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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
[ ] 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 Identification No.)
incorporation or organization)
101 S. Washington Street, Berkeley Springs, WV 25411
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (304) 258 - 1520
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES [ ] NO [X]
The aggregate value of the common stock of the Registrant that was held by
non-affiliates as of the most recently completed second fiscal quarter (June 30,
2004), was approximately $30.9 million. This amount was based on the last
closing sale price of a share of common stock of $80.00 as of the same date.
Common Stock $1 par value, 458,048 shares outstanding as of May 12, 2005.
CNB FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PART 1: FINANCIAL INFORMATION
PAGE
Item 1 Financial Statements
Consolidated Statements of Financial Condition as of March 31, 2005 (Unaudited)
and December 31, 2004....................................................................... 3
Consolidated Statements of Income for the Three Months ended March 31, 2005 and 2004
(Unaudited)................................................................................. 4
Consolidated Statements of Changes in Shareholders' Equity for the Three
Months Ended March 31, 2005 (Unaudited) and the Year Ended December 31, 2004............... 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 (Unaudited).................................................. 6
Notes to Consolidated Financial Statements (Unaudited)......................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Three Months ended March 31, 2005.............................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 21
Item 4. Controls and Procedures........................................................................ 22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 23
Item 6. Exhibits and Reports on Form 8-K............................................................... 23
SIGNATURES..................................................................................... 24
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 indicates that the
disclosure of forward-looking information is desirable for investors and
encourages such disclosure by providing a safe harbor for forward-looking
statements that involve risk and uncertainty. All statements other than
statements of historical fact included in this Form 10-Q including statements in
Management's Discussion and Analysis of Financial Condition and Results of
Operations are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. In order to comply with the terms of the safe
harbor, CNB notes that a variety of factors could cause CNB's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in those forward-looking statements. These factors could
include the following possibilities: (1) competitive pressures among depository
and other financial institutions may increase significantly; (2) changes in the
interest rate environment may reduce margins; (3) general economic conditions
may become unfavorable resulting in reduced credit quality or demand for loans;
(4) legislative or regulatory changes could increase expenses; and (5)
competitors may have greater financial resources and develop products that
enable them to compete more successfully than CNB.
2
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, DECEMBER 31,
ASSETS 2005 2004
------------- -------------
(Unaudited)
Cash and due from banks $ 7,206,423 $ 10,047,939
Federal funds sold 7,000 91,000
Securities available for sale
(at approximate market value) 54,482,243 59,740,291
Federal Home Loan Bank stock, at cost 881,000 1,169,800
Federal Reserve Bank stock, at cost 129,650 129,650
Loans and lease receivable, net 159,198,466 154,919,582
Accrued interest receivable 1,010,446 1,042,573
Premises and equipment, net 6,216,349 6,044,446
Deferred income taxes 858,595 512,224
Cash surrender value of life insurance 1,174,843 1,168,922
Intangible assets 708,691 738,057
Other assets 517,278 1,393,582
------------- -------------
TOTAL ASSETS $ 232,390,984 $ 236,998,066
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 39,246,846 $ 36,965,406
Interest-bearing demand 48,618,047 48,055,089
Savings 32,183,577 31,981,754
Time, $100,000 and over 30,503,972 34,265,305
Other time 55,648,559 56,460,984
------------- -------------
$ 206,201,001 $ 207,728,538
Accrued interest payable 512,576 543,551
FHLB borrowings 5,500,000 8,600,000
Securities sold under repurchase agreement 222,023 216,909
Accrued expenses and other liabilities 1,880,150 1,760,328
------------- -------------
TOTAL LIABILITIES $ 214,315,750 $ 218,849,326
------------- -------------
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 14,700,363 14,172,144
Accumulated other comprehensive income (946,769) (345,044)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY $ 18,075,234 $ 18,148,740
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 232,390,984 $ 236,998,066
============= =============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
3
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
----------- -----------
INTEREST INCOME
Interest and fees on loans $ 2,509,694 $ 2,384,198
Interest and dividends on securities
U.S. Government agencies and
corporations 357,226 243,549
Mortgage backed securities 91,304 89,731
State and political subdivisions 107,681 44,978
Other 6,957 2,863
Interest on federal funds sold 230 2,785
----------- -----------
$ 3,073,092 $ 2,768,104
----------- -----------
INTEREST EXPENSE
Interest on interest bearing demand, $ 771,006 $ 778,859
savings and time deposits
Interest on FHLB borrowings 37,096 2,900
----------- -----------
$ 808,102 $ 781,759
----------- -----------
NET INTEREST INCOME $ 2,264,990 $ 1,986,345
