Attached files
file | filename |
---|---|
EX-21 - EX-21 - CNB FINANCIAL SERVICES INC | l39167exv21.htm |
EX-32.1 - EX-32.1 - CNB FINANCIAL SERVICES INC | l39167exv32w1.htm |
EX-31.1 - EX-31.1 - CNB FINANCIAL SERVICES INC | l39167exv31w1.htm |
EX-32.2 - EX-32.2 - CNB FINANCIAL SERVICES INC | l39167exv32w2.htm |
EX-31.2 - EX-31.2 - CNB FINANCIAL SERVICES INC | l39167exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
Or
o | 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 | 550773918 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
101 S. Washington Street, Berkeley Springs, WV | 25411 | |
(Address of principal executive offices) | (Zip Code) |
Registrants 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Exchange Act.
Yes o No þ
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 þ No o
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 registrants 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 þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a Smaller Reporting Company) | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or the average bid
and asking price of such common equity, as of the last business day at the registrants most
recently completed second fiscal quarter (June 30, 2009) was approximately $12.9 million. This
amount was based on the last closing sale price of a share of common stock of $47.40 as of the
same date.
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 443,648 shares of common stock, par value $1 per share, as of
February 25, 2010.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the following documents have been incorporated by reference into this form
10-K as indicated:
Documents | 10-K Parts | |
1. CNB Financial Services, Inc. 2010 Proxy Statement
|
Part III |
Table of Contents
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
TABLE OF CONTENTS
PAGE | ||||
4 | ||||
9 | ||||
11 | ||||
11 | ||||
11 | ||||
12 | ||||
14 | ||||
16 | ||||
35 | ||||
37 | ||||
73 | ||||
73 | ||||
73 | ||||
74 | ||||
75 | ||||
75 | ||||
75 | ||||
75 | ||||
76 | ||||
77 |
2
Table of Contents
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, including those factors set
forth under Risk Factors contained herein. 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; | |
| General economic conditions may become unfavorable resulting in reduced credit quality or demand for loans; | |
| Delinquency rates on loans; | |
| Additional assessments may be imposed by the FDIC; | |
| Additional expense to the provision for loan losses may be greater than anticipated; | |
| Loan activity may continue to be soft in the commercial real estate portfolio with very little generation of new loans; | |
| Real estate activity for 2010 in the Eastern Panhandle of West Virginia may not improve; | |
| Changes in accounting principles, policies or guidelines; and | |
| Current economic environment. |
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
Table of Contents
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 on March 20, 2000, at the direction of the Board of Directors of CNB Bank, Inc. (the
Bank) for the purpose of becoming a financial services holding company. The Company and its
subsidiary are collectively referred to herein as CNB.
A special meeting of the Banks 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 Banks 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 Banks 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, CNBs
percentage of ownership in Morgan County Title Insurance Agency, LLC decreased to 33%. On August
31, 2009, Morgan County Title Insurance Agency, LLC was dissolved and the final distribution was
made during the fourth quarter 2009.
The Bank was organized on June 20, 1934 and has operated as a national banking association
continuously until October 16, 2006, at which time the Bank obtained a West Virginia state charter
and began operating as a state banking association.
EMPLOYEES
As of December 31, 2009 and 2008, CNB employed 91 and 95 full-time equivalent employees,
respectively.
BUSINESS OF CNB FINANCIAL SERVICES, INC. AND CNB BANK, INC.
The Companys primary function is to direct, plan and coordinate the business activities of
the Bank and its subsidiary.
CNB Bank, Inc. is a full-service commercial bank conducting general banking and trust
activities through six full-service offices and six automated teller machines located in Morgan and
Berkeley Counties, West Virginia and Washington County, Maryland.
CNB Bank, Inc. 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 borrowers 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 individuals lending expertise and
experience.
The Banks 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.
The Eastern Panhandle of West Virginia has been hit hard by the national and global downturn.
Recent estimates suggest the region lost jobs at a rate of -3.6%, compared to the state rate of
-3.0% and the U.S. rate of -3.9% from the second quarter of 2009 to the same quarter in 2009. The
unemployment rate in the Eastern Panhandle skyrocketed from 4.5% in the second quarter of 2009 to
8.7% during the same period of 2009. The state of West Virginia and the nation also recorded
similar spikes at 8.5% and 9.1%, respectively.
Population growth in the Eastern Panhandle has outpaced the surrounding metropolitan areas,
the state and the nation. The Eastern Panhandle population increased from 146,179 residents in
2003 to 169,984 in 2008 which translates into an annual
4
Table of Contents
growth rate of 3.1%. The Eastern Panhandle
also added new jobs at a rate of 1.6% per year during the 2003-2008 period, outpacing West Virginia
at .9% per year and the United States at 1.1% per year.
With the bursting of the housing bubble, housing activity has decreased dramatically.
Residential construction starts have declined 70.4% in 2009 from 2008. Nonbuilding construction
starts have also shown a declining trend in recent years. In 2007, nonbuilding construction starts
in the Eastern Panhandle were $206.6 million. Since then, however, nonbuilding have plummeted
55.5% in 2008 and another 80.0% in 2009.
Similarly to the plummeting of residential construction starts, the bursting of the housing
bubble is also reflected in the price of houses. From the second quarter of 2008 to the same
quarter of 2009, house prices declined by 4.0% nationally while house prices held up better in West
Virginia only falling by 1.5% during the same period. The Eastern Panhandle along with the many
surrounding metropolitan areas have suffered much more severely than the national trend posting
major declines in house prices during the past two years.
The outlook for the Eastern Panhandle calls for employment to grow from 2010 through 2013 at a
rate of 1.4% per year, as the national and world economies accelerate out of a particularly severe
downturn. Construction jobs stabilize during the next two years and then begin to grow slowly
during 2012-2013. Rebounding job growth drives per capita personal income higher with growth
expected to average 1.3% per year. Population growth in the Eastern Panhandle is expected to
average 2.1% per year during the next five years while the unemployment rate is forecast to surge
to 8.5% in 2010 and then gradually descend to 6.5% by 2013.
COMPETITION
CNB Bank, Inc. 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 Banks market.
AVAILABLE INFORMATION
Our Internet address is www.cnbwv.com. The Securities and Exchange Commission (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 SECs public reference facilities at 100 F Street, NE,
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, Senior 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 Companys 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
5
Table of Contents
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.
On July 30, 2002, the Senate and the House of Representatives of the United State (Congress)
enacted the Sarbanes-Oxley Act of 2002, a law that addresses, among other issues, corporate
governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of
corporate information. The New York Stock Exchange proposed corporate governance rules that were
enacted by the Securities and Exchange Commission. The changes are intended to allow stockholders
to more easily and efficiently monitor the performance of companies and directors.
Effective August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, the Banks chief
executive officer and chief financial officer are each required to certify that CNBs Quarterly and
Annual Reports do not contain any untrue statement of a material fact. The rules have several
requirements, including having these officers certify that: they are responsible for establishing,
maintaining, and regularly evaluating the effectiveness of CNBs internal controls; they have made
certain disclosures to CNBs auditors and the audit committee of the Board of Directors about CNBs
internal controls; and they have included information in CNBs Quarterly and Annual Reports about
their evaluation and whether there have been significant changes in CNBs internal controls or in
other factors that could significantly affect internal controls subsequent to the evaluation. As
of October 5, 2009, the audit requirements related to internal controls contained in Section 404 of
Sarbanes-Oxley have been delayed until 2010.
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 Companys 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.
On October 14, 2008, under authority granted by the Emergency Economic Stabilization Act of
2008 (the EESA), the United States Department of the Treasury adopted the Troubled Asset Relief
Program (TARP) and the Capital Purchase Program (the CPP) whereby the Treasury will purchase up
to $250 billion of preferred stock and warrants to be issued by United States banks, savings
associations and their holding companies. CNB has analyzed the TARP program and has elected not to
participate in this program at this time.
Bank Subsidiary Regulation. The Bank converted from a national bank to a state bank in 2006
and is regulated by the West Virginia Division of Banking and the Federal Deposit Insurance
Corporation. The Bank is also subject to supervision, examination and regulation by 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 banks 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 banks
regulatory agency.
Beginning in late 2008, the economic environment caused higher levels of bank failures, which
dramatically increased FDIC resolution costs and led to a significant reduction in the Deposit
Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates
paid by financial institutions for deposit insurance. The base assessment
rate was increased by seven basis points (7 cents for every $100 of deposits) for the first
quarter of 2009. Effective April 1,
6
Table of Contents
2009, initial base assessment rates were changed to range from
12 basis points to 45 basis points across all risk categories with possible adjustments to these
rates based on certain debt-related components. These increases in the base assessment rate have
increased our deposit insurance costs and negatively impacted our earnings. In addition, in May
2009, the FDIC imposed a special assessment on all insured institutions due to recent bank and
savings association failures. The emergency assessment amounted to 5 basis points on each
institutions assets minus tier one (core) capital as of June 30, 2009, subject to a maximum equal
to 10 basis points times the institutions assessment base. Our special assessment, which was
reflected in earnings for the quarter ended June 30, 2009, was approximately $130,000. The FDIC may
impose additional emergency special assessments if necessary to maintain public confidence in
federal deposit insurance or as a result of deterioration in the deposit insurance fund reserve
ratio due to institution failures. Any additional emergency special assessment imposed by the FDIC
will negatively impact our earnings.
On November 12, 2009, the FDIC adopted a final rule requiring that all institutions prepay
their assessments for the fourth quarter of 2009 and all of 2010, 2011 and 2012. This pre-payment
was due on December 30, 2009. However, the FDIC may exempt certain institutions from the prepayment
requirement if the FDIC determines that the prepayment would adversely affect the safety and
soundness of the institution. We were not granted an exemption to this prepayment requirement.
The Bank is a member of the Federal Home Loan Bank of Pittsburgh. The FHLB provided credit to
its member in the form of advances. As a member of the FHLB of Pittsburgh, the bank must maintain
an investment in the capital stock of that FHLB in an amount equal to the greater of 1% of the
aggregate outstanding principal amount of its respective residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year or 5% of its advances from the
FHLB.
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
institutions 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 20: Regulatory Matters in the Notes to 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.
7
Table of Contents
Effect of Environmental Regulation
The Banks 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.
International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (U.S. 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.
We are subject to extensive regulation, supervision and examination by federal and state
banking authorities. Any change in applicable regulations or laws could have a substantial impact
on us and our operations. Additional legislation and regulations that could significantly affect
our powers, authority and operations may be enacted or adopted in the future, which could have a
material adverse effect on our financial condition and results of operations. New legislation
proposed by Congress may give bankruptcy courts the power to reduce the increasing number of home
foreclosures by giving bankruptcy judges the authority to restructure mortgages and reduce a
borrowers payments. Property owners would be allowed to keep their property while working out
their debts. Other similar bills placing additional temporary moratoriums on foreclosure sales or
otherwise modifying foreclosure procedures to the benefit of borrowers and the detriment of lenders
may be enacted by either Congress or the States of West Virginia, Pennsylvania or Maryland in the
future. These laws may further restrict our collection efforts on one-to-four single-family
mortgage loans. Additional legislation proposed or under consideration in Congress would give
current debit and credit card holders the chance to opt out of an overdraft protection program and
limit overdraft fees, which could result in additional operational costs and a reduction in our
non-interest income.
Further, our regulators have significant discretion and authority to prevent or remedy unsafe
or unsound practices or violations of laws by financial institutions and holding companies in the
performance of their supervisory and enforcement duties. In this regard, banking regulators are
considering additional regulations governing compensation, which may adversely affect our ability
to attract and retain employees. On June 17, 2009, the Obama Administration published a
comprehensive regulatory reform plan that is intended to modernize and protect the integrity of the
United States financial system. The Presidents plan contains several elements that would have a
direct effect on us. The reform plan proposes the creation of a new federal agency, the Consumer
Financial Protection Agency, which would be dedicated to protecting consumers in the financial
products and services market. The creation of this agency could result in new regulatory
requirements and raise the cost of regulatory compliance. In addition, legislation stemming from
the reform plan could require changes in regulatory capital requirements, and compensation
practices. If implemented, the foregoing regulatory reforms may have a material impact on our
operations. However, because the legislation needed to implement the Presidents reform plan has
not been introduced, and because the final legislation may differ significantly from the
legislation proposed by the Administration, we cannot determine the specific impact of regulatory
reform at this time.
8
Table of Contents
Item 1A. RISK FACTORS
This report contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially. Factors that could
cause or contribute to such differences include, but are not limited to, those discussed below, as
well as those discussed elsewhere in this report.
The banking business is very competitive.
The banking business is generally a highly competitive business. Our total assets have grown
over the past four years from approximately $259.0 million at December 31, 2005, to $289.5 million
at December 31, 2009. Our business plan calls for minimal growth over the next three years. Our
ability to continue to grow depends, in part, upon our ability to successfully attract deposits and
identify favorable loan and investment opportunities. In the event that we do not continue to
grow, our results of operations could be adversely impacted.
Our ability to grow successfully will depend on whether we can continue to fund this growth
while maintaining cost controls and asset quality, as well as on factors beyond our control, such
as national and regional economic conditions and interest rate trends. If we are not able to
control costs and maintain asset quality, such growth could adversely impact our earnings and
financial condition.
As of June 30, 2009, based on an FDIC analysis done as of June 30 each year, there were
fourteen other banks in CNBs market area. The total Morgan County commercial bank deposits, which
include a total of five banking offices, as of June 30, 2009, were in excess of $242.6 million.
