational and financial, aimed
at achieving lasting improvement in CNB's long-term financial
performance.
The committee and the CEO utilize human resources' staff, and, as
appropriate, other qualified consultants to review compensation
practices as they compare to industry norms.
The committee utilizes an internal salary administration plan for the
basis of its analysis of compensation levels throughout CNB, including
the CEO. The plan includes job descriptions for all positions and
considers the overall responsibility of each position based on
characteristics including, job knowledge, problem-solving,
accountability, human relations, communications, supervision of others
and marketing. Salary ranges for each position are developed based on
market information available for similar positions at financial
institutions both in the communities where CNB does business and
outside its market area. Salary surveys utilized include those
provided by the West Virginia Bankers Association, Topnet, Cumberland
Valley Chapter of the Society for Human Resources Management and
Business and Legal Reports, Inc. These results are updated annually by
the human resources staff using current market data which reflects
marketplace changes, inflation, and, if applicable, corporate
performance. This information is considered by the committee.
The individual components of CNB's compensation program include:
(a) Base Salary. Base salary levels are established for the CEO primarily
based upon evaluation of the historical performance, degree of
responsibility, level of experience and number of years with CNB. In
addition, the committee considers compensation data available for
similar positions in financial institutions in the same geographic
area.
With respect to the base salary granted to Mr. Rokisky for the year
2004, the committee took into account the performance during 2003 and
information referred to above. Particular emphasis was placed on Mr.
Rokisky's individual performance, including his leadership role
through a period of continued growth, and CNB's continued strong
financial performance.
(b) Annual Incentives/Bonuses. Bonuses are not granted to senior officers
as a regular component of compensation. Contributions to the 401(k)
plan on behalf of all employees who defer into the plan are based on
bank performance as a percentage of assets.
The committee believes that the total compensation awarded to the CEO
and other officers of CNB is consistent with the committee's
objectives. The amounts paid to individual executives are consistent
with competition within the market and with banks of similar size as
reflected by individual performance of each executive, and are
rationally linked with the fulfillment of corporate objectives and
corporate financial performance.
The following graph compares the yearly percentage change in CNB's (and
prior to CNB's formation, the bank's) cumulative total shareholder return
on common stock for the five-year period ending December 31, 2004, with the
cumulative total return of the CoreData Index (SIC Code Index 6712-Bank
Holding Companies). Shareholders may obtain a copy of the index by calling
CoreData Financial Information, at telephone number (804) 649-6923. There
is no assurance that CNB's stock performance will continue in the future
with the same or similar trends as depicted in the graph.
63
The information used to determine CNB's cumulative total shareholder return
on its common stock is based upon information furnished to CNB or the bank
by one or more parties involved in purchases or sales of CNB's (and prior
to its formation, the bank's) common stock. There is no public market for
CNB's (and prior to its formation, the bank's) common stock and share
prices used to determine CNB's cumulative shareholder return are based upon
sporadic trading activity in privately negotiated transactions. We have not
attempted to verify or determine the accuracy of the representations made
to CNB or the bank.
COMPARE CUMULATIVE RETURN
AMONG CNB FINANCIAL SERVICES, INC.,
MGFS INDEX AND SIC CODE INDEX
(PERFORMANCE GRAPH)
1999 2000 2001 2002 2003 2004
------ ------ ----- ------ ------ ------
CNB Financial Services, INC. 100.00 128.03 94.84 106.38 139.50 140.44
SIC Code Index 100.00 51.72 75.29 91.16 122.19 140.26
CoreData Index 100.00 90.27 79.93 63.49 84.52 94.81
ASSUMES $100 INVESTED ON NOV. 14, 1997
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2003
SIC Code Index is SIC 6712 Bank Holding Companies
CoreData Index is CoreData Financial Information Composite Market Value Index
64
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 21, 2005,
relating to the beneficial ownership of the common stock by (a) each person
or group known by CNB to own beneficially more than 5% of the outstanding
common stock; (b) each of CNB's directors; and (c) all directors and
executive officers of CNB as a group. Unless otherwise noted below, the
persons named in the table have sole investment power with respect to each
of the shares reported as beneficially owned by such person.
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS (1)
- ---------------- ---------------- --------------------
Kenneth W. Apple 450 *
J. Robert Ayers (2) 1,915 *
John E. Barker (3) 17,600 3.84
Margaret S. Bartles (4) 200 *
Jay E. Dick (5) 15,691 3.43
Herbert L. Eppinger (6) 2,870 *
Robert L. Hawvermale (7) 3,730 *
J. Philip Kesecker (8) 13,632 2.98
Jerald McGraw (9) 1,514 *
Martha H. Quarantillo 400 *
Thomas F. Rokisky (10) 1,546 *
Charles S. Trump IV (11) 11,410 2.49
Arlie R. Yost (12) 2,210 *
All directors and executive officers as a group (14 persons) 73,362 16.02
D. Louise Stotler and Deborah Dhayer
3077 Valley Road, Berkeley Springs, WV, 25411 47,488 10.37
Mary Lou Trump
298 Grove Heights Road, Berkeley Springs, WV, 25411 53,470 11.67
* Indicates holdings of less than 1%.
(1) Includes shares of common stock held by the named individual as of February
21, 2005.
(2) Includes 1,815 shares held jointly with spouse.
(3) Includes 14,300 shares held jointly with spouse and 3,000 shares held
jointly with children.
(4) Includes 100 shares held jointly with spouse.
(5) Includes 15,591 shares held jointly with spouse.
(6) Includes 2,770 shares held jointly with spouse.