PROVISION FOR LOAN LOSSES 106,000 87,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 2,158,990 $ 1,899,345
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts $ 257,481 $ 257,189
Other service charges, commissions
and fees 129,994 89,247
Insurance commissions 38,139 33,002
Other operating income 17,215 17,531
Net gain on sale of securities - 49,876
Income from title company 6,510 9,829
----------- -----------
$ 449,339 $ 456,674
----------- -----------
NONINTEREST EXPENSES
Salaries $ 704,829 $ 595,918
Employee benefits 268,530 217,879
Occupancy of premises 90,333 77,906
Furniture and equipment expense 202,741 202,054
Other operating expenses 504,306 415,888
Net loss on sale of securities 2,065 -
----------- -----------
$ 1,772,804 $ 1,509,645
----------- -----------
INCOME BEFORE INCOME TAXES $ 835,525 $ 846,374
PROVISION FOR INCOME TAXES 307,306 277,505
----------- -----------
NET INCOME $ 528,219 $ 568,869
=========== ===========
BASIC EARNINGS PER SHARE $ 1.15 $ 1.24
=========== ===========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
--------- ----------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 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
------------
Comprehensive income:
Net income for three months
ended March 31, 2005 - - 528,219 - 528,219
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $368,799) - - - (601,725) (601,725)
------------
Total Comprehensive Income (Loss) - - - - (73,506)
--------- ----------- ----------- ---------- ------------
BALANCE, MARCH 31, 2005 $ 458,048 $ 3,863,592 $14,700,363 $ (946,769) $ 18,075,234
========= =========== =========== ========== ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
5
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 528,219 $ 568,869
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 195,698 171,462
Provision for loan losses 106,000 87,000
Deferred income taxes 22,428 -
Net loss (gain) on sale of securities 2,065 (49,876)
Decrease in accrued interest receivable 32,127 63,708
Decrease in other assets 819,149 317,494
(Decrease) in accrued interest payable (30,975) (33,585)
Increase in accrued expenses and other liabilities 119,822 74,450
Amortization of deferred loan (fees) cost 13,128 484
Amortization (accretion) of premium and discount on investments 14,394 19,291
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,822,055 $ 1,219,297
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans $ (4,398,012) $ (3,308,211)
Proceeds from sales of securities 14,832,347 3,900,535
Proceeds from maturities, repayments and calls of securities 396,697 9,144,734
Purchases of securities (10,957,979) (6,920,919)
Purchases of Federal Home Loan Bank stock (1,209,700) (230,100)
Redemptions of Federal Home Loan Bank stock 1,498,500 388,400
Purchases of premises and equipment (281,080) (177,996)
Net (increase) decrease in federal funds sold 84,000 (3,915,000)
Premiums paid on life insurance (5,921) (5,921)
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES $ (41,148) $ (1,124,478)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits $ 3,046,221 $ 5,197,282
Net (decrease) in time deposits (4,573,758) (1,348,005)
Net increase in securities sold under repurchase agreement 5,114 -
Net (decrease) in FHLB borrowings (3,100,000) (1,200,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ (4,622,423) $ 2,649,277
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (2,841,516) $ 2,744,096
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,047,939 7,641,280
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,206,423 $ 10,385,376
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 839,077 $ 815,344
The Notes to Consolidated Financial Statements are an integral part of these
statements.
6
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation and Contingencies
In the opinion of CNB Financial Services, Inc. ("CNB" or the
"Company"), the accompanying unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary for a fair presentation of CNB financial condition as of March
31, 2005 and the results of operations for the three months ended March
31, 2005 and 2004 and cash flows for the three months ended March 31, 2005
and 2004.
The accompanying unaudited financial statements have been prepared
in accordance with the instructions for Form 10-Q. These financial
statements should be read in conjunction with the consolidated financial
statements and the notes included in CNB's Annual Report for the year
ended December 31, 2004.
In the ordinary course of business, the company and its subsidiary
are involved in various legal proceedings. In the opinion of the
management of CNB, there are no proceedings pending to which CNB is a
party or to which its property is subject, which, if determined adversely
to CNB, would be material in relation to CNB's financial condition. There
are no proceedings pending other than ordinary routine litigation incident
to the business of CNB. In addition, no material proceedings are pending
or are known to be threatened or contemplated against CNB by government
authorities.
Note 2. Business Combinations
On June 11, 2004, Citizens National Bank purchased certain assets
and liabilities associated with the Hancock Branch of Fidelity Bank, a
subsidiary bank of Mercantile Bankshares Corporation (formerly Home
Federal). The results of the Hancock Branch's operations have been
included in the consolidated financial statements since that date.
The following table provides information concerning the allocations
of the purchase price and the fair values of the assets and liabilities
acquired of the Hancock branch:
AT JUNE 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)
============
7
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2. Business Combinations (continued)
Citizens National Bank recorded $781,000 of core deposit intangible,
which has a weighted-average useful life of 7 years.