The total Berkeley County commercial bank deposits, which include a total of thirty one banking
offices, as of June 30, 2009, were in excess of $1.0 billion. The total Hancock, Maryland
commercial bank deposits, which include three banking offices, as of June 30, 2009, were in excess
of $90.1 million. At this same date CNB had a 71.7% share of the Morgan County commercial bank
deposits, a 3.4% share of the Berkeley County commercial bank deposits and a 40.8% share of the
Hancock, Maryland commercial bank deposits. CNB represents Morgan Countys only locally owned
bank, as the other existing commercial banks have their parent-Bank headquarters in Charleston,
West Virginia (City National) and Charlotte, North Carolina (BB&T).
For most of the services which CNB provides, there is also competition from financial
institutions other than commercial banks in attracting deposits and in making loans with local
offices and those that do business over the internet. We compete for loans principally through the
interest rates and loan fees we charge and the efficiency and quality of services we provide.
Increasing levels of competition in our banking and financial services businesses may reduce our
market share or cause the prices we charge for our services to fall. Our results may differ in
future periods depending upon the nature or level of competition. In addition, some traditional
banking services or competing services are offered by insurance companies, investment counseling
firms and other business firms and individuals. Many of CNBs competitors have significantly
greater financial and marketing resources than we have.
The existence of larger financial institutions in Morgan and Berkeley Counties, West Virginia
and Washington County, Maryland, some of which are owned by larger regional or national companies,
influence the competition in CNBs market area. The principal competitive factors in the market for
deposits and loans are interest rates, either paid on deposits or charged on loans. West Virginia
law allows statewide branch banking which provides increased opportunities for CNB, but it also
increases the potential competition for our service area. In addition, in 1994, Congress passed the
Riegle-Neal Interstate Banking and Branching Efficiency Act. Under this Act, absent contrary action
by a states legislature, interstate branch banking was allowed to occur after June 1, 1997. States
are permitted to elect to participate to a variety of degrees in interstate banking or states may
elect to opt out. In 1996, the West Virginia Legislature elected to opt in. Accordingly,
out-of-state banks may form de novo banks or may acquire existing branches of West Virginia banks
on a reciprocal basis.
In the future, CNBs lending limit could create a competitive disadvantage.
In the future, CNB may not be able to attract larger volume customers because the size of
loans that CNB can offer to potential customers is less than the size of the loans that many of
CNBs larger competitors can offer. Accordingly, CNB may lose customers seeking large loans to
mortgage companies, larger commercial banks and other financial institutions. We anticipate that
our lending limit will continue to increase proportionately with CNBs growth in earnings; however,
CNB may not be able to successfully attract or maintain larger customers.
CNB engages in commercial and consumer lending activities which are riskier than residential real
estate lending.
CNB makes loans that involve a greater degree of risk than loans involving residential real
estate lending. Commercial business loans may involve greater risks than other types of lending
because they are often made based on varying forms of collateral, and repayment of these loans
often depends on the success of the commercial venture. Consumer loans may involve
greater risk because adverse changes in borrowers incomes and employment after funding of the
loans may impact their abilities to repay the loans.
9
Table of Contents
CNBs loan portfolio at December 31, 2009, consists of the following:
Type of Loan | Percentage of Portfolio | |||
Residential Real Estate Loans |
66 | % | ||
Commercial Loans, principally real estate secured |
26 | % | ||
Consumer Loans |
8 | % |
CNB has limited control over its profitability because CNB cannot control the various factors that
can cause fluctuations in interest rates.
Aside from credit risk, the most significant risk resulting from CNBs normal course of
business, extending loans and accepting deposits, is interest rate risk. If market interest rate
fluctuations cause CNBs cost of funds to increase faster than the yield of its interest-earning
assets, then its net interest income will be reduced. CNBs results of operations depend to a large
extent on the level of net interest income, which is the difference between income from
interest-earning assets, such as loans and investment securities, and interest expense on
interest-bearing liabilities, such as deposits and borrowings. Interest rates are highly sensitive
to many factors that are beyond CNBs control, including general economic conditions and the
policies of various governmental and regulatory authorities. In establishing interest rates on
deposit accounts, CNB considers various factors, including rates offered by competing institutions
in their local market. In doing so, CNB tries to offer interest rates which fall in the mid range
of the local competing financial institutions.
To effectively monitor the interest rate risk discussed above, CNB uses a computer model to
project the change in net interest income under various changes in interest rates. To provide
guidance to management, CNBs board of directors, through its Asset/Liability/Investment Committee,
has established a policy related thereto which includes interest rate risk parameters within which
to operate. As of December 31, 2009, CNBs interest rate risk is within the parameters.
CNBs success depends on CNBs management team.
The departure of one or more of CNBs officers or other key personnel could adversely affect
CNBs operations and financial position. The Companys management makes most decisions that involve
CNBs operations. The key personnel have all been with CNB since 2001. They include Thomas F.
Rokisky, Patricia C. Muldoon and Rebecca S. Stotler.
An economic slowdown in our market area could hurt CNBs business.
Because we focus our business in the Eastern Panhandle of West Virginia and the western part
of Maryland, an economic slowdown in these areas could hurt our business. An economic slowdown
could have the following consequences:
| Loan delinquencies may increase; | ||
| Problem assets and foreclosures may increase; | ||
| Demand for the products and services of CNB may decline; and | ||
| Collateral (including real estate) for loans made by CNB may decline in value, in turn reducing customers borrowing power and making existing loans less secure. |
The slowdown in both the local and national markets has caused an increase in delinquencies
and loan foreclosures. Management anticipates this trend to continue into 2010.
The global financial crisis may have an adverse affect on our Bank, business and results of
operations.
Significant declines in the housing market in recent months, falling home prices, increased
foreclosures and unemployment as well as problems affecting the automobile industry and business in
general may adversely affect the Banks loan demand as customers may be reluctant to borrow in this
economic environment. Additionally, the economic downturn may result in some of the Banks
borrowers being unable to make loan repayments and may result in foreclosures and the Bank
recording writedowns which would adversely affect the Banks results of operations.
The Banks investments are exposed to various risks, such as interest rate, market, currency
and credit risks. Due to the level of risk associated with certain investments and the level of
uncertainty related to changes in the value of investments, it is at least reasonably possible that
changes in risks in the near term would materially affect investment assets reported in the
financial statements.
10
Table of Contents
In addition, recent economic uncertainty and market events have led to unprecedented
volatility in currency, commodity, credit and equity markets culminating in failures of some
banking and financial services firms and Government intervention to solidify others. These recent
events underscore the level of investment risk associated with the current economic environment,
and accordingly the level of risk in the Banks investments.
CNB is highly regulated.
The operations of CNB are subject to extensive regulation by federal, state and local
governmental authorities and are subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on them. Policies adopted or required by these governmental
authorities can affect CNBs business operations and the availability, growth and distribution of
CNBs investments, borrowings and deposits.
CNB may incur increased charge-offs and additional loan loss provision due to negative credit in
the future.
In the future, CNB could experience negative credit quality trends that could lead to a
deterioration of asset quality. Such deterioration could require CNB to incur loan charge-offs in
the future and incur additional loan loss provision, both of which would have the effect of
decreasing earnings.
Marketability of Common Stock.
There is no active market for our outstanding shares, and it is unlikely that an
established market for our shares will develop in the near future. We presently do not intend to
seek listing of the shares on any securities exchange, or quotation on the Nasdaq interdealer
quotation system. It is not known whether significant trading activity will take place for several
years, if at all. Accordingly, a shareholder may not be able to sell their shares immediately upon
offering them for sale.
Item 2. PROPERTIES
CNB Financial Services, Inc.
CNBs headquarters are located at the main office of CNB Bank, Inc. located at 101 South
Washington Street, Berkeley Springs, West Virginia.
CNB Bank, Inc.
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 1610 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 a full service branch located at 14994 Apple
Harvest Drive, Martinsburg, West Virginia. In April 2005, the bank opened an additional full
service branch located at 1231 T.J. Jackson Drive, Falling Waters, West Virginia. On June 11,
2004, CNB purchased certain assets and liabilities associated with the Hancock Branch of Fidelity
Bank, a subsidiary bank of Mercantile Bankshares Corporation (formerly Home Federal). CNB assumed
responsibility for all the deposit services including checking, savings and certificate of
deposits. CNB also acquired loans, equipment and leasehold improvements and assumed the lease for
the real estate located at 333 East Main Street, Hancock, Maryland. Each of the banks locations
provides ATM services, in addition to traditional lobby and drive-in services. The main office
and branches are owned free and clear of any indebtedness. The bank owns all of the facilities
described above with the exception of the Hancock, Maryland branch on which the bank owns
improvements situated on leased land. Management believes that the facilities are of sound
construction, in good operating condition, are appropriately insured and are adequately equipped
for carrying on the business of the Company. The net book value of the banks premises and
equipment as of December 31, 2009, is $5.6 million.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Bank 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 CNBs 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. (REMOVED AND RESERVED)
11
Table of Contents
Part II
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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 managements knowledge, have been individually arranged. The prices listed below are
based upon information available to management through discussions with shareholders, and to
managements knowledge, 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.
Based on information that management is aware of, the majority of shares sold during 2009 and
2008 were at a price that ranged from $45 to $80 per share. Book value per share increased from
$51.69 at December 31, 2008, to $57.77 at December 31, 2009.
On August 23, 2007, the Board of Directors approved a stock repurchase program to repurchase
issued shares of common stock of CNB Financial Services, Inc. Management is authorized to
repurchase up to 45,804 shares or 10% of the outstanding shares of CNB Financial Services, Inc.
common stock at the prevailing fair market value. The stock repurchase program will terminate upon
the repurchase of 45,804 shares. Through this program as of December 31, 2009, shareholders
equity has been reduced by $825,068 through the repurchase of 14,400 shares of CNB Financial
Services, Inc. common stock of which 1,800 shares was purchased in the fourth quarter. Below is a
listing of the shares repurchased during the fourth quarter of 2009.
Total Number | Total Number of Shares Purchased | Maximum Number of Shares | ||||||||||||||
of Shares | Average Price | as Part of Publicly Announced | that may yet be purchased under | |||||||||||||
Period | Purchased | Paid per Share | Plans or Programs | the Plans or Programs | ||||||||||||
Beginning balance
September 30, 2009 |
12,600 | 33,205 | ||||||||||||||
October 1, 2009
October 31, 2009 |
600 | $ | 46.60 | 600 | 32,605 | |||||||||||
November 1, 2009
November 30, 2009 |
1,200 | $ | 45.25 | 1,200 | 31,405 | |||||||||||
December 1, 2009
December 31, 2009 |
| $ | | | 31,405 | |||||||||||
Total |
1,800 | 14,400 | ||||||||||||||
Dividends which have been declared by the Board of Directors semiannually, decreased from
$1.90 per share in 2008 to $1.55 per share in 2009, an 18.4% decrease. The ability of CNB to pay
dividends is subject to certain limitations imposed by various banking regulations. See Note 20:
Regulatory Matters in the Notes to Consolidated Financial Statements for a more detailed
discussion on the limitations. As of February 25, 2010, the number of record holders excluding
individual participants in securities positions listings was 663.
12
Table of Contents
The prices listed below represent the high and low market prices for stock trades reported during each quarter. |
Per Share | ||||||||||||
High | Low | Dividend | ||||||||||
2009 |
||||||||||||
First quarter |
$ | 66.00 | $ | 47.00 | ||||||||
Second quarter |
$ | 60.00 | $ | 44.50 | $ | 0.53 | ||||||
Third quarter |
$ | 46.70 | $ | 46.70 | ||||||||
Fourth quarter |
$ | 46.60 | $ | 45.25 | $ | 1.02 | ||||||
2008 |
||||||||||||
First quarter |
$ | 80.00 | $ | 65.00 | ||||||||
Second quarter |
$ | 67.00 | $ | 65.50 | $ | 0.53 | ||||||
Third quarter |
$ | 63.50 | $ | 63.50 | ||||||||
Fourth quarter |
$ | 63.85 | $ | 49.40 | $ | 1.37 |
CNBs stock is not traded on an established exchange and there are no known market makers,
therefore there is no established public trading market for CNBs stock. The prices listed above
are based upon information available to management through discussions with shareholders, and to
managements knowledge, 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.