(7) Includes 1,200 shares held by spouse and 100 shares held jointly with
spouse.
(8) Includes 3,098 shares held by spouse and 1,860 shares held jointly with
spouse and 350 held in an educational trust.
(9) Includes 110 shares held by spouse and 964 shares held jointly with spouse.
(10) Includes 1,425 shares held in an Individual Retirement Account.
(11) Includes 842 shares held by spouse and 300 shares held as custodian for
children.
(12) Includes 1,770 shares held jointly with spouse.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CNB has had and intends to continue to have banking and financial
transactions in the ordinary course of business with directors and
executive officers of CNB and their associates. Total loans outstanding
from CNB at December 31, 2004, to CNB's officers and directors as a group
and members of their immediate families and companies in which they had an
ownership interest of 10% or more was $1,786,246, or approximately 9.8% of
total equity capital. These loans do not involve more than the normal risk
of collectibility or present other unfavorable features. These loans were
made in the ordinary course of business and were made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons.
65
Trump and Trump, in which director Charles S. Trump, IV is a partner,
performed legal services for CNB and the bank. Fees paid by CNB and the
bank to that law firm were $54,227 during 2004.
CNB, Charles S. Trump, IV and George I. McVey are members in a Limited
Liability Company, Morgan County Title Insurance Agency, LLC, which was
formed in February 2001. Morgan County Title Insurance Agency, LLC, paid
Trump and Trump management fees of $72,328. Charles S. Trump, IV and George
I. McVey are partners in Trump and Trump.
ITEM 14. PRINCIPAL ACCOUNTANT'S FEES AND SERVICES
The following fees were paid by CNB and the bank to Smith Elliott Kearns &
Company, LLC:
2004 2003
------- -------
Audit Fees $52,400 $58,150
Audit-Related Fees (a) 1,795 8,530
Tax Fees (b) 4,600 4,100
All Other Fees (c) 4,995 19,450
(a) Principally review of information technology controls, consultation about
the application of accounting principles to specific transactions, branch
cash count procedures and consultation about internal control matters.
(b) Principally tax compliance services (including federal and state returns).
(c) Principally due diligence procedures related to branch acquisition and
agreed upon procedures related to the trust department.
The audit committee charter requires that the audit committee pre-approve
all audit and non-audit services to be provided to the company by the
independent accountants; provided, however, that the audit committee has
specifically authorized its chairman to pre-approve the provision of any
non-audit service to the company. Further, the foregoing pre-approval
policies may be waived, with respect to the provision of any non-audit
services consistent with the exceptions for federal securities law. All of
the services described above for which Smith Elliott Kearns & Company, LLC
billed the company for the fiscal year ended December 31, 2004, were
pre-approved by the company's audit committee. For the fiscal year ended
December 31, 2004, the company's audit committee did not waive the
pre-approval requirement of any non-audit services to be provided to CNB by
Smith Elliott Kearns & Company, LLC.
66
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The consolidated financial statements listed on the index to Item 8 of
this Annual Report on Form 10-K are filed as a part of this Annual
Report.
2. Financial Statement Schedules
All schedules applicable to the Registrant are shown in the respective
financial statements or in the notes thereto included in this Annual
Report.
3. Exhibits
2.2 Articles of Incorporation of CNB Financial Services, Inc. filed
as exhibit 3.1 to the Registration Statement on Form S-4,
Registration No. 333-36186, filed May 3, 2000 with the Securities
and Exchange Commission.
2.3 Bylaws of CNB Financial Services, Inc. filed as exhibit 3.2 to
the Registration Statement on Form S-4, Registration No.
333-36186, filed May 3, 2000 with the Securities and Exchange
Commission.
14 Code of Ethics.
21 Subsidiaries of CNB Financial Services, Inc. filed as an exhibit
hereto.
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
31.1 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) See (a) 3 above.
(c) See (a) 1 and 2 above.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CNB Financial Services, Inc.
(Registrant)
Date March 23, 2005 /s/ Thomas F. Rokisky
----------------------------------------
Thomas F. Rokisky, President/CEO
Date March 23, 2005 /s/ Rebecca S. Stotler
----------------------------------------
Rebecca S. Stotler, Vice President/CFO
(Principal Financial and
Accounting Officer)
68
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on the 23th March 2005.
Signatures Title
---------- -----
/s/ J. Philip Kesecker Chairman and Director
- -------------------------------------
J. PHILIP KESECKER
/s/ Thomas F. Rokisky President/CEO and Director
- -------------------------------------
THOMAS F. ROKISKY
/s/ Kenneth W. Apple Director
- -------------------------------------
KENNETH W. APPLE
/s/ J. Robert Ayers Director
- -------------------------------------
J. ROBERT AYERS
/s/ John E. Barker Director
- -------------------------------------
JOHN E. BARKER
/s/ Margaret S. Bartles Director
- -------------------------------------
MARGARET S. BARTLES
/s/ Jay E. Dick Director
- -------------------------------------
JAY E. DICK
/s/ Herbert L. Eppinger Director
- -------------------------------------
HERBERT L. EPPINGER
/s/ Robert L. Hawvermale Director
- -------------------------------------
ROBERT L. HAWVERMALE
/s/ Jerald McGraw Director
- -------------------------------------
JERALD MCGRAW
/s/ Martha H. Quarantillo Director
- -------------------------------------
MARTHA H. QUARANTILLO
/s/ Charles S. Trump IV Director
- -------------------------------------
CHARLES S. TRUMP IV
/s/ Arlie R. Yost Director
- -------------------------------------
ARLIE R. YOST
69