Note 3. Securities
The amortized cost and estimated market value of debt securities at
March 31, 2005 and December 31, 2004 by contractual maturity are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Securities are summarized as follows:
MARCH 31, 2005 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 $ 2,003,406 $ - $ 38,606 $ 1,964,800 4.25%
After 1 but within 5 years 4,917,209 - 115,384 4,801,825 3.99%
After 5 but within 10 years 27,457,351 - 626,973 26,830,378 4.44
----------- ---------- ----------- -----------
$34,377,966 $ - $ 780,963 $33,597,003 4.37%
----------- ---------- ----------- -----------
States and political subdivisions
Within one year $ 873,762 $ 9,345 $ - $ 883,107 3.83%
After 1 but within 5 years 2,012,255 3,106 26,527 1,988,834 2.83%
After 5 but within 10 years 10,271,762 45,506 132,765 10,184,503 3.51
----------- ---------- ----------- -----------
$13,157,779 $ 57,957 $ 159,292 $13,056,444 3.43%
----------- ---------- ----------- -----------
Mortgage backed securities $ 7,996,674 $ - $ 167,878 $ 7,828,796 4.49%
----------- ---------- ----------- -----------
Total securities available for sale $55,532,419 $ 57,957 $ 1,108,133 $54,482,243 4.16%
=========== ========== =========== ===========
Restricted:
Federal Reserve Bank stock $ 129,650 $ - $ - $ 129,650 6.00%
Federal Home Loan Bank stock 881,000 - - 881,000 2.86
----------- ---------- ----------- -----------
Total restricted investments $ 1,010,650 $ - $ - $ 1,010,650 3.26%
=========== ========== =========== ===========
8
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Securities (continued)
DECEMBER 31, 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%
=========== ========== =========== ===========
The carrying value of securities pledged to secure public deposits
and for other purposes as required or permitted by law totaled $31,999,255
at March 31, 2005 and $32,538,864 at December 31, 2004. Also, a security
with a carrying value of $242,025 is designated for customer repurchase
agreements at March 31, 2005 and $247,275 at December 31, 2004.
Proceeds from sales of securities available for sale (excluding
maturities) during the three months ended March 31, 2005 and the year
ended December 31, 2004 were $14,832,347 and $6,391,436, respectively.
Gross gains (losses) of $77,075 and $(79,140) during the three months
ended March 31, 2005 and $135,546 and $(0) for the year ended December 31,
2004 were realized on the respective sales.
9
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Securities (continued)
The following table shows our investments' gross unrealized losses
and fair value, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss
position, at March 31, 2005.
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 $25,543,222 $ 571,507 $4,023,950 $ 209,455 $29,567,172 $ 780,962
State and political subdivisions 9,993,902 159,292 - - 9,993,902 159,292
Mortgage backed securities 7,008,791 131,911 820,005 35,967 7,828,796 167,878
----------- ---------- ---------- ---------- ----------- ----------
Total temporarily impaired
securities $42,545,915 $ 862,710 $4,843,955 $ 245,422 $47,389,870 $1,108,132
=========== ========== ========== ========== =========== ==========
Note 4. Loans and Leases Receivable
Major classifications of loans at March 31, 2005 and December 31,
2004, were as follows:
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
Loans:
Real estate $ 111,291,187 $ 108,158,901
Commercial real estate 23,897,552 22,758,761
Consumer 16,185,733 16,404,853
Commercial 9,173,378 8,880,771
Overdrafts 66,884 82,556
------------- -------------
$ 160,614,734 $ 156,285,842
Leases: 161,945 166,389
------------- -------------
$ 160,776,679 $ 156,452,231
Net deferred loan fees, costs,
premiums and discounts 276,315 274,800
Allowance for loan losses (1,854,528) (1,807,449)
------------- -------------
$ 159,198,466 $ 154,919,582
============= =============
10
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. Loans and Leases Receivable (continued)
An analysis of the allowance for possible loan losses is as follows:
MARCH 31, DECEMBER 31,
--------------------------- ------------
2005 2004 2004
----------- ----------- ------------
Balance, Beginning $ 1,807,449 $ 1,607,763 $ 1,607,763
Provision charged to
operations 106,000 87,000 393,000
Recoveries 41,130 77,705 158,850
Loans charged off (100,051) (100,067) (352,164)
----------- ----------- ------------
Balance, Ending $ 1,854,528 $ 1,672,401 $ 1,807,449
=========== =========== ============
Loans are placed in nonaccrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When interest accruals are
discontinued, interest credited to income is reversed. Nonaccrual loans
are restored to accrual status when all delinquent principal and interest
becomes current or the loan is considered secured and in the process of
collection. Certain loans that are determined to be sufficiently
collateralized may continue to accrue interest after reaching 90 days past
due. A summary of nonperforming loans is as follows:
MARCH 31, DECEMBER 31,
-------------------- ------------
2005 2004 2004
-------- -------- ------------
Nonaccrual loans $276,387 $780,530 $ 380,731
Loans past due 90 days or more still accruing interest - - -
-------- -------- ------------
Total $276,387 $780,530 $ 380,731
======== ======== ============
Note 5. Time Deposits
At March 31, 2005, the scheduled maturities of time deposits are as
follows:
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- -----------
Within 3 months $ 2,004,774 $ 6,375,373
3 months thru 6 months 774,681 3,890,602
6 months thru 12 months 1,263,594 7,080,046
Over 12 months 26,460,923 68,806,510
----------- -----------
$30,503,972 $86,152,531
=========== ===========
11
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6. Federal Home Loan Bank Borrowings
MARCH 31, DECEMBER 31,
------------------------- --------------
2005 2004 2004
----------- ------------ --------------
Federal Home Loan Bank advances $ 5,500,000 $ - $ 8,600,000
Citizens National Bank is a member of the Federal Home Loan Bank
("FHLB") of Pittsburgh and, as such, can take advantage of the FHLB
program for overnight and term advances at published daily rates. Under
the terms of a blanket collateral agreement, advances from the FHLB are
collateralized by qualifying mortgages and US government agencies and
mortgage-backed securities. In addition, all of the Bank's stock in the
FHLB is pledged as collateral for such debt. Advances available under this
agreement are limited by available and qualifying collateral and the
amount of FHLB stock held by the borrower.