13
Table of Contents
Item 6. SELECTED FINANCIAL DATA
TABLE 1. FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
In thousands except for per share data | ||||||||||||||||||||
At Year-End |
||||||||||||||||||||
Total assets |
$ | 289,498 | $ | 282,257 | $ | 290,415 | $ | 276,069 | $ | 258,953 | ||||||||||
Securities available for sale |
72,273 | 62,605 | 66,017 | 50,873 | 55,194 | |||||||||||||||
Loans and lease, net of unearned income |
194,707 | 200,752 | 202,669 | 204,319 | 180,207 | |||||||||||||||
Deposits |
252,292 | 227,895 | 226,645 | 233,083 | 219,288 | |||||||||||||||
Shareholders equity |
25,630 | 23,218 | 22,821 | 20,322 | 19,008 | |||||||||||||||
Significant Ratios |
||||||||||||||||||||
Return on average assets |
0.75 | % | 0.96 | % | 0.90 | % | 0.92 | % | 1.00 | % | ||||||||||
Return on average shareholders equity |
8.88 | 11.66 | 11.88 | 12.46 | 12.91 | |||||||||||||||
Average shareholders equity to average assets |
8.49 | 8.21 | 7.55 | 7.35 | 7.76 | |||||||||||||||
Net interest margin |
3.71 | 3.92 | 3.53 | 3.77 | 4.12 | |||||||||||||||
Summary of Operations |
||||||||||||||||||||
Interest income |
$ | 15,642 | $ | 16,995 | $ | 17,201 | $ | 15,989 | $ | 13,420 | ||||||||||
Interest expense |
5,412 | 6,307 | 7,725 | 6,269 | 3,850 | |||||||||||||||
Net interest income |
10,230 | 10,688 | 9,476 | 9,720 | 9,570 | |||||||||||||||
Provision for loan losses |
1,853 | 940 | 169 | 275 | 352 | |||||||||||||||
Net interest income after provision for loan losses |
8,377 | 9,748 | 9,307 | 9,445 | 9,218 | |||||||||||||||
Non-interest income |
2,172 | 2,241 | 2,400 | 1,968 | 2,007 | |||||||||||||||
Non-interest expense |
7,834 | 7,967 | 8,012 | 7,760 | 7,541 | |||||||||||||||
Income before income taxes
and discontinued operations |
2,715 | 4,022 | 3,695 | 3,653 | 3,684 | |||||||||||||||
Discontinued operations |
| | | 124 | | |||||||||||||||
Income tax expense |
565 | 1,307 | 1,191 | 1,308 | 1,238 | |||||||||||||||
Net income |
2,150 | 2,715 | 2,504 | 2,469 | 2,446 | |||||||||||||||
Per Share Data |
||||||||||||||||||||
Net income |
$ | 4.82 | $ | 6.01 | $ | 5.48 | $ | 5.39 | $ | 5.34 | ||||||||||
Cash dividends |
1.55 | 1.90 | 1.69 | 1.54 | 1.44 | |||||||||||||||
Net book value |
57.77 | 51.69 | 50.16 | 44.37 | 41.50 |
14
Table of Contents
TABLE 2. SELECTED QUARTERLY FINANCIAL DATA
2009 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
In thousands | ||||||||||||||||
Interest income |
$ | 3,977 | $ | 3,894 | $ | 3,900 | $ | 3,871 | ||||||||
Interest expense |
1,346 | 1,343 | 1,354 | 1,369 | ||||||||||||
Net interest income |
2,631 | 2,551 | 2,546 | 2,502 | ||||||||||||
Provision for loan losses |
390 | 375 | 400 | 688 | ||||||||||||
Noninterest income |
570 | 551 | 543 | 508 | ||||||||||||
Noninterest expense |
1,910 | 2,013 | 1,881 | 2,030 | ||||||||||||
Income before income taxes |
901 | 714 | 808 | 292 | ||||||||||||
Provision for income taxes |
269 | 201 | 194 | (99 | ) | |||||||||||
Net income |
$ | 632 | $ | 513 | $ | 614 | $ | 391 | ||||||||
Basic earnings per share |
$ | 1.41 | $ | 1.15 | $ | 1.38 | $ | 0.88 | ||||||||
2008 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
In thousands | ||||||||||||||||
Interest income |
$ | 4,351 | $ | 4,178 | $ | 4,218 | $ | 4,248 | ||||||||
Interest expense |
1,793 | 1,572 | 1,531 | 1,411 | ||||||||||||
Net interest income |
2,558 | 2,606 | 2,687 | 2,837 | ||||||||||||
Provision for loan losses |
105 | 120 | 160 | 556 | ||||||||||||
Noninterest income |
581 | 589 | 589 | 482 | ||||||||||||
Noninterest expense |
1,869 | 1,926 | 1,991 | 2,180 | ||||||||||||
Income before income taxes |
1,165 | 1,149 | 1,125 | 583 | ||||||||||||
Provision for income taxes |
386 | 379 | 372 | 170 | ||||||||||||
Net income |
$ | 779 | $ | 770 | $ | 753 | $ | 413 | ||||||||
Basic earnings per share |
$ | 1.71 | $ | 1.70 | $ | 1.67 | $ | 0.93 | ||||||||
15
Table of Contents
Item 7. MANAGEMENTS 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 full fiscal years ended December 31, 2009 and
2008. 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 managements expectations; actual results may differ. Amounts and percentages used in
this discussion have been rounded. All average balances are based on monthly averages.
CRITICAL ACCOUNTING POLICIES
CNBs financial position and results of operations are impacted by managements application of
accounting policies involving judgments made to arrive at the carrying value of certain assets.
Managements 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 CNBs
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 and accrued interest receivable.
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 managements estimates and judgments relating to inherently uncertain events,
actual results may differ from these estimates. For a more detailed discussion on the allowance
for loan losses, see Nonperforming Loans and Allowance For Loan Losses in this Managements
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.
EARNINGS SUMMARY
CNB had net income totaling $2.1 million or $4.82 per share, $2.7 million or $6.01 per share
and $2.5 million or $5.48 per share for fiscal years 2009, 2008 and 2007, respectively. Annualized
return on average assets and average equity were .8% and 8.9%, respectively, for 2009 compared to
1.0% and 11.7% for 2008 and .9% and 11.9% for 2007.
Net income for the year 2010 is expected to be impacted by the continued slowing in the banks
loan demand along with the possibility of additional writedowns on existing and potential
foreclosed properties and loans. The Bank is anticipating an expense of approximately $1.4 million
to the provision for loan losses during 2010 due to continued increase in past due loans, loans
with weaknesses, impaired loans and foreclosed properties. Another factor affecting the 2010 net
income is the increased expense of FDIC insurance which is expected to exceed $491,000 compared to
$382,000 in 2009. The Federal Reserve amended Regulation E to required financial institutions to
obtain a specific opt-in consent from customers in order for the institution to be able to pay into
overdraft and charge an overdraft fee whenever a customers ATM transactions and one-time debit
card transactions, such as point-of-sale transactions, cause an account to go into overdraft. This
amendment will have an impact on the banks overdraft fee income in 2010.
NET INTEREST INCOME
Net interest income represents the primary component of the banks 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 2009 decreased by $458,000 or 4.3% over 2008. Interest income in 2009
decreased by $1.4 million or 8.0% compared to 2008, while interest expense decreased by $896,000 or
14.2% during 2009 as compared to 2008. Interest income decreased during 2009 compared to 2008 as a
result of a decrease in the average balance of loans and taxable securities offset by an increase
in the average balances of tax exempt investment securities, certificates of deposit and federal
funds sold. Average rates earned on interest earning assets also decreased during 2009 compared to
2008. Interest expense decreased during 2009 compared to 2008 as a result of a decrease in the
average balance of borrowings offset by an increase in the average balance of savings, NOW accounts
and time deposit accounts. A decrease in the average rates paid on all interest bearing liability
accounts also contributed to the decrease in interest expense for 2009.
16
Table of Contents
Net interest income in 2008 increased by $1.2 million or 12.8% over 2007. Interest income in
2008 decreased by $206,000 or 1.2% compared to 2007, while interest expense decreased by $1.4
million or 18.4% during 2008 as compared to 2007. Interest income decreased during 2008 compared to
2007 as a result of a decrease in the average balance of loans and federal funds sold offset by an
increase in the average balances of investment securities. Average rates earned on interest
earning assets also decreased during 2008 compared to 2007. Interest expense decreased during 2008
compared to 2007 as a result of a decrease in the average balance of savings, NOW accounts and
money market accounts offset by an increase in the average balance of time deposit accounts and
borrowings. A decrease in the average rates paid on all interest bearing liability accounts also
contributed to the decrease in interest expense for 2008.
During 2009, the bank used funds generated from deposit growth to fund the purchase of
investment securities and decrease borrowings. During 2008, the bank used funds generated from
FHLB borrowings and time deposit account growth to fund the purchase of investment securities and
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 decreased from 2008 to
2009. See Table 3 Distribution of Assets, Liabilities and Shareholders Equity; Interest Rates
and Interest Differential.
17
Table of Contents
TABLE 3. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
INTEREST RATES AND INTEREST DIFFERENTIAL
` | DECEMBER 31, 2009 | DECEMBER 31, 2008 | DECEMBER 31, 2007 | |||||||||||||||||||||||||||||||||
YTD | YTD | YIELD/ | YTD | YTD | YIELD/ | YTD | YTD | YIELD/ | ||||||||||||||||||||||||||||
AVERAGE | AVERAGE | AVERAGE | ||||||||||||||||||||||||||||||||||
BALANCE | INTEREST | RATE | BALANCE | INTEREST | RATE | BALANCE | INTEREST | RATE | ||||||||||||||||||||||||||||
In thousands | ||||||||||||||||||||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||||||||||||||
Federal funds sold |
$ | 2,428 | $ | 7 | 0.16 | % | $ | | $ | | | % | $ | 701 | $ | 37 | 4.97 | % | ||||||||||||||||||
Certificates of deposit |
2,578 | 18 | 0.70 | | | | | | | |||||||||||||||||||||||||||
Securities: |
||||||||||||||||||||||||||||||||||||
Taxable |
43,666 | 2,084 | 4.77 | 49,888 | 2,514 | 5.04 | 45,820 | 2,192 | 4.78 | |||||||||||||||||||||||||||
Tax-exempt (1) |
20,788 | 687 | 5.01 | 14,776 | 510 | 5.23 | 11,100 | 386 | 5.27 | |||||||||||||||||||||||||||
Loans (net of unearned
interest) (2) (4) (5) |
200,177 | 12,618 | 6.30 | 202,803 | 13,757 | 6.78 | 204,045 | 14,356 | 7.04 | |||||||||||||||||||||||||||
Total interest
earning assets (1) |
$ | 269,637 | $ | 15,414 | 5.72 | % | $ | 267,467 | $ | 16,781 | 6.27 | % | $ | 261,666 | $ | 16,971 | 6.49 | % | ||||||||||||||||||
Nonearning assets: |
||||||||||||||||||||||||||||||||||||
Cash and due
from banks |
$ | 6,470 | $ | 6,590 | $ | 7,573 | ||||||||||||||||||||||||||||||
Bank premises and
equipment, net |
5,712 | 5,970 | 6,249 | |||||||||||||||||||||||||||||||||
Other assets |
6,694 | 5,704 | 5,688 | |||||||||||||||||||||||||||||||||
Allowance for
loan losses |
(3,181 | ) | (2,292 | ) | (2,171 | ) | ||||||||||||||||||||||||||||||
Total assets |
$ | 285,332 | $ | 283,439 | $ | 279,005 | ||||||||||||||||||||||||||||||
Interest bearing
liabilities: |
||||||||||||||||||||||||||||||||||||
Savings deposits |
$ | 24,750 | $ | 29 | 0.12 | % | $ | 23,540 | $ | 69 | 0.29 | % | $ | 25,335 | $ | 119 | 0.47 | % | ||||||||||||||||||
Time deposits |
140,905 | 4,945 | 3.51 | 125,689 | 5,148 | 4.10 | 122,639 | 5,632 | 4.59 | |||||||||||||||||||||||||||
NOW accounts |
22,399 | 108 | 0.48 | 22,348 | 202 | 0.90 | 31,534 | 772 | 2.45 | |||||||||||||||||||||||||||
Money market
accounts |
12,726 | 24 | 0.19 | 12,801 | 120 | 0.94 | 13,252 | 287 | 2.17 | |||||||||||||||||||||||||||
Borrowings |
12,669 | 306 | 2.42 | 30,538 | 768 | 2.51 | 18,173 | 915 | 5.03 | |||||||||||||||||||||||||||
Total interest
bearing liabilities |
$ | 213,449 | $ | 5,412 | 2.54 | % | $ | 214,916 | $ | 6,307 | 2.93 | % | $ | 210,933 | $ | 7,725 | 3.66 | % | ||||||||||||||||||
Noninterest bearing
liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
$ | 42,102 | $ | 41,209 | $ | 42,575 | ||||||||||||||||||||||||||||||
Other liabilities |
5,568 | 4,039 | 4,424 | |||||||||||||||||||||||||||||||||
Shareholders equity |
24,213 | 23,275 | 21,073 | |||||||||||||||||||||||||||||||||
Total liabilities and
shareholders equity |
$ | 285,332 | $ | 283,439 | $ | 279,005 | ||||||||||||||||||||||||||||||
Net interest income (1) |
$ | 10,002 | $ | 10,474 | $ | 9,246 | ||||||||||||||||||||||||||||||
Net interest spread (3) |
3.18 | % | 3.34 | % | 2.83 | % | ||||||||||||||||||||||||||||||
Net interest income to
average interest earning
assets (1) |
3.71 | % | 3.92 | % | 3.53 | % | ||||||||||||||||||||||||||||||
(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 $227,805 in 2009, $214,622 in 2008 and $229,997 in 2007. | |
(5) | Interest income on loans includes fees of $85,075 in 2009, $77,546 in 2008 and $86,770 in 2007 from the Business Manager Program, student loans and lease receivables. |
18
Table of Contents
Table 4 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 years average rate), and (ii) changes in rate (change in the average rate times the prior
years 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 2009, net
interest income decreased $922,000 due to changes in volume and increased $450,000 due to changes
in interest rates. Also, net interest income was affected by a $13,000 increase in loan fees. In
2008, net interest income increased $841,000 due to changes in volume and increased $387,000 due to
changes in interest rates. Also, net interest income was affected by a $15,000 decrease in loan
fees.
TABLE 4. VOLUME AND RATE ANALYSIS OF CHANGES IN INTEREST INCOME
(Taxable equivalent basis) | 2009 over 2008 | 2008 over 2007 | ||||||||||||||||||||||
Change due to | Total | Change due to | Total | |||||||||||||||||||||
Volume | Rate | Change | Volume | Rate | Change | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Interest earned on: |
||||||||||||||||||||||||
Federal funds sold |
$ | 7 | $ | | $ | 7 | $ | (23 | ) | $ | (14 | ) | $ | (37 | ) | |||||||||
Certificates of deposit |
18 | | 18 | | | | ||||||||||||||||||
Taxable securities |
(300 | ) | (130 | ) | (430 | ) | 201 | 121 | 322 | |||||||||||||||
Tax-exempt securities |
198 | (21 | ) | 177 | 128 | (4 | ) | 124 | ||||||||||||||||
Loans |
(176 | ) | (963 | ) | (1,139 | ) | (80 | ) | (519 | ) | (599 | ) | ||||||||||||
Total interest earned |
$ | (253 | ) | $ | (1,114 | ) | $ | (1,367 | ) | $ | 226 | $ | (416 | ) | $ | (190 | ) | |||||||
Interest expense on: |
||||||||||||||||||||||||
Savings deposits |
$ | 3 | $ | (43 | ) | $ | (40 | ) | $ | (8 | ) | $ | (42 | ) | $ | (50 | ) | |||||||
Time deposits |
1,101 | (1,304 | ) | (203 | ) | 141 | (625 | ) | (484 | ) | ||||||||||||||
NOW accounts |
| (94 | ) | (94 | ) | (179 | ) | (391 | ) | (570 | ) | |||||||||||||
Money market accounts |
(1 | ) | (95 | ) | (96 | ) | (8 | ) | (159 | ) | (167 | ) | ||||||||||||
Other borrowing |
(434 | ) | (28 | ) | (462 | ) | (561 | ) | 414 | (147 | ) | |||||||||||||
Total interest expense |
$ | 669 | $ | (1,564 | ) | $ | (895 | ) | $ | (615 | ) | $ | (803 | ) | $ | (1,418 | ) | |||||||
Net interest income |
$ | (922 | ) | $ | 450 | $ | (472 | ) | $ | 841 | $ | 387 | $ | 1,228 | ||||||||||
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 5 is the difference between the average rate earned on earning assets and
the average rate paid 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.
19
Table of Contents
TABLE 5. INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS
(Taxable equivalent basis) | 2009 | 2008 | 2007 | |||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Earning assets |
$ | 269,637 | 5.72 | % | $ | 267,467 | 6.27 | % | $ | 261,666 | 6.49 | % | ||||||||||||
Interest bearing liabilities |
$ | 213,449 | 2.54 | % | $ | 214,916 | 2.93 | % | $ | 210,933 | 3.66 | % | ||||||||||||
Interest rate spread |
3.18 | % | 3.34 | % | 2.83 | % | ||||||||||||||||||
Interest free sources used
to fund earning assets(1) |
56,188 | 0.53 | % | 52,551 | 0.58 | % | 50,733 | 0.70 | % | |||||||||||||||
Total sources of funds |
$ | 269,637 | $ | 267,467 | $ | 261,666 | ||||||||||||||||||
Net interest margin |
3.71 | % | 3.92 | % | 3.53 | % | ||||||||||||||||||
(1) | Non-interest bearing liabilities and shareholders equity less non-interest earning assets. |
The following discussion analyzes changes in the banks spreads and margins in terms of
basis points. A basis point is a unit of measure for interest rates equal to .01%. One hundred
basis points equals 1%.
Interest rate spread decreased 16 basis points in 2009 and the net interest margin decreased
21 basis points. The interest rate spread was negatively impacted by a 55 basis point decrease in
earning asset yields offset by a 39 basis point decrease in interest bearing liability costs.
Interest rate spread increased 51 basis points in 2008 and the net interest margin increased 39
basis points. The interest rate spread was positively impacted by a 73 basis point decrease in
interest bearing liability costs offset by a 22 basis point decrease in earning asset yields.
After dropping 400 basis points during 2008, the prime rate was unchanged for 2009. In 2009,
loan yields decreased 48 basis points compared to a decrease of 26 basis points in 2008. Although
the prime rate was unchanged during 2009, the effect of the 400 basis point changes during 2008
had a full year impact on yields during 2009. During the first quarter 2008 alone, the prime rate
dropped 200 basis points. During the remainder of 2008, the pace of the declines in the prime rate
slowed. Although, the prime rate moved by 400 basis points in 2008, the loan yields only decreased
26 basis points as compared to an increase of 26 basis points in 2007. The impact of the decrease
of the prime rate was lessened due to the fact that 40.8% of the banks commercial real estate and
real estate portfolio are fixed rates which the fluctuations in the prime rate do not affect.
Interest rates on deposit accounts and other liabilities are tied to the shorter term rates such as
the prime and federal funds rate. In 2009, liability costs decreased by 39 basis points primarily
due to a decrease in the cost of funds on all deposit accounts offset by a slowing in the decrease
in the cost of borrowing funds from FHLB. In 2008, liability costs decreased by 73 basis points
primarily due to a decrease in the cost of funds on all deposit accounts along with a larger
decrease in the cost of borrowing funds from FHLB.
PROVISION FOR LOAN LOSSES
The amount charged to the provision for loan losses is based on Managements 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 Assets and Allowance for Loan Losses for
a comprehensive analysis.
20
Table of Contents
NONINTEREST INCOME
Noninterest income decreased $70,000 or 3.1% during 2009 over 2008. The decrease in 2009 was
partially a result of decreases in overdraft account fees and trust fee income. The decrease in
fees related to overdrafts is a result of the Banks customer base being much more aware of the
status of their deposit accounts and proactive in keeping these accounts in a satisfactory
condition. Trust fees decreased, although, the level of trust assets being managed during 2009
increased $4.4 million from the December 31, 2008 level of $32.7 million, the average assets under
management decreased to $34.6 million, a decrease of $3.3 million or 8.8% from the average of $38.0
million in 2008. This decrease in average trust assets is due to market value decline. The
decrease in trust fees over the decrease in trust assets in 2009 is due to additional assets being
added to several large advisory accounts which have lower marginal rates.
In January 2007, the bank began selling all fixed rate residential mortgage loans to secondary
market investors. During 2009, 2008 and 2007, CNB originated and sold $7.8 million, $4.3 million
and $5.4 million, respectively of loans to secondary market investors. Although, the volume of
loans sold increased from 2008 to 2009, the yield spread premium the bank earned on these sold
loans continued to shrink due to the competitiveness in the marketplace which resulted in a
decrease in the gain on sales of loans of $16,000. Comparing 2008 to 2007, both the volume of
loans sold decreased from $5.4 million to $4.3 million along with the yield spread premium earned
on these loans resulting in a decrease of $35,000 in gain on sales of loans.
Other factors contributing to the decrease in noninterest income for 2009 was smaller gains
recorded on the sales and calls of investment securities, an increase in the losses recorded on the
sales or writedowns of other real estate owned and repossessed assets. The reason for the smaller
gains on the sales and calls of investment securities was due to in 2008 the bank recognizing
$64,000 gains on called securities which compares to the loss of $3,000 in 2009. The bank was able
to sell $3.8 million in investment securities in 2009 compared to $2.8 million in 2008.
The bank recorded a loss of $149,000 on the sale of other real estate owned or the writedown
of other real estate owned. These writedowns were necessary due to the inability of the bank to
sell these properties in the current housing market. Losses of $12,000 were recorded in 2009 on
the sale or the writedown of repossessed assets.
Offsetting these decreases were increases in debit card fee income, miscellaneous income and
smaller losses on the disposal of equipment and software along with a fee increase effective
November 1, 2009. The increase in debit card fee income for 2009 and 2008 have a direct
correlation to the increased deposit base of the bank and the increased usage of debit cards by our
customer base.
Miscellaneous income increased due to the death of one of the banks Board of Directors in
February 2009 and the bank was the named beneficiary of a life insurance policy on the director.
The bank received $194,184 in a death benefit, $135,326 of which has been recorded in assets as
cash surrender value. The difference of $58,858 is reflected in other operating income.
During the fourth quarter 2008, the bank disposed of equipment and software due to the banks
outsourcing conversion in December 2008. The bank recorded a loss of $49,000 on the disposal of
this equipment and software. During the fourth quarter 2009, the bank disposed of equipment due to
the outsourcing of the banks statement rendering process. The bank recorded a loss of $7,600 on
the disposal of this equipment.
The slight increase in the income from the title company is due to the final distribution in
the fourth quarter 2009 of $1,169. On August 31, 2009, Morgan County Title Insurance Agency, LLC
was dissolved which CNB had a 33% ownership in the limited liability company.
Noninterest income decreased $159,000 or 6.6% during 2008 over 2007. The decrease in 2008
was a result of decreases in trust fees, gain on sale of stock, gain on sales of loans and income
from the title company offset by increases in debit card fees and gain on sales and calls of
securities.
The decrease in trust fees is due to the fact that assets under management have decreased from
$42.6 million at December 31, 2007 to $32.7 million at December 31, 2008. This 23.2% decrease is
primarily due to market value decline. Although trust fees declined during 2008, there was a
reallocation of trust assets during 2008 into accounts earning higher management fees which helped
to offset the 23.2% decrease due to the market value decline causing trust fee income to only
decrease by 4.6%.
The decrease in the gain on sale of stock in 2008 was due to the banks $59,000 realized gain
in the second quarter of 2007 on 1,644 shares of stock the bank received in 2000 from the
demutualization of an insurance company. The bank was unaware of these shares, but immediately
upon knowledge of the existence of the stock, the bank took possession of the stock and sold it.
21
Table of Contents
The decrease in the income from the title company in 2008 is a direct result of the slowing in
the loan demand in our market area and the overall decline in the economic conditions.
Other factors contributing to the decrease in non interest income for 2008 was the loss of
$86,000 on other-than- temporary impairment of securities. At December 31, 2008, management
analyzed the portfolio noting two collateralized mortgage obligations to be performing very poorly
and the loans within the portfolio have increased delinquencies and foreclosures. Therefore,
management recorded an other than temporarily impaired loss on these two collateralized mortgage
obligations of $86,468, a 9.8% reduction in the book value. The bank also recorded a loss of
$69,000 on the sale of other real estate owned or the writedown of other real estate owned. This
writedown was necessary due to the continued decline in the economic conditions in the banks
local housing market and the inability of the bank to sell these properties in a timely fashion.
Gain on sales and calls of securities contributed $120,000 to non interest income during 2008
which compared to a loss of $2,700 for the same period in 2007. The level of trust assets being
managed decreased from $42.6 million at December 31, 2007 to $32.7 million at December 31, 2008, a
23.2% decrease and the fees earned on these assets decreased by $11,000 or 4.6%. The average level
of trust assets being managed decreased by $4.0 million or 9.6%.
NONINTEREST EXPENSES
Noninterest expenses decreased $133,000 or 1.7% during 2009 over the prior comparable period.
Salaries decreased by $169,000 due to a concerted effort, beginning in the first quarter of 2009
and continuing throughout the year, on the part of bank management to control expenses by
eliminating extra hours worked and to utilize employees time more efficiently. Also contributing
to the decrease was the employment of four less full time equivalent employees from the same time
period last year. These decreases were offset by lower merit increases.
The decrease in employee benefits expense is due primarily to a decrease in the post
retirement expense due to a change in assumptions along with decreases in most all other employee
benefit accounts due to a reduction in employee hours or the controlling of expenses by management.
Occupancy expense decreased $12,000 from 2008 to 2009 as a result of the negotiation of
several vendor contracts to decrease the cost of their services offset by increased cost of real
property taxes and bank operating supplies. During 2009, the bank installed new fluorescent light
fixtures at all six bank locations which the cost of the new light bulbs was charged to bank
operating supplies.
Furniture and equipment expense showed a decrease for 2009 compared to 2008 of $203,000. This
decrease is due to a decrease in furniture and equipment maintenance expense, equipment expense and
depreciation expense for computer hardware and furniture and equipment. The decreased maintenance
expense is due to the number and amount of maintenance contracts declined due to the outsourcing of
the Banks technology in December 2008. These expenses have shifted to data processing fees and
are included in other operating expenses on the statement of income.
Equipment expense decreased due to in the fourth quarter 2008 approximately $51,000 in
expenses were recorded which related to the outsourcing conversion of the banks computer system.
Depreciation expense decreased due to equipment becoming fully depreciated during this time period
along with the computer hardware which was written off in 2008 as it was no longer in service after
the outsourcing of the Banks technology in December 2008.
The increase in other operating expenses of $381,000 was due to increases in data processing
expense, FDIC assessment fees, 75th anniversary expenses and other loan expense. These
increases were offset by decreases to marketing expense, stationery, supplies and printing, debit
card expense, audit and accounting expense and employee training expense. Data processing expense
increased due to the expenses related to the monthly outsourcing charges of the banks data
processing system began in the second quarter of 2009. The FDIC assessment fee increased due to
the increase in the quarterly assessment rate along with the 5 basis point special one time
assessment for every $100 of deposits the bank holds. The one time special assessment of $130,188
was paid on September 30, 2009. The bank celebrated its 75th anniversary on June 19,
2009. The celebrations began in April 2009 at each of the banks branch locations and finished
with a large picnic celebration in the local state park for customers and local businesses. Other
loan expense increased due to the costs associated with acquiring and maintaining the foreclosed
properties the bank owns.
During 2009, the bank was in a cost cutting mode and attempted to reduce all non essential
expenses to a minimum. This cost cutting mode is reflective in the decreased marketing expense and
employee training expense. Stationery, supplies and printing decreased due to in late 2008, the
bank began the purchase of paper supplies for the 75th anniversary celebration of the
bank during 2009.
22
Table of Contents
Noninterest expenses decreased $46,000 or .6% during 2008 over the prior comparable period.