Note 7. Supplemental Retirement Plan
On January 2, 2004, the Bank entered into a nonqualified
supplemental retirement benefit agreement with the President which when
fully vested would pay the President or his beneficiary an amount of
$30,000 per year for 10 years beginning June 11, 2011, if he retires on or
after May 29, 2011. Termination of employment prior to that date other
than by reasons of death or disability will result in a reduced benefit.
The expense for the three months ended March 31, 2005 was $8,160.
Note 8. New Branch
On December 15, 2003, the Bank purchased a parcel of land in Falling
Waters, Berkeley County, West Virginia for $503,261 to construct a new
branch facility. Construction on the new facility began August 2004 and
was completed in April 2005. The Bank's total cost to construct the new
branch location totaled $966,005.
Note 9. Supplemental Health Insurance Plan
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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
CNB Financial Services, Inc. ("CNB" or the "Company") was organized
under the laws of West Virginia in March 2000 at the direction of the Board
of Directors of Citizens National Bank (the "Bank") for the purpose of
becoming a financial services holding company. The Company's primary function
is to direct, plan and coordinate the business activities for the Bank and
its subsidiary. We refer to the Company and its subsidiary as "CNB".
On August 31, 2000, the Bank, via merger, became a wholly-owned
subsidiary of the Company and the shareholders of the Bank became
shareholders of the Company. Each Bank shareholder received two shares of the
Company stock for each share of the Bank's common stock. The merger was
accounted for as a pooling of interests.
The Bank was organized on June 20, 1934, and has operated in Berkeley
Springs in Morgan County, West Virginia, as a national banking association
continuously since that time. The Bank is a full-service commercial bank
conducting general banking and trust activities through five full-service
offices and five automated teller machines located in Morgan and Berkeley
Counties, West Virginia and Washington County, Maryland. The Bank's sixth
full-service branch and ATM opened in April 2005 in Berkeley County, West
Virginia. The Bank formed CNB Insurance Services, Inc., a wholly owned
subsidiary, which is a property and casualty insurance agency selling
primarily personal lines of insurance.
The Bank purchased a parcel of land in Falling Waters, Berkeley County,
West Virginia on December 15, 2003 for $503,261 to construct a new branch
facility. Construction on the new branch facility began in August 2004 and
was completed in April 2005. On April 27, 2005, the new branch building
opened.
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 certificates of deposit.
Additionally, CNB acquired loans, equipment and leasehold improvements and
assumed the lease for the real estate located at 333 East Main Street,
Hancock, Maryland.
The following discussion and analysis presents the significant changes
in financial condition and results of operations of CNB for the three months
ended March 31, 2005 and 2004. This discussion may include forward-looking
statements based upon management's expectations. Actual results may differ.
We have rounded amounts and percentages used in this discussion and have
based all average balances on daily averages.
CRITICAL ACCOUNTING POLICIES
CNB has established various accounting policies which govern the
application of accounting principles generally accepted in the United States
of America in the preparation and presentation of CNB's consolidated
financial statements. The significant accounting policies of CNB are
described in "Item 1, Critical Accounting Policies" and Note 1: Summary of
Significant Accounting Policies of the Consolidated Financial Statements on
Form 10-K as of December 31, 2004, and along with the disclosures presented
in other financial statement notes, provide information on how significant
assets and liabilities are valued in the financial statements and how those
values are determined. Certain accounting policies involve significant
judgments, assumptions and estimates by management that have a material
impact on the carrying value of certain assets and liabilities, which
management considers to be critical accounting policies. The judgments,
assumptions and estimates used by management are based on historical
experience, knowledge of the accounts and other factors, which are believed
to be reasonable under the circumstances. Because of the nature of the
judgment and assumptions made by management,
13
actual results could differ from these judgments and estimates, which could
have a material impact on the carrying values of assets and liabilities and
the results of operations of the Company.
CNB views the determination of the allowance for loan losses as a
critical accounting policy that requires the most significant judgments,
assumptions and estimates used in the preparation of its consolidated
financial statements. For a more detailed discussion on the allowance for
loan losses, see Nonperforming Loans and Allowance For Loan Losses in the
Management's Discussion and Analysis and Allowance for Loan Losses in Note 1:
Summary of Significant Accounting Policies and Note 4: Loans and Leases
Receivable in the Notes to Consolidated Financial Statements in the Form 10-K
for December 31, 2004.
EARNINGS SUMMARY
Net income for the three months ended March 31, 2005 was $528,000 or
$1.15 per share compared to $569,000 or $1.24 per share for the same period
in 2004. Annualized return on average assets and average equity were .9% and
11.4% respectively, for the three months ended March 31, 2005, compared with
1.1% and 13.5%, respectively, for the three months ended March 31, 2004.
Earnings projections for the remainder of 2005 show net income to
decrease due to the additional expenses related to the opening of the new
branch facility and the additional costs of compliance with the provisions of
the Sarbanes-Oxley Act of 2002.
NET INTEREST INCOME
Net interest income represents the primary component of CNB's earnings.
It is the difference between interest and fee income related to earning
assets and interest expense incurred to carry interest-bearing liabilities.
Changes in the volume and mix of interest earning assets and interest bearing
liabilities, as well as changing interest rates, impact net interest income.
To manage these changes, their impact on net interest income and the risk
associated with them, CNB utilizes an ongoing asset/liability management
program. This program includes analysis of the difference between rate
sensitive assets and rate sensitive liabilities, earnings sensitivity to rate
changes, and source and use of funds. A discussion of net interest income and
the factors impacting it is presented below.
Net interest income for the three months ended March 31, 2005 increased
by $279,000 or 14.0% over the same period in 2004. Interest income for the
three months ended March 31, 2005 increased by $305,000 or 11.0% compared to
the same period in 2004, while interest expense increased by $26,000 or 3.4%
during the three months ended March 31, 2005, as compared to the same period
in the prior year.
Increased net interest income for the three month period is
attributable in part to a higher level of net interest earning assets offset
by a decrease in the rates earned thereon. Although interest expense paid on
interest bearing liabilities increased due to an increase in the outstanding
balance of interest bearing liabilities, the increase in deposit growth was
at a slower pace than the increase in loan and investment growth. While the
Bank experienced a shift in the asset mix from higher yielding loans to lower
yielding investment securities, there was also a shift in the deposit mix
from higher interest bearing time deposits to lower interest bearing deposit
accounts. The decrease in the rates earned on interest earning assets is due
to the current economic conditions.
During the first quarter of 2005 compared to the same period in 2004,
average net interest earning assets increased $27.3 million or 14.6% and
average net interest bearing liabilities increased $21.4 million or 14.0%
contributed to increased net interest income. CNB experienced a 2 basis point
decrease in the ratio of net interest income to average interest earning
assets. The 19 point decrease in rates earned on average interest earning
assets offset by a 20 basis point decrease in rates paid on average interest
bearing liabilities resulted in the decrease in the net interest margin.
14
See Table 1 - Distribution of Assets, Liabilities, and Shareholders'
Equity; Interest Rates and Interest Differential.
The net interest margin is impacted by the change in the spread between
yields on earning assets and rates paid on interest bearing liabilities.
15
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
MARCH 31, 2005 MARCH 31, 2004
-------------------------------- -------------------------------
QTR QTR
AVERAGE QTR YIELD/ AVERAGE QTR YIELD/
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
--------- --------- -------- --------- --------- --------
(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold $ 40 $ - 2.37% $ 1,258 $ 3 0.91%
Securities:
Taxable 43,018 456 4.24 31,602 336 4.25
Tax-exempt (1) 12,674 108 5.16 5,361 45 5.09
Loans (net of unearned interest) (2)(5)(6) 158,168 2,437 6.16 148,420 2,322 6.26
--------- --------- ---- --------- --------- ----
Total interest earning assets (1) $ 213,900 $ 3,001 5.61% $ 186,641 $ 2,706 5.80%
--------- --------- ---- --------- --------- ----
Nonearning assets:
Cash and due from banks $ 9,850 $ 9,008
Bank premises and equipment, net 6,116 5,264
Other assets 4,247 3,017
Allowance for loan losses (1,872) (1,663)
--------- ---------
Total assets $ 232,241 $ 202,267
========= =========
Interest bearing liabilities:
Savings deposits $ 31,778 $ 39 0.49% $ 25,197 $ 31 0.49%
Time deposits 87,734 541 2.47 92,450 661 2.86
NOW accounts 39,128 170 1.74 25,290 69 1.09
Money market accounts 10,011 21 0.84 9,082 18 0.79
Borrowings 5,633 37 2.63 893 3 1.34
--------- --------- ---- --------- --------- ----
Total interest bearing liabilities $ 174,284 $ 808 1.85% $ 152,912 $ 782 2.05%
--------- --------- ---- --------- --------- ----
Noninterest bearing liabilities:
Demand deposits $ 37,195 $ 30,159
Other liabilities 2,291 2,287
Shareholders' equity 18,471 16,909
--------- ---------
Total liabilities and
shareholders' equity $ 232,241 $ 202,267
========= =========
--------- ---------
Net interest income (1) $ 2,193 $ 1,924
========= =========
Net interest spread (3) 3.76% 3.75%
==== ====
Net interest income to average
interest earning assets (1) 4.10% 4.12%
==== ====
(1) Yields are expressed on a tax equivalent basis using a 34% tax rate.
(2) For the purpose of these computations, nonaccruing loans are included in
the amounts of average loans outstanding.
(3) Net interest spread is the difference between the weighted average yield
on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Yields/Rates are expressed on annualized basis.
(5) Interest income on loans excludes fees of $72,000 in 2005 and $62,000 in
2004.
(6) Interest income on loans includes fees of $15,484 in 2005 and $36,431 in
2004 from the Business Manager Program, student loans and lease
receivables.
16
PROVISION FOR LOAN LOSSES
The amount charged to provision for loan losses is based on
management's evaluation of the loan portfolio. Management determines the
adequacy of the allowance for loan losses, based on past loan loss
experience, current economic conditions and composition of the loan
portfolio. The allowance for loan losses is the best estimate of management
of the probable losses which have been incurred as of a balance sheet date.