Salaries decreased by
$45,000 due to the employment of two less full time equivalent employees from the same time
period last year and lower merit increases for employees. In 2007, the bank paid bonuses totaling
$36,000 in May based in part on the banks 2006 performance and also accrued $30,000 for bonuses to
be paid in 2008 to the top four executive officers. In 2008, $36,000 was accrued for bonuses for
the top four executive officers to be paid in 2009. The increase in employee benefits expense is
due primarily to an increase in the post retirement expense. This expense increased by $98,000 due
to a change in the assumptions. Offsetting this increase were decreases to group insurance expense
and vested health contribution expense, pension expense and payroll taxes. In 2008, bank employees
were offered two different group health insurance plans to choose from, a lower deductible plan
which the employee would pay 10% of the premium cost and a higher deductible plan which the bank
would pay 100% of the premium cost. With the lower deductible plan which 62% of the participating
employees chose, the banks portion of the premium would be approximately the same as the premium
paid in 2007. With the higher deductible plan which 38% of the participating employees chose, the
yearly savings to the bank would be approximately $15,000. Along with this change in deductibles
and premium charges, the number of employees enrolled in the plan has also declined. Due to the
number of employees in the group insurance plan declining, this has also impacted the vested health
contribution expense. The decrease in payroll taxes is a result of the employment of two less
full time equivalent employees from the same time period last year.
Occupancy expense decreased $17,000 from 2007 to 2008 because of some minor building repairs,
renovations and painting at the main office and additional painting at one of the banks branch
facilities done in 2007 which were not required in 2008. These decreases were offset by an
increase in property taxes. Furniture and equipment expense showed a decrease for 2008 as compared
to 2007. This decrease is a result of the reduction in the depreciation expense due to some
computer hardware becoming fully depreciated during this time period. Equipment expense increased
due to approximately $51,000 in expenses incurred in the fourth quarter related to the outsourcing
conversion of the banks computer system. Equipment expense, prior to the fourth quarter, had
shown a decrease as compared to the same period in 2007 due to upgrades made to LCD displays at a
few of the banks ATM machines and numerous repairs to other bank equipment performed during 2007.
The decrease in other operating expenses was due to decreases in marketing expense, data
processing expense, professional service fees, courier services and franchise tax expense.
Marketing expense decreased due to the concentrated effort of the bank to lower costs through
funneling advertising monies to be used in more effective modes of advertising along with a
decrease in public relations and promotional expenses. The decrease in data processing expense is
due in part to the fact that proof of deposit encoding supplies were not needed after June 2007
because the bank began image processing through check image exchange. Professional fees decreased
in 2008 because the expense for documentation of the banks internal controls in connection with
the Sarbanes-Oxley Act of 2002 was completed in 2007. The expenses for testing the internal
controls have shifted to audit fees expense which increased in 2008 from 2007. Courier services
were ended in late 2007 when the bank began image processing through check image exchange.
Franchise tax expense decreased due to the West Virginia franchise tax rate decrease for 2008.
These decreases in 2008 were offset by increases to stationary, supplies and printing,
telephone, ATM expense, debit card expense, directors fees, FDIC assessment expense, legal fees
and other miscellaneous operating expenses. The increase in stationary, supplies and printing is
due to the fourth quarter 2008 the bank began the purchase of paper supplies to begin the
75th anniversary celebration of the bank during 2009. ATM and debit card expenses
increased due to the monthly fees for ATM and debit card fees continue to increase due to increased
costs and volume of usage. Committee meeting fees for the Board of Directors increased in April
2008. The FDIC assessment fee increased because the banks one time assessment credit was
completely exhausted in the second quarter of 2008 causing the assessment to increase from $27,000
in 2007 to $84,000 in 2008. Legal fees increased due to the increased number of foreclosures and
bankruptcies that the bank experienced in 2008 along with the increased number of civil actions the
bank initiated in 2008. The increase in other miscellaneous operating expenses was caused by the
expense of $14,261 associated with the reimbursement of five commercial customers who participated
in the banks money market mutual fund sweep product. This product was offered in 2005 due to
demand from commercial depositors to earn interest on their business checking accounts. On
September 17, 2008, the bank was notified by The Reserve, the company managing these money market
mutual funds, that the net asset value of these funds would be 97%. The bank has committed to
cover up to 3% should the final liquidation result in a 97% payment.
The Company performs an annual test of impairment of acquired customer lists. The annual test
for impairment resulted in no loss for the years ended December 31, 2009, 2008 or 2007.
23
Table of Contents
INCOME TAXES
Provision for income tax totaled $565,000 in 2009, $1.3 million in 2008 and $1.2 million in
2007. The effective tax rate was 20.8% in 2009 compared to 32.5% and 32.2% in 2008 and 2007,
respectively. The 2009 reduction in the effective tax rate is due in part to a significant
increase in tax exempt interest income, tax exempt life insurance proceeds and an adjustment to
deferred tax liability related to the bank changing its estimate of the likelihood of the
taxability for the cash surrender value life insurance related to the deferred compensation plan.
The banks income tax expense differs from the amount computed at statutory rates primarily due to
the tax-exempt earnings from certain investment securities and loans, and non-deductible expenses,
such as life insurance premiums. See Note 14: Income Taxes in the Notes to Consolidated Financial
Statements for a comprehensive analysis of income tax expense.
FINANCIAL CONDITION
Table 6 examines CNB Bank, Inc.s financial condition in terms of its sources and uses of
funds. Average funding sources and uses increased $2.2 million or .8% in 2009 compared with an
increase of $5.8 million or 2.2% in 2008.
TABLE 6. SOURCES AND USES OF FUNDS
2009 | 2008 | 2007 | ||||||||||||||||||||||||||
Average | Increase (Decrease) | Average | Increase (Decrease) | Average | ||||||||||||||||||||||||
Balance | Amount | % | Balance | Amount | % | Balance | ||||||||||||||||||||||
In thousands | ||||||||||||||||||||||||||||
Funding uses: |
||||||||||||||||||||||||||||
Federal funds
sold |
$ | 2,428 | $ | 2,428 | 100.0 | % | $ | | $ | (701 | ) | (100.0 | )% | $ | 701 | |||||||||||||
Certificates of
deposit |
2,578 | 2,578 | 100.0 | | | | | |||||||||||||||||||||
Securities available
for sale |
64,454 | (210 | ) | (0.3 | ) | 64,664 | 7,744 | 13.6 | 56,920 | |||||||||||||||||||
Loans |
200,177 | (2,626 | ) | (1.3 | ) | 202,803 | (1,242 | ) | (0.6 | ) | 204,045 | |||||||||||||||||
Total uses |
$ | 269,637 | $ | 2,170 | 0.8 | % | $ | 267,467 | $ | 5,801 | 2.2 | % | $ | 261,666 | ||||||||||||||
Funding sources: |
||||||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 35,125 | $ | (24 | ) | (0.1 | )% | $ | 35,149 | $ | (9,637 | ) | (21.5 | )% | $ | 44,786 | ||||||||||||
Savings deposits |
24,750 | 1,210 | 5.1 | 23,540 | (1,795 | ) | (7.1 | ) | 25,335 | |||||||||||||||||||
Time deposits |
140,905 | 15,216 | 12.1 | 125,689 | 3,050 | 2.5 | 122,639 | |||||||||||||||||||||
Short-term borrowings |
12,669 | (17,869 | ) | (58.5 | ) | 30,538 | 12,365 | 68.0 | 18,173 | |||||||||||||||||||
Noninterest bearing funds, net(1) |
56,188 | 3,637 | 6.9 | 52,551 | 1,818 | 3.6 | 50,733 | |||||||||||||||||||||
Total sources |
$ | 269,637 | $ | 2,170 | 0.8 | % | $ | 267,467 | $ | 5,801 | 2.2 | % | $ | 261,666 | ||||||||||||||
(1) | Noninterest bearing liabilities and shareholders equity less noninterest earning assets. |
Total assets increased $7.2 million or 2.6% to $289.5 million from December 31, 2008, to
December 31, 2009, due primarily to a $9.7 million increase in investment securities, a $2.0
million increase in certificates of deposit investments, a $1.7 million increase in other assets
offset by a $6.0 million decrease in loans.
Total liabilities increased $4.8 million or 1.9% to $263.9 million from December 31, 2008, to
December 31, 2009, due primarily to an increase in deposits of $24.4 million offset by a decrease
in FHLB borrowings of $19.0 million and a decrease in accrued expenses and other liabilities of
$568,000. Shareholders equity increased $2.4 million to $25.6 million at December 31, 2009,
primarily due to net income of $2.1 million, a $1.2 million increase in accumulated other
comprehensive income offset by cash dividends of $689,000 and stock repurchases of $255,000.
The components of accumulated other comprehensive income at December 31, 2009, were unrealized
gains and losses on available for sale securities, net of deferred income taxes and unrecognized
pension costs, net of deferred income taxes. The
24
Table of Contents
increase in accumulated other comprehensive income was due to the decrease in unrecognized pension costs and an increase in the unrealized market
value appreciation of the available for sale investment security portfolio. 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. In 2006, CNB implemented guidance now codified as ASC Topic 715,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans in which the
unfunded liability resulting from the projected benefit obligation exceeding the fair value of the
plan assets is recorded as a liability and any unrecognized pension costs are recorded net of tax
in accumulated other comprehensive income. See Note 11: Pension Plan in the Notes to Consolidated
Financial Statements for further details.
LOAN PORTFOLIO
At December 31, 2009, total loans decreased $6.0 million or 3.0% to $194.7 million from $200.8
million at December 31, 2008. Although each category of loans except commercial real estate loans
and consumer loans experienced decreases, the loan mix was unchanged from December 31, 2008.
Commercial real estate loans have shown an increase of $3.4 million which is in part attributable
to several large loans to builders for presold entry level homes. The buyers of these homes have
been pre-approved by area banks and qualify for the $8,000 government tax credit. Another factor
was the consolidation of debt from other banks to CNB by a large land developer of $1.5 million and
a commercial business customer consolidating debt of $925,000. Consumer loans have shown a slight
increase of $18,000. Beginning in January 2007, the bank began selling all fixed rate residential
mortgage loans to secondary market investors. During 2009, CNB originated and sold $7.8 million of
loans to secondary market investors. The bank continues to experience a slowdown in the
residential loan demand due to the slowdown in the housing market along with tightened secondary
market and private mortgage company guidelines. Although the banks lending officers continue to
be proactive in their marketing effort in the banks lending area, the uncertainty of the current
financial position of prospective bank customers caused a lag in officer calls during a portion of
2009. The banks lending area has seen a shift in the market price on real property from price
appreciation in 2006 to a declining market in 2008 and 2009. The banks management believes the
slowdown in the housing market and the lower loan demand will continue through the first half of
2010. The loan to deposit ratio was 77.2% at December 31, 2009 and 88.1% at December 31, 2008.
The ratio of net charge-offs to average loans outstanding was .4% in 2009 and .2% in 2008.
Table 7 sets forth the amount of loans outstanding (net of unearned income) as of the dates
shown:
TABLE 7. LOANS AND LEASES OUTSTANDING
December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
In thousands | ||||||||||||||||||||
Real estate |
$ | 129,509 | $ | 137,770 | $ | 143,012 | $ | 143,767 | $ | 125,723 | ||||||||||
Commercial real estate |
43,972 | 40,614 | 37,588 | 36,967 | 29,492 | |||||||||||||||
Consumer |
16,684 | 16,666 | 15,544 | 15,934 | 16,802 | |||||||||||||||
Commercial |
7,277 | 7,931 | 8,179 | 9,172 | 9,314 | |||||||||||||||
Overdrafts |
203 | 92 | 104 | 163 | 356 | |||||||||||||||
$ | 197,645 | $ | 203,073 | $ | 204,427 | $ | 206,003 | $ | 181,687 | |||||||||||
Leases |
585 | 105 | 113 | 124 | 145 | |||||||||||||||
$ | 198,230 | $ | 203,178 | $ | 204,540 | $ | 206,127 | $ | 181,832 | |||||||||||
Net deferred loan fees, premiums and
discounts |
380 | 325 | 273 | 324 | 397 | |||||||||||||||
Allowance for loan
losses |
(3,903 | ) | (2,751 | ) | (2,144 | ) | (2,132 | ) | (2,022 | ) | ||||||||||
$ | 194,707 | $ | 200,752 | $ | 202,669 | $ | 204,319 | $ | 180,207 | |||||||||||
25
Table of Contents
The commercial real estate loan portfolio showed an increase in outstanding loans of $3.4
million from $40.6 million at December 31, 2008 to $44.0 million at December 31, 2009. The
commercial real estate loan portfolio is approximately 22% of the total loan portfolio at December
31, 2009 and 20% of the total loan portfolio at December 31, 2008. The banks activity in the
Berkeley County market continues to expand with the three branch locations located in that area.
The banks loan activity also increased in the Maryland market after acquiring the Hancock,
Maryland branch in June 2004. In addition, the banks loan growth has benefited from several large
commercial real estate loans closing in 2009. Management believes additional growth in the real
estate and commercial real estate area are possible in 2010 through the extension of the $8,000
government tax credit for qualified home buyers and the recent passage of a local school bond by
taxpayers along with $31 million in government stimulus funds being made available to fund public
and private projects, managements projections for commercial real estate activity for 2010 are
positive for the Eastern Panhandle of West Virginia.
Real estate mortgage loans comprised mainly of one to four family residences continued to be
the banks dominant loan category. Mortgage lending comprises approximately 66% of the total loan
portfolio at December 31, 2009, and 68% of the total loan portfolio at December 31, 2008, totaling
$129.5 million at December 31, 2009, and $137.8 million at December 31, 2008. With real estate
values down, very few home owners were able to refinance their current mortgage to increase their
mortgage. The local economy saw very few home sales in 2009. Customers were mainly refinancing
their homes into fixed rate loans. CNB originated $8.6 million in fixed rate loans during 2009 of
which $1.3 million was a runoff of existing loans in our portfolio which the customer refinanced
into a fixed rate loan. Another factor in the decrease in the real estate portfolio is the fact
that approximately $1.7 million in mortgage loans became foreclosed properties of the bank.