The provision for loan losses is a charge to earnings which is made to
maintain the allowance for loan losses at a sufficient level. The provision
for loan losses for the three months ended March 31, 2005, and March 31,
2004, amounted to $106,000 and $87,000, respectively. Loan quality remains
stable, past dues are minimal and nonaccruals have decreased for the same
period. Management believes the allowance for loan losses is adequate and is
not aware of any information relating to the loan portfolio which it expects
will materially impact future operating results, liquidity or capital
resources. In addition, federal regulators may require additional reserves as
a result of their examination of the bank. See "Nonperforming Assets and
Allowance for Loan Losses" for further discussion.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 2005 decreased
$8,000 or 1.6% to $449,000 from $457,000 in the first quarter of 2005. The
decrease in noninterest income is attributable to a decrease in gain on sale
of investment securities offset by an increase in fees generated from the
insurance commissions, ATM and debit card fees and trust fee income.
Insurance commissions increased due to general rate increases from the
insurance companies and a slight increase in new written business for the
first quarter. The increase in fees related to the ATM and debit card have a
direct correlation to the increased deposit base of the bank. Trust fees
increased due to the assets under management increased 20% over the same
period last year, the fee schedule for trust fees was increased by 10% during
the fourth quarter of 2004 and fee income was received for the settlement of
an estate during the first quarter of 2005.
NONINTEREST EXPENSES
Noninterest expenses for the three months ended March 31, 2005,
increased $263,000 or 17.4%. Salaries increased due to normal merit
increases, several new hires and salaries for employees of the Hancock branch
acquired during the second quarter 2004. Employee benefits increased due to
an increase in pension expense and the increased number of employees.
Although, the bank changed its health insurance program, effective January 1,
2005, to a high deductible plan with reduced per employee premiums the
insurance expense for the first quarter 2005 showed a slight increase over
the same period last year due to the increased number of employees.
Concurrent with the creation of the high deductible insurance plan, the Bank
established a vested health contribution plan which enables the Bank to
contribute to health reimbursement accounts for each employee on the plan. A
$14,000 expense was incurred in the first quarter of 2005 for the health
reimbursement accounts. The increase in occupancy expense was due to
increases in general utilities costs and supply costs for operating the bank.
The increase in other operating expenses was due to an increase in postage,
data processing expense, debit card expense, outside service fees, audit, tax
and accounting fees and the amortization of premium purchased for the Hancock
branch facility. These increases were offset by decreases in bounce
protection expense and business manager expense. The increase in postage and
debit card expense is a direct result of the increased deposit base of the
bank. Outside service fees and audit, tax and accounting fees increased due
to additional costs of compliance with new banking regulations and the
provisions of the Sarbanes-Oxley Act of 2002. Bounce protection expense
decreased due to the expiration of the Bank's contract with Pinnacle
Financial Strategies in February 2004. Business manager expense decreased due
to a decrease in the volume of receivables the bank purchased in the first
quarter of 2005 due to a decline in customer need for the program.
17
INCOME TAXES
The Bank's provision for income taxes increased $30,000 or 10.7% to
$307,000 for the three months ended March 31, 2005. The effective tax rates
for the first quarter of 2005 and 2004 were 36.8% and 32.8%, 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 and certain non deductible expenses.
FINANCIAL CONDITION
The Bank's total assets as of March 31, 2005 decreased $4.6 million or
1.9% to $232.4 million from December 31, 2004 due primarily to a $2.8 million
decrease in cash and due from banks, $5.6 million decrease in investment
securities and $876,000 decrease in other assets offset by a $4.3 million
increase in loans. The decrease in other assets is due to WV Housing Clearing
account for loans in process balance being greater at December 31, 2004 than
March 31, 2005 due to the timing of the settlement of these loans. The Bank's
total liabilities decreased $4.5 million or 2.1% to $214.3 million from
December 31, 2004 due to a $1.5 million decrease in deposits and $3.1 million
decrease borrowings. Shareholders' equity decreased $74,000 to $18.1 million
at March 31, 2005, primarily due to net income of $528,000 offset by a
$602,000 decrease in accumulated other comprehensive income. The $602,000
decrease in accumulated other comprehensive income is a direct result of the
decline in market value of available for sale securities. The components of
accumulated other comprehensive income at March 31, 2005 and December 31,
2004, were unrealized gains and losses on available for sale securities, net
of deferred income taxes and minimum pension liability adjustment, net of
deferred income taxes. The unrealized gains and losses are primarily a
function of available market interest rates relative to the yield being
generated on the available for sale portfolio. No earnings impact results
unless the securities are actually sold.
LOAN PORTFOLIO
At March 31, 2005, total loans increased $4.3 million or 2.8% to $159.2
million from $154.9 million at December 31, 2004. This increase is mainly a
result of a focused effort by all loan officers to generate loans. Loan
officers have increased personal contact with realtors, auto dealers and
commercial businesses during the first three months of 2005. In addition, the
Bank offered a fixed rate residential mortgage promotion and a mortgage
program in which the Bank pays up to $2,000 of certain closing costs during
the first quarter of 2005. The Bank and its branches are centered in a
naturally growing part of West Virginia. Berkeley County was recently rated
the 3rd most populous county in West Virginia and in the top 100 for the
fastest growing counties in the United States.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of nonaccrual loans, loans which are past
due 90 days or more and still accruing interest, restructured loans and other
real estate owned. The following table summarized the Bank's nonperforming
assets as of the periods shown:
18
MARCH 31, DECEMBER 31,
----------------------------- -----------
2005 2004 2004
----------- ----------- -----------
Nonaccrual loans $ 276,387 $ 780,530 $ 380,731
Loans past due 90 days or more
still accruing interest - - -
----------- ----------- -----------
Total nonperforming loans $ 276,387 $ 780,530 $ 380,731
----------- ----------- -----------
Other real estate owned $ - $ - $ -
----------- ----------- -----------
Total nonperforming assets $ 276,387 $ 780,530 $ 380,731
=========== =========== ===========
Nonperforming loans/Total loans 0.17% 0.53% 0.25%
Nonperforming assets/Total assets 0.12% 0.38% 0.16%
Allowance for loan losses/Total loans 1.16% 1.13% 1.17%
As of March 31, 2005, the Bank has no loans which management
considers to be impaired. Management is aware of four borrowers who have
exhibited weaknesses. Their loans have aggregate uninsured balances of
$2.1 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 and management anticipates any additional potential loss
would be minimal.
The allowance for loan losses is the best estimate by management of
the probable losses which have been incurred as of a balance sheet date.
Management makes this determination quarterly by its analysis of overall
loan quality, changes in the mix and size of the loan portfolio, previous
loss experience, general economic conditions, information about specific
borrowers and other factors. The Bank's methodology for determining the
allowance for loan losses established both an allocated and an unallocated
component. The allocated portion of the allowance represents the results
of analyses of individual loans that the Bank monitors for potential
credit problems and pools of loans within the portfolio. Management bases
the allocated portion of the allowance for loans principally on current
loan risk ratings, historical loan loss rates adjusted to reflect current
conditions, as well as analyses of other factors that may have affected
the collectibility of loans in the portfolio. The Bank analyzes all
commercial loans it is monitoring as potential credit problems to
determine whether those loans are impaired, with impairment measured by
reference to the borrowers' collateral values and cash flows.
The unallocated portion of the allowance for loan losses represents
the results of analyses that measure probable losses inherent in the
portfolio that are not adequately captured in the allocated allowance
analyses. These analyses include consideration of unidentified losses
inherent in the portfolio resulting from changing underwriting criteria,
changes in the types and mix of loans originated, industry concentrations
and evaluations, allowance levels relative to selected overall credit
criteria and other economic indicators used to estimate probable incurred
losses. At March 31, 2005, the allowance for loans losses totaled $1.9
million compared to $1.8 million at December 31, 2004. The allowance for
loans losses as a percentage of loans was 1.2% as of March 31, 2005 and
December 31, 2004.
19
An analysis of the allowance for loan losses is summarized below:
In thousands MARCH 31, DECEMBER 31,
------------------------ ------------------------
2005 2004
------------------------ ------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------- ------ -------------
Commercial, financial $ 863 21 % $ 810 20 %
and agriculture
Real estate - residential 476 69 467 69
mortgage
Installment and other 304 10 323 11
Unallocated 212 N/A 207 N/A
------ --- ------ ---
Total $1,855 100 % $1,807 100 %
====== === ====== ===
DEPOSITS
The Bank's deposits decreased $1.5 million or .7% during the three
months ended March 31, 2005. The Bank has experienced a slight change in
the deposit account mix during the first three months of 2005. Moderate
growth continues in regular demand, interest-bearing demand and savings
deposits. The increase is primarily due to the continued customer growth
in the Bank's market area of Morgan and Berkeley Counties, West Virginia
and Washington County, Maryland. The Bank experienced an overall decrease
of $4.6 million other time deposits and rate sensitive jumbo certificates
of deposit during the first three months of 2005. This decrease is
attributable to customers withdrawing funds or closing their 36-month
Ultimate Certificates of Deposit on the anniversary date or maturity date
due to competitive rate market. The Bank began increasing their rates paid
on their certificates of deposit during the end of the first quarter of
2005.
CAPITAL RESOURCES
Shareholders' equity decreased $74,000 or .4% during the first three
months of 2005 due to $528,000 in net income offset by $602,000 decrease
in accumulated other comprehensive income. The Bank is subject to
regulations of the Office of the Comptroller of the Currency that impose
certain minimum regulatory capital requirements. Under each measure, the
Bank was substantially in excess of the minimum regulatory requirements,
and, by definition was "well capitalized" at March 31, 2005. The following
table summarized, as of March 31, 2005, the Bank's capital ratios.
Components Actual Required
of Capital Ratio Ratio
---------- ------ --------
Tier 1 Capital $ 17,915 7.7% 4.0%
Total Risk Based Capital $ 19,660 14.2% 8.0%
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2003, the EITF reached consensus on Issue 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." Issue 03-1 provides guidance in the recognition and
measurement of other-than-temporary impairment for certain securities,
including:
20
- All debt securities and equity securities that are subject to the
scope of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities"; and
- Equity securities that are not subject to the scope of SFAS No. 115
and that are accounted for under the cost method of accounting, or
cost method investments.