Although the net decrease in real estate mortgage loans totaled $8.3 million, actual real
estate mortgage loan originations were higher as the bank sold all fixed rate mortgage loans
originated in 2009 to secondary market investors. During 2009, CNB sold $7.8 million of fixed rate
loans to secondary market investors. The banks increased presence in Berkeley County, West
Virginia, and Washington County, Maryland continues to generate additional activity in the real
estate mortgage loan arena.
The consumer loan portfolio showed a slight increase of $18,000. 2009 was a very slow year
for automobile lending whether it was direct or indirect lending. The banks primary consumer loan
market area is Morgan and Berkeley Counties, West Virginia and Washington County, Maryland which
are all considered to be conservative spending areas.
26
Table of Contents
Table 8 summarizes the approximate contractual maturity and sensitivity of certain loan types
to changes in interest rates as of December 31, 2009:
TABLE 8. CONTRACTUAL MATURITY AND SENSITIVITY
December 31, 2009 | ||||||||||||||||
One year | One through | Over | ||||||||||||||
or less | Five years | Five years | Total | |||||||||||||
In thousands | ||||||||||||||||
Commercial, financial and agricultural: |
||||||||||||||||
Floating rate |
$ | 28,383 | $ | 14,910 | $ | | $ | 43,293 | ||||||||
Fixed rate |
1,989 | 4,040 | 1,927 | 7,956 | ||||||||||||
Total |
$ | 30,372 | $ | 18,950 | $ | 1,927 | $ | 51,249 | ||||||||
Real estate mortgage: |
||||||||||||||||
Floating rate |
$ | 11,046 | $ | 60,946 | $ | 402 | $ | 72,394 | ||||||||
Fixed rate |
923 | 4,728 | 49,845 | 55,496 | ||||||||||||
Total |
$ | 11,969 | $ | 65,674 | $ | 50,247 | $ | 127,890 | ||||||||
Real estate construction: |
||||||||||||||||
Floating rate |
$ | 1,547 | $ | | $ | | $ | 1,547 | ||||||||
Fixed rate |
72 | | | 72 | ||||||||||||
Total |
$ | 1,619 | $ | | $ | | $ | 1,619 | ||||||||
Consumer: |
||||||||||||||||
Floating rate |
$ | 206 | $ | 115 | $ | | $ | 321 | ||||||||
Fixed rate |
1,050 | 9,992 | 5,524 | 16,566 | ||||||||||||
Total |
$ | 1,256 | $ | 10,107 | $ | 5,524 | $ | 16,887 | ||||||||
Lease financing: |
||||||||||||||||
Floating rate |
$ | | $ | | $ | | $ | | ||||||||
Fixed rate |
| 488 | 97 | 585 | ||||||||||||
Total |
$ | | $ | 488 | $ | 97 | $ | 585 | ||||||||
The bank still offers both variable rate loans and fixed rate mortgage products. Demand
for variable rate loan products significantly dropped in 2008 and continued to be weak in 2009 due
to the secondary market fixed rates being at historic lows. Given the current economic climate,
the banks customers want the security of a fixed rate loan product even though these products are
sold to secondary market investors. As of December 31, 2009, 59.0% of the banks mortgage loans
were adjustable rate loans and 41.0% were fixed rate loans. Compared to December 31, 2008, 59.2%
of the banks mortgage loans were adjustable rate loans and 40.8% were fixed rate loans.
Currently, the bank has approximately $2.2 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. Included in this $2.2 million in fixed rate loans in the banks
portfolio are $808,000 of loans intended to be sold in 2009 to a specific secondary market investor
who ceased operations prior to the settlement of the transactions. CNB retained these loans in
their portfolio instead of selling them to another secondary market investor.
27
Table of Contents
NONPERFORMING ASSETS 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. 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, 2009 and 2008, nonaccrual loans approximated .79% and .75% of total
loans (net), respectively. At December 31, 2009, there are eleven loans considered to be impaired
with a balance of $904,000 (net of government agency guarantees) and a specific allowance of
$200,000. At December 31, 2008, there were ten loans considered to be impaired with a balance of
$1.2 million (net of government agency guarantees) and a specific allowance of $286,000. As of
December 31, 2009, management is aware of forty one borrowers who have exhibited weaknesses. Their
loans have aggregate uninsured balances of $6.2 million. A specific allowance of $956,000 has been
established for these loans 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 assets as of the dates indicated:
TABLE 9. NONPERFORMING ASSETS
December 31 | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
In thousands | ||||||||||||||||||||
Foreclosed real estate (other real estate owned) |
$ | 387 | $ | 253 | $ | 151 | $ | | $ | | ||||||||||
Impaired loans, not on nonaccrual |
827 | 131 | 848 | | | |||||||||||||||
Nonaccrual loans, impaired (1) |
109 | 1,096 | 562 | | | |||||||||||||||
Nonaccrual loans, not impaired |
1,456 | 403 | 552 | 402 | 790 | |||||||||||||||
Loans past due 90 days or more still accruing interest |
| | | 5 | | |||||||||||||||
Total non-performing assets |
$ | 2,779 | $ | 1,883 | $ | 2,113 | $ | 407 | $ | 790 | ||||||||||
(1) | Some of these loans have government agency guarantees reducing the banks exposure by $31,379 for December 31, 2009 and $57,611 for December 31, 2008. |
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 banks 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, 2009 and 2008, the allowance
for loan losses totaled $3.9 million and $2.8 million, respectively. The allowance for loan
losses as a percentage of loans was 2.0% and 1.4% as of December 31, 2009 and 2008, respectively.
The provision for loan losses exceeded net charge-offs by $1.2 million and $607,000 in 2009 and
2008, respectively.
28
Table of Contents
Table 10 shows a summary of the Companys loan loss experience:
TABLE 10. ALLOWANCE FOR LOAN LOSSES
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
In thousands | ||||||||||||||||||||
Loans outstanding at end of year |
$ | 198,230 | $ | 203,178 | $ | 204,540 | $ | 206,127 | $ | 181,832 | ||||||||||
Daily average balance of loans and leases |
$ | 200,177 | $ | 202,803 | $ | 204,045 | $ | 194,712 | $ | 170,158 | ||||||||||
Balance of allowance for loan losses
at beginning of year |
$ | 2,751 | $ | 2,144 | $ | 2,132 | $ | 2,022 | $ | 1,807 | ||||||||||
Loans charged off: |
||||||||||||||||||||
Commercial, financial and agricultural |
$ | 4 | $ | 48 | $ | | $ | 20 | $ | | ||||||||||
Real estate mortgage |
508 | 178 | 20 | | | |||||||||||||||
Consumer |
305 | 296 | 320 | 298 | 306 | |||||||||||||||
Total loans charged off |
$ | 817 | $ | 522 | $ | 340 | $ | 318 | $ | 306 | ||||||||||
Recoveries: |
||||||||||||||||||||
Commercial, financial and agricultural |
$ | 1 | $ | 21 | $ | 5 | $ | | $ | 2 | ||||||||||
Consumer |
89 | 166 | 178 | 152 | 167 | |||||||||||||||
Real estate mortgage |
26 | 2 | | | | |||||||||||||||
Total recoveries |
$ | 116 | $ | 189 | $ | 183 | $ | 152 | $ | 169 | ||||||||||
Net charge-offs |
$ | 701 | $ | 333 | $ | 157 | $ | 166 | $ | 137 | ||||||||||
Provision charged to expense |
$ | 1,853 | $ | 940 | $ | 169 | $ | 276 | $ | 352 | ||||||||||
Balance, end of year |
$ | 3,903 | $ | 2,751 | $ | 2,144 | $ | 2,132 | $ | 2,022 | ||||||||||
Selected Asset Quality Ratios: |
||||||||||||||||||||
Net charge-offs to average loans |
0.35 | % | 0.16 | % | 0.08 | % | 0.09 | % | 0.08 | % | ||||||||||
Allowance for loan losses to loans
outstanding at end of year |
1.97 | % | 1.35 | % | 1.05 | % | 1.03 | % | 1.11 | % | ||||||||||
Non-performing assets (1) to total assets |
0.96 | % | 0.67 | % | 0.73 | % | 0.15 | % | 0.31 | % | ||||||||||
Non-accrual loans to total loans |
0.79 | % | 0.75 | % | 0.54 | % | 0.20 | % | 0.43 | % |
(1) | Includes accruing loans past due 90 days or more, impaired loans and other real estate owned |
29
Table of Contents
Table 11 summarizes the allocation of the allowance for loan losses by loan type: |
TABLE 11. HISTORICAL ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, | ||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
% 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 |
$ | 1,428 | 26 | % | $ | 1,178 | 22 | % | $ | 886 | 22 | % | $ | 1,231 | 22 | % | $ | 1,056 | 21 | % | ||||||||||||||||||||
Real estate-
construction and
mortgages |
1,613 | 66 | 543 | 69 | 479 | 69 | 508 | 70 | 528 | 69 | ||||||||||||||||||||||||||||||
Consumer, leasing
and other |
483 | 8 | 415 | 8 | 244 | 8 | 225 | 8 | 303 | 10 | ||||||||||||||||||||||||||||||
Impaired loans |
235 | 0 | 383 | 1 | 255 | 1 | | | | | ||||||||||||||||||||||||||||||
Unallocated |
144 | N/A | 232 | N/A | 280 | N/A | 168 | N/A | 135 | N/A | ||||||||||||||||||||||||||||||
Total |
$ | 3,903 | 100 | % | $ | 2,751 | 100 | % | $ | 2,144 | 100 | % | $ | 2,132 | 100 | % | $ | 2,022 | 100 | % | ||||||||||||||||||||
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 2009, 2008 and 2007, the provision totaled $1.9 million,
$940,000 and $169,000, respectively. Loan quality remains good even though, past due, nonaccrual
loans and foreclosed properties have increased. Also, net charge offs as a percentage of average
loans increased from .2% in 2008 to .4% in 2009. During 2009, the bank experienced ten loans sent
to foreclosure sale of which the bank had to purchase eight of them. During 2008, the bank
experienced eight loans sent to foreclosure sale of which the bank had to purchase seven of them.
The banks lending area also continues to show signs of a slowdown in the housing market. For the
reasons stated above management significantly increased the provision for loan losses in 2009.
Management anticipates this trend continuing into 2010. Therefore, management plans to maintain
the same provision for loan losses into the first quarter of 2010. In addition, federal and state
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 banks securities portfolio consists of available for sale securities, restricted
investments and certificates of deposit 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 $11.7 million to $76.6 million at December 31, 2009 from December 31, 2008.
The composition of the portfolio continues to reflect the banks conservative philosophy which
places greater importance on safety and liquidity than on yield. At December 31, 2009,
approximately 11.3% of the portfolio is comprised of U.S. Government agencies and corporations,
6.3% in corporate bonds, 34.3% in mortgage backed securities and collateralized mortgage
obligations, 42.5% in state and municipal securities, 3.0% in restricted investments and 2.6% in
certificates of deposit investments. As loan demand continued to be slow, the percentage of the
investment portfolio in mortgage backed securities, corporate bonds and state and municipal
securities has increased significantly from 63.7% at December 31, 2008 to 83.1% at December 31,
2009. The term to maturity is limited to seven years for Treasury and Agency bonds and 15 years
for Municipal bonds. Typically, investments in Agency bonds contain a call feature. The average
term to maturity of the portfolio as of December 31, 2009 was 4.3 years. At December 31, 2009,
management analyzed the investment portfolio and determined no other than temporary losses were
needed at the present time. At December 31, 2008, management analyzed their portfolio noting two
collateralized mortgage obligations to be performing very poorly and the loans within the portfolio
have increased delinquencies and foreclosures. Therefore, management recorded an other than
temporary loss on these two collateralized mortgage obligations of $86,468, a 9.8% reduction in the
book value.
30
Table of Contents
Table 12 sets forth the carrying amount of investment securities as of the dates shown:
TABLE 12. INVESTMENT SECURITIES
December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Available for sale: |
||||||||||||
U.S. Government agencies and
corporations |
$ | 8,623 | $ | 10,804 | $ | 31,170 | ||||||
Corporate bonds |
4,812 | 6,592 | | |||||||||
State and municipal securities |
32,533 | 16,965 | 11,477 | |||||||||
Mortgage-backed securities |
13,416 | 17,783 | 14,139 | |||||||||
Collateralized mortgage obligations |
12,889 | 10,461 | 9,231 | |||||||||
Restricted securities |
2,321 | 2,321 | 2,624 | |||||||||
Cerificates of deposit |
1,989 | | | |||||||||
Total |
$ | 76,583 | $ | 64,926 | $ | 68,641 | ||||||
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. The average balance in
federal funds sold increased from $0 in 2008 to $2.4 million in 2009. The increased federal funds
sold average balance is a direct result of the bank decreasing its borrowings during 2009 due to
increase in the average balance of all deposit accounts except money market accounts. The average
balance in federal funds sold decreased from $701,000 in 2007 to $0 in 2008. The decreased federal
funds sold average balance is a direct result of the bank having to increase its borrowings during
2008 due to the decrease in the average balance of all deposit accounts except time deposits.
See Note 3: Securities in the Notes to Consolidated Financial Statements for a comprehensive
analysis of the securities portfolio.
DEPOSITS AND OTHER FUNDING SOURCES
Total deposits were $252.3 million at December 31, 2009, an increase of $24.4 million or 10.7%
over deposits at December 31, 2008. This increase was reflected in all deposit categories. The
bank has experienced increased customer activity in the deposit area during 2009 especially in the
non interest bearing checking and savings areas. Although the rates on interest bearing demand
accounts are low they remain competitive and customers continue to open these accounts also. The
bank was able to capture entire customer relationships from the certificate of deposit to checking
and savings accounts to rental of safe deposit boxes. During the first quarter of 2009, the bank
experienced a decrease in the Ultimate Invest checking account due to the drop in interest rates.
Factors affecting the increase in certificates of deposit and certificates of deposit over
$100,000 are the increase in IRA rollovers by customers from their 401k programs through their
employment and the continued growth of our Washington County, Maryland branch. In our Washington
County, Maryland market area, there have been a number of bank mergers over the last few years and
CNB continues to benefit from these mergers with the increased volume of new deposit accounts. The
banks Washington County, Maryland branch has grown $6.8 million in deposits since December 31,
2008.
The banks 8-month and 14-month non renewable certificates of deposit rolled off completely in
June and April 2009, respectively. These matured funds along with outside funds from both existing
and new customers are contributing factors to the increase in the banks certificates of deposit
over 100,000. The banks customers are shifting their money from these matured Certificates of
Deposit into preexisting 36-month Ultimate Certificates of Deposit. The banks 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 and deposits may be made to this CD at any time.
Another contributing factor to the increase in the banks certificates of deposit over
$100,000 is due to the banks successful bid for $5.0 million in certificate of deposit funds from
the State of WV Treasurers office in May 2009. This certificate of deposit carried an interest
rate of .508% and matured in November 2009. In November 2009, the bank was again successful in
their bid for $5.0 million in certificate of deposit funds from the State of WV Treasurers office.
This certificate of deposit carries an interest rate from .176% to .181% and matures in May 2010. In August
2009, the bank was also successful in its bid for $500,000 in certificate of deposit funds from the
State of WV Treasurers office. This certificate of deposit carries an interest rate of .351% and
matures in February 2010. Also during 2009, two current public fund depositors increased their
certificate of deposit holdings with the bank by $2.2 million aggregate.
31
Table of Contents
Average deposits showed a $17.3 million increase, or 7.7% increase, to $242.9 million in 2009.
Deposits at the Valley Road branch totaled $18.2 million at December 31, 2009, an increase of
$901,000 from December 31, 2008. Deposits at the Hedgesville branch totaled $18.4 million at
December 31, 2009, an increase of $1.1 million from December 31, 2008. Deposits at the Martinsburg
branch totaled $8.8 million at December 31, 2009, an increase of $601,000 from December 31, 2008.
The banks Washington County, Maryland branch has grown $6.8 million in deposits since December 31,
2008. Deposits at the Spring Mills branch totaled $9.5 million at December 31, 2009, an increase
of $1.4 million over December 31, 2008.
The bank has continued to experience a change in the deposit account mix during 2009.
Noninterest-bearing deposits increased by $3.9 million or 9.9%, during 2009. At December 31,
2009, noninterest-bearing deposits represented 17.2% of total deposits, compared to 17.3% for 2008.
Average noninterest-bearing deposits increased 2.2% from $41.2 million in 2008 to $42.1 million in
2009. Noninterest-bearing deposit account balances grew steadily throughout 2009 but increased
significantly in the fourth quarter of 2009. The significant increase was due to the timing of
some direct deposits totaling $3.8 million which were posted on December 31, 2009 rather than in
January 2010 as in previous years.
Interest-bearing deposits increased by $20.5 million or 10.9% to $208.9 million at December
31, 2009. Interest-bearing checking deposits increased by $10,000 in 2009, while, the average
interest-bearing checking deposits decreased $24,000. Included in this category are NOW accounts
and Money Market accounts. The difference between the average interest-bearing checking deposit
balances and the actual interest-bearing checking balances is due to the decline in the first
quarter balances then a considerable increase during the second and third quarter and a $2.5
million decrease in the balance during the fourth quarter of 2009 to show only a marginal change.
While the average savings deposits increased $1.2 million or 5.1% to $24.8 million in 2009, actual
savings accounts increased $1.4 million at December 31, 2009 to $24.9 million. The difference
between the increase in the average savings deposits and the increase in the actual savings
deposits is due to savings account balances is due to large increases in the first and third
quarters of 2009 with the second and fourth quarters regressing slightly from the prior quarter
increases.
The banks largest source of interest-bearing funds is certificates of deposit. These
accounts totaled $148.4 million at December 31, 2009, an increase of $19.0 million or 14.7%. The
increase in the banks certificates of deposit accounts is attributable to steady increases during
all four quarters of 2009. The bank experienced a slight shift from Certificates of Deposit to
Certificates of Deposit over $100,000. This shift was caused by the continued ability of
customers to deposit funds into a preexisting 36-month Ultimate Certificate of Deposit causing this
certificate to exceed the $100,000 amount. The banks 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 and deposits may be made to this CD at any time. These certificates, if
purchased in 2006 and 2007, had an interest rate of over 4.0%. When the 2006 certificates rolled
over in 2009, the current interest rate was 2.0% or below. The Certificates of Deposit over
$100,000 increased significantly due to the successful bids of the bank for the WV State
Treasurers office deposit funds.
The average time deposits increased $15.2 million or 12.1% to $140.9 million in 2009. The
difference between the increases in average time deposits and actual time deposits is due to the
large increases in the first half of 2009 and than steady but smaller growth in the last half of
2009. In July 2008, the bank began offering two new Certificates of Deposit with attractive rates
and special features to encourage new and existing customers to deposit with us. The 8-month CD
offered a penalty free withdrawal of funds after being open for 30 days. The 28-month offered a
one time increase in rate and eligibility for a $25 CNB gift card. The minimum opening deposit on
these two CDs was $5,000. At the same time, the bank increased the rate on an existing 18-month
deposit product to give a wider choice of maturities to our customers. These CDs, even though no
deposits could be made to them, along with the 36-month CD were very popular with customers due to
the special features and attractive rates. Two of the three featured CDs are still being offered
but at lower rates and without the special features. The 8-month CD was discontinued in December
2008. The 36-month CD continues to prevail and be the certificate of choice for bank customers.
32
Table of Contents
Table 13 is a summary of the maturity distribution of certificates of deposit in amounts of
$100,000 or more as of December 31, 2009:
TABLE 13. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
Amount | Percent | |||||||
In thousands | ||||||||
Three months or less |
$ | 7,420 | 10.17 | % | ||||
Three through six months |
9,500 | 13.02 | ||||||
Six through twelve months |
17,322 | 23.73 | ||||||
Over twelve months |
38,740 | 53.08 | ||||||
Total |
$ | 72,982 | 100 | % | ||||
CONTRACTUAL OBLIGATIONS
Table 14 shows the banks significant contractual obligations as of December 31, 2009:
TABLE 14. CONTRACTUAL OBLIGATIONS
Payments due by period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 year | 1-3 years | 4-5 years | 5 years | ||||||||||||||||
Purchase obligations |
$ | 3,808,777 | $ | 474,447 | $ | 967,164 | $ | 985,434 | 1,381,732 | |||||||||||
Other long-term liabilities
reflected on the registrants
balance sheet under GAAP |
||||||||||||||||||||
Supplemental retirement liability (1) |
199,642 | | 17,500 | 60,000 | 122,142 | |||||||||||||||
Pension liability |
1,869,989 | | | | 1,869,989 | |||||||||||||||
401k liability |
36,243 | 36,243 | | | | |||||||||||||||
Deferred compensation |
1,197,321 | | | | 1,197,321 | |||||||||||||||
Post retirement liability (1) |
275,480 | 58,493 | 88,077 | 57,217 | 71,693 | |||||||||||||||
Total contractual obligations |
$ | 7,387,452 | $ | 569,183 | $ | 1,072,741 | $ | 1,102,651 | $ | 4,642,877 | ||||||||||
(1) | These amounts represent the net present value of cash flow payments at December 31, 2009. |
CAPITAL RESOURCES
The bank remains well capitalized. Total shareholders equity at December 31, 2009 of $25.6
million represents 8.9% of total assets. This compares to $23.2 million or 8.2% at December 31,
2008. Included in capital at December 31, 2009, is $750,000 of unrealized gains on available for
sale securities and $1.4 million unrecognized pension costs, both net of deferred income taxes. At
December 31, 2008, the bank had unrealized losses on available for sale securities of $194,000 and
$1.7 million unrecognized pension costs, both net of deferred income taxes. Such unrealized gains
and losses on the investment portfolio 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 Federal Reserves 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.
33
Table of Contents
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, | ||||||||
2009 | 2008 | |||||||
Return on average assets |
.75 | % | .96 | % | ||||
Return on average equity |
8.88 | 11.66 | ||||||
Dividend payout ratio |
32.04 | 31.48 | ||||||
Average equity to average assets ratio |
8.49 | 8.21 |
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of the banks 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 banks 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, 2009, these sources totaled $72.3 million, or
25.0% of total assets. In addition, liquidity may be generated through loan repayments, over $4.5
million of available borrowing arrangements with correspondent banks and available collateralized
borrowings from the Federal Home Loan Bank. At December 31, 2009, management considered the banks
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 $2.3 million of cash from operations in 2009, which compares to $5.3 million in 2008 and
$3.0 million in 2007. The bank generated cash through net financing activities in 2009 of $4.4
million which compares to $12.0 million used in financing activities in 2008 and $11.6 million
cash being generated through net financing activities in 2007. Net cash used in investing
activities of $6.4 million in 2009 compares to net cash provided by investing activities totaling
$3.7 million in 2008 and net cash used in investing activities of $14.2 million in 2007. 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 banks 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 banks sensitivity of earnings to changes in interest
rates within the banks policy guidelines are monitored by using a combination of off-balance sheet
and on-balance sheet financial instruments. The banks Chief Executive Officer, Chief 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 banks policy is intended to ensure that the
bank measures a range of rate scenarios and patterns of rate movements that are reasonably
possible.
One common interest rate risk measure is the gap, or the difference between rate sensitive
assets and rate sensitive liabilities. A positive gap occurs when rate-sensitive assets exceed
rate-sensitive liabilities. This tends to be beneficial in rising interest rate environments. A
negative gap refers to the opposite situation and tends to be beneficial in declining interest rate
environments. However, the gap does not consider future changes in the volume of rate sensitive
assets or liabilities or the possibility that interest rates of various products may not change by
the same amount or at the same time. In addition, certain assumptions must be made in constructing
the gap. For example, the bank considers administered rate deposits, such as savings accounts, to
be immediately rate sensitive although their actual rate sensitivity could differ from this
assumption. The bank monitors its gap on a quarterly basis.
34
Table of Contents
TABLE 16. INTEREST SENSITIVITY ANALYSIS
December 31, 2009 | ||||||||||||||||||||||||||||||||||
Interest Sensitivity Period | ||||||||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||||
In thousands | ||||||||||||||||||||||||||||||||||
Rate sensitive assets |
||||||||||||||||||||||||||||||||||
Loans, net of unearned interest |
$ | 94,705 | $ | 21,956 | $ | 22,187 | $ | 14,568 | $ | 15,083 | $ | 26,210 | 194,707 | $ | 191,451 | |||||||||||||||||||
Average interest rate |
6.76 | % | 7.61 | % | 7.76 | % | 7.93 | % | 6.58 | % | 5.71 | % | 7.06 | % | ||||||||||||||||||||
Securities |
18,215 | 5,132 | 5,289 | 4,493 | 4,491 | 34,653 | 72,273 | 72,273 | ||||||||||||||||||||||||||
Average interest rate |
0.55 | % | 1.28 | % | 1.93 | % | 2.35 | % | 2.75 | % | 4.25 | % | 2.19 | % | ||||||||||||||||||||
Total interest sensitive assets |
$ | 112,920 | $ | 27,088 | $ | 27,476 | $ | 19,061 | $ | 19,574 | $ | 60,863 | $ | 266,980 | ||||||||||||||||||||
Interest sensitive liabilities |
||||||||||||||||||||||||||||||||||
Non-interest-bearing deposits |
$ | 4,338 | $ | 4,338 | $ | 4,338 | $ | 4,338 | $ | 4,338 | $ | 21,692 | 43,382 | $ | 43,382 | |||||||||||||||||||
Average interest rate |
| % | | % | | % | | % | | % | | % | | % | ||||||||||||||||||||
Savings and interest-bearing checking |
6,049 | 6,049 | 6,049 | 6,049 | 6,049 | 30,245 | 60,490 | 60,490 | ||||||||||||||||||||||||||
Average interest rate |
0.12 | % | 0.12 | % | 0.12 | % | 0.12 | % | 0.12 | % | 0.12 | % | 0.12 | % | ||||||||||||||||||||
Time deposits |
63,331 | 48,548 | 25,122 | 5,263 | 6,156 | | 148,420 | 157,634 | ||||||||||||||||||||||||||
Average interest rate |
0.93 | % | 1.25 | % | 1.55 | % | 2.05 | % | 2.40 | % | | % | 1.48 | % | ||||||||||||||||||||
Total interest sensitive liabilities |
$ | 73,718 | $ | 58,935 | $ | 35,509 | $ | 15,650 | $ | 16,543 | $ | 51,937 | $ | 252,292 | ||||||||||||||||||||
GAP |
$ | 39,202 | $ | (31,847 | ) | $ | (8,033 | ) | $ | 3,411 | $ | 3,031 | $ | 8,926 | ||||||||||||||||||||
Cumulative GAP |
$ | 39,202 | $ | 7,355 | $ | (678 | ) | $ | 2,733 | $ | 5,764 | $ | 14,690 | |||||||||||||||||||||
GAP to sensitive assets ratio |
14.68 | % | (11.93) | % | (3.01) | % | 1.28 | % | 1.14 | % | 3.34 | % | ||||||||||||||||||||||
Cumulative GAP to sensitive
assets ratio |
14.68 | % | 2.75 | % | (0.26) | % | 1.02 | % | 2.16 | % | 5.50 | % | ||||||||||||||||||||||
GAP to total assets ratio |
13.54 | % | (11.00) | % | (2.77) | % | 1.18 | % | 1.05 | % | 3.08 | % | ||||||||||||||||||||||
Cumulative GAP to total assets ratio |
13.54 | % | 2.54 | % | (0.23) | % | 0.95 | % | 2.00 | % | 5.08 | % |
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 banks 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
banks assets and liabilities change more frequently than those of non-banking entities. The
banks policies attempt to structure its mix of financial instruments and manage its interest rate
sensitivity in order to minimize the potential adverse effects of market forces on its net interest
income, earnings and capital.