Issue 03-1 also provides guidance on disclosure requirements for
other-than-temporary impairment for cost method investments. The guidance in
these areas of Issue 03-1 is effective for fiscal years ending after June 15,
2004. The implementation of these areas of Issue 03-1 is not anticipated to have
a material impact on our financial statements. We have previously adopted the
disclosure provisions of Issue 03-1 for debt and equity investments that are
accounted for under SFAS No. 115. Those requirements were effective for fiscal
years ending after December 15, 2003.
On March 31, 2005, the FASB issued a final FSP EITF Issue 03-1-1 that
delays the effective date for the measurement and recognition guidance contained
within Issue 03-1. Disclosures required by Issue 03-1 have not been deferred.
The FASB noted that this delay does not suspend existing accounting requirements
for assessing whether impairments of held to maturity and available for sale
securities are other-than-temporary, including current guidance for cost method
investments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to economic loss that arises from changes in
the values of certain financial instruments. The types of market risk exposures
generally faced by banking entities include interest rate risk, equity market
price risk, foreign currency risk and commodity price risk. Due to the nature of
its operations, only equity market price risk and interest rate risk are
significant to the Bank.
The objective of the Bank's liquidity management program is to ensure the
continuous availability of funds to meet the withdrawal demands of depositors
and the credit needs of borrowers. The basis of the Bank's liquidity comes from
the stability of its core deposits. Liquidity is also available through the
available for sale securities portfolio and short-term funds such as federal
funds sold which totaled $54.5 million, or 23.5% of total assets at March 31,
2005. In addition, liquidity may be generated through loan repayments and over
$3.0 million of available borrowing arrangements with correspondent banks. At
March 31, 2005, management considered the Bank's ability to satisfy its
anticipated liquidity needs over the next twelve months. Management believes
that the Bank is well positioned and has ample liquidity to satisfy these needs.
The Bank generated $1.8 million of cash from operations in the first three
months of 2005, which compares to $1.2 million during the same time period in
2004. $4.6 million was used in net financing activities to paydown borrowings
and fund deposit runoff through March 31, 2005, which compares to $2.6 million
generated from financing activities for the first three months of 2004. These
proceeds along with proceeds from the sales and calls of investment securities
were used to fund loans and purchase securities during each year. Net cash used
in investing activities totaled $41,000 during the first three months of 2005
compared to $1.1 million during the same time period in 2004. 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
21
guidelines if necessary to minimize adverse effects. Also, the Bank's policy is
intended to ensure the Bank measures a range of rate scenarios and patterns of
rate movements that are reasonably possible. The Bank measures the impact that
200 basis point changes in rates would have on earnings over the next twelve
months.
In analyzing interest rate sensitivity for policy measurement, the Bank
compares its forecasted earnings in both a "high rate" and "low rate" scenario
to a base-line scenario. The Bank's base-line scenario is its estimated most
likely path for future short-term interest rates over the next 12 months. The
"high rate" and "low rate" scenarios assumes a 100 and 200 basis point increases
or decreases in the prime rate from the beginning point of the base-line
scenario over the most current 12-month period. The Bank's policy limit for the
maximum negative impact on earnings resulting from "high rate" or "low rate"
scenarios is 10 percent. The policy measurement period is 12 months in length,
beginning with the first month of the forecast.
The Bank's base-line scenario holds the prime rate constant at 5.75
percent through March 2006. Based on the April 2005 outlook, if interest rates
increased or decreased by 200 basis points, the model indicates that net
interest income during the policy measurement period would be affected by less
than 10 percent, in both an increasing or decreasing interest rate scenario.
CONTRACTUAL OBLIGATIONS
During the quarter ended March 31, 2005, the Bank entered into a contract
with a consulting firm related to the internal controls assessment, design
effectiveness and documentation, and internal control testing to be compliant
with the provisions of the Sarbanes-Oxley Act of 2002. This contract will not
exceed $160,000. There were no other material changes outside the normal course
of business to the quantitative and qualitative disclosures about contractual
obligations previously reported on Form 10-K for the year ended December 31,
2004. See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Contractual Obligations" in the Form 10-K for
December 31, 2004 for a detailed discussion.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer, based
on their evaluation as of the end of the reporting period of this quarterly
report of the Company's disclosure controls and procedures (as defined in Rule
13 (a) - 14 (c) of the Securities Exchange Act of 1934), have concluded that the
Company's disclosure controls and procedures are adequate and effective for
purposes of Rule 13 (a) - 14 (c) and timely, alerting them to material
information relating to the Company required to be included in the Company's
filings with the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
There have been no changes in the Company's internal controls over
financial reporting in the fiscal quarter ended March 31, 2005, that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
Presently, the Bank has engaged consultants to assist in the documentation
of internal controls and make recommendations for improvements, if necessary, as
part of the compliance with Section 404 of the Sarbanes-Oxley Act.
22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None; however, CNB is involved in various legal proceedings occurring in
the ordinary course of business. There are no material legal proceedings
to which CNB or its subsidiary is a part, or to which any of their
property is subject.
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits:
31.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
23
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CNB Financial Services, Inc.
- ----------------------------
(Registrant)
Date May 12, 2005 /s/ Thomas F. Rokisky, President/CEO
------------------------------------------
Date May 12, 2005 /s/ Rebecca S. Stotler, Vice President/CFO
------------------------------------------
24