A comparison of the carrying value of the banks financial instruments to their estimated fair
value as of December 31, 2009 and December 31, 2008, is disclosed in Note 22 of the Notes to the
Consolidated Financial Statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Interest Rate Sensitivity in Item 6 hereof.
35
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 |
||||||||
37 | ||||||||
38 | ||||||||
39 | ||||||||
40 | ||||||||
41 | ||||||||
42 | ||||||||
43 | ||||||||
EX-21 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
36
Table of Contents
MANAGEMENTS REPORT ON INTERNAL CONTROL
To Our Shareholders
CNB Financial Services, Inc.
Berkeley Springs, West Virginia
CNB Financial Services, Inc.
Berkeley Springs, West Virginia
The management of CNB Financial Services, Inc. (CNB) and its wholly-owned subsidiary has the
responsibility for establishing and maintaining an adequate internal control structure and
procedures for financial reporting. Management maintains a comprehensive system of internal
control to provide reasonable assurance of the proper authorization of transactions, the
safeguarding of assets and the reliability of the financial records. The system of internal
control provides for appropriate division of responsibility and is documented by written policies
and procedures that are communicated to employees. CNB and its wholly-owned subsidiary maintain an
internal auditing program, under the supervision of the Audit Committee of the Board of Directors,
which independently assesses the effectiveness of the system of internal control and recommends
possible improvements.
Under the supervision and with the participation of the Corporations management, including
its Chief Executive Officer and Chief Financial Officer, the Corporation has evaluated the
effectiveness of its internal control over financial reporting as of December 31, 2009, using the
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based upon this evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that the Corporations disclosure controls and procedures are
adequate and effective to ensure that material information relating to the Corporation and its
consolidated subsidiaries is made known to them by others within those entities. The Chief
Executive Officer and the Chief Financial Officer believe that at December 31, 2009, CNB Financial
Services, Inc. and its wholly-owned subsidiary maintained an effective system of internal control
over financial reporting.
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.
/s/ Thomas F. Rokisky
|
/s/ Rebecca S. Stotler | ||
Thomas F. Rokisky President and Chief Executive Officer |
Rebecca S. Stotler Sr. Vice President and Chief Financial Officer |
||
February 25, 2010 |
37
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
CNB Financial Services, Inc.
Berkeley Springs, West Virginia
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, 2009 and 2008, 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, 2009. 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. CNB Financial Services, Inc. is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. 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, 2009 and 2008, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America.
/s/ SMITH ELLIOTT KEARNS & COMPANY, LLC | ||||
Hagerstown, Maryland
March 5, 2010
March 5, 2010
38
Table of Contents
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2009 AND 2008
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2009 AND 2008
2009 | 2008 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 5,068,118 | $ | 4,770,724 | ||||
Certificates of deposit |
1,989,017 | | ||||||
Securities available for sale
(at approximate market value) |
72,272,665 | 62,604,735 | ||||||
Federal Home Loan Bank stock, at cost |
2,321,300 | 2,321,300 | ||||||
Loans and leases receivable, net |
194,707,226 | 200,752,202 | ||||||
Accrued interest receivable |
1,334,704 | 1,272,742 | ||||||
Foreclosed real estate (held for sale), net |
386,500 | 253,300 | ||||||
Premises and equipment, net |
5,554,927 | 5,842,368 | ||||||
Deferred income taxes |
1,753,665 | 1,889,746 | ||||||
Cash surrender value of life insurance |
1,601,720 | 1,617,055 | ||||||
Intangible assets |
162,628 | 274,145 | ||||||
Other assets |
2,345,418 | 658,665 | ||||||
TOTAL ASSETS |
$ | 289,497,888 | $ | 282,256,982 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Demand |
$ | 43,381,922 | $ | 39,469,377 | ||||
Interest-bearing demand |
35,564,826 | 35,554,781 | ||||||
Savings |
24,925,247 | 23,476,255 | ||||||
Time, $100,000 and over |
72,982,196 | 55,269,424 | ||||||
Other time |
75,437,663 | 74,125,229 | ||||||
$ | 252,291,854 | $ | 227,895,066 | |||||
Accrued interest payable |
1,170,417 | 1,126,219 | ||||||
FHLB borrowings |
6,400,000 | 25,445,000 | ||||||
Accrued expenses and other liabilities |
4,005,322 | 4,572,907 | ||||||
TOTAL LIABILITIES |
$ | 263,867,593 | $ | 259,039,192 | ||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, $1 par value; 5,000,000 shares
authorized; 458,048 shares issued at December 31, 2009 and
2008 and 443,648 and 449,151 outstanding at December 31, 2009
and 2008, respectively |
$ | 458,048 | $ | 458,048 | ||||
Capital surplus |
4,163,592 | 4,163,592 | ||||||
Retained earnings |
22,476,562 | 21,015,652 | ||||||
Accumulated other comprehensive income (loss) |
(642,839 | ) | (1,848,990 | ) | ||||
$ | 26,455,363 | $ | 23,788,302 | |||||
Less treasury stock, at cost, 14,400 shares in 2009 and 8,897
shares in 2008 |
(825,068 | ) | (570,512 | ) | ||||
TOTAL SHAREHOLDERS EQUITY |
$ | 25,630,295 | $ | 23,217,790 | ||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 289,497,888 | $ | 282,256,982 | ||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
39
Table of Contents
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009 | 2008 | 2007 | ||||||||||
INTEREST INCOME |
||||||||||||
Interest and fees on loans |
$ | 12,846,225 | $ | 13,971,297 | $ | 14,585,845 | ||||||
Interest and dividends on securities: |
||||||||||||
U.S. Government agencies and
corporations |
247,780 | 660,426 | 1,372,612 | |||||||||
Corporate bonds |
361,768 | 346,400 | | |||||||||
Mortgage backed securities |
1,362,588 | 1,409,912 | 708,398 | |||||||||
State and political subdivisions |
798,067 | 520,511 | 398,255 | |||||||||
Interest on certificates of deposit |
18,484 | | | |||||||||
Dividend income from FHLB stock |
| 84,316 | 93,883 | |||||||||
Interest on FHLB deposits |
35 | 2,766 | 5,489 | |||||||||
Interest on federal funds sold and deposits |
7,002 | | 36,921 | |||||||||
$ | 15,641,949 | $ | 16,995,628 | $ | 17,201,403 | |||||||
INTEREST EXPENSE |
||||||||||||
Interest on interest bearing demand,
savings and time deposits |
$ | 5,106,052 | $ | 5,539,747 | $ | 6,809,967 | ||||||
Interest on FHLB borrowings |
305,530 | 767,619 | 915,241 | |||||||||
$ | 5,411,582 | $ | 6,307,366 | $ | 7,725,208 | |||||||
NET INTEREST INCOME |
$ | 10,230,367 | $ | 10,688,262 | $ | 9,476,195 | ||||||
PROVISION FOR LOAN LOSSES |
1,852,726 | 940,500 | 168,999 | |||||||||
NET INTEREST INCOME AFTER |
||||||||||||
PROVISION FOR LOAN LOSSES |
$ | 8,377,641 | $ | 9,747,762 | $ | 9,307,196 | ||||||
NONINTEREST INCOME |
||||||||||||
Service charges on deposit accounts |
$ | 1,321,910 | $ | 1,390,288 | $ | 1,389,868 | ||||||
Other service charges and fees |
605,545 | 577,337 | 541,753 | |||||||||
Trust fee income |
197,232 | 231,660 | 242,831 | |||||||||
Other operating income |
135,030 | 68,315 | 129,322 | |||||||||
Net gain on sales of loans |
36,125 | 51,782 | 86,871 | |||||||||
Net gain (loss) on sales and calls of securities |
35,444 | 119,550 | (2,688 | ) | ||||||||
Other than temporary impairment on investment securities |
| (86,468 | ) | | ||||||||
Net gain (loss) on sale of other real estate owned |
(148,921 | ) | (69,264 | ) | | |||||||
Net gain (loss) on disposal of premises, equipment and
software |
(7,575 | ) | (49,212 | ) | 225 | |||||||
Net gain (loss) on sale of repossessed assets |
(11,600 | ) | | | ||||||||
Income from title company |
8,262 | 7,030 | 12,023 | |||||||||
$ | 2,171,452 | $ | 2,241,018 | $ | 2,400,205 | |||||||
NONINTEREST EXPENSES |
||||||||||||
Salaries |
$ | 2,714,069 | $ | 2,883,534 | $ | 2,928,925 | ||||||
Employee benefits |
1,148,288 | 1,277,780 | 1,241,633 | |||||||||
Occupancy of premises |
492,600 | 504,608 | 521,962 | |||||||||
Furniture and equipment expense |
576,456 | 779,423 | 784,588 | |||||||||
Other operating expenses |
2,902,331 | 2,520,944 | 2,535,246 | |||||||||
$ | 7,833,744 | $ | 7,966,289 | $ | 8,012,354 | |||||||
INCOME BEFORE INCOME TAXES |
$ | 2,715,349 | $ | 4,022,491 | $ | 3,695,047 | ||||||
PROVISION FOR INCOME TAXES |
565,618 | 1,307,280 | 1,190,791 | |||||||||
NET INCOME |
$ | 2,149,731 | $ | 2,715,211 | $ | 2,504,256 | ||||||
BASIC EARNINGS PER SHARE |
$ | 4.82 | $ | 6.01 | $ | 5.48 | ||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
40
Table of Contents
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
Accumulated | ||||||||||||||||||||||||
Other | Total | |||||||||||||||||||||||
Common | Treasury | Capital | Retained | Comprehensive | Shareholders | |||||||||||||||||||
Stock | Stock | Surplus | Earnings | Income (Loss) | Equity | |||||||||||||||||||
BALANCE, DECEMBER 31, 2006 |
$ | 458,048 | $ | | $ | 4,163,592 | $ | 17,421,402 | $ | (1,720,780 | ) | $ | 20,322,262 | |||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income for 2007 |
| | | 2,504,256 | | 2,504,256 | ||||||||||||||||||
Change in unrealized gains
(losses) on securities available
for sale (net of tax of $395,359) |
| | | | 645,060 | 645,060 | ||||||||||||||||||
Change in unfunded pension liability
( net of tax of $200,979) |
| | | | 327,914 | 327,914 | ||||||||||||||||||
Total Comprehensive Income |
3,477,230 | |||||||||||||||||||||||
Acquisition of treasury stock, at cost,
3,099 shares |
| (207,633 | ) | | | | (207,633 | ) | ||||||||||||||||
Cash dividends ($1.69 per share) |
| | | (770,414 | ) | | (770,414 | ) | ||||||||||||||||
BALANCE, DECEMBER 31, 2007 |
$ | 458,048 | $ | (207,633 | ) | $ | 4,163,592 | $ | 19,155,244 | $ | (747,806 | ) | $ | 22,821,445 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income for 2008 |
| | | 2,715,211 | | 2,715,211 | ||||||||||||||||||
Change in unrealized gains
(losses) on securities available
for sale (net of tax of $112,510) |
| | | | (183,569 | ) | (183,569 | ) | ||||||||||||||||
Change in unfunded pension liability
( net of tax of $562,408) |
(917,615 | ) | (917,615 | ) | ||||||||||||||||||||
Total Comprehensive Income |
1,614,027 | |||||||||||||||||||||||
Acquisition of treasury stock, at cost,
5,798 shares |
| (362,879 | ) | | | | (362,879 | ) | ||||||||||||||||
Cash dividends ($1.90 per share) |
| | | (854,803 | ) | | (854,803 | ) | ||||||||||||||||
BALANCE, DECEMBER 31, 2008 |
$ | 458,048 | $ | (570,512 | ) | $ | 4,163,592 | $ | 21,015,652 | $ | (1,848,990 | ) | $ | 23,217,790 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income for 2009 |
| | | 2,149,731 | | 2,149,731 | ||||||||||||||||||
Change in unrealized gains
(losses) on securities available
for sale (net of tax of $578,321) |
| | | | 943,577 | 943,577 | ||||||||||||||||||
Change in unfunded pension liability
( net of tax of $160,932) |
262,574 | 262,574 | ||||||||||||||||||||||
Total Comprehensive Income |
3,355,882 | |||||||||||||||||||||||
Acquisition of treasury stock, at cost,
5,503 shares |
| (254,556 | ) | | | | (254,556 | ) | ||||||||||||||||
Cash dividends ($1.55 per share) |
| | | (688,821 | ) | | (688,821 | ) | ||||||||||||||||
BALANCE, DECEMBER 31, 2009 |
$ | 458,048 | $ | (825,068 | ) | $ | 4,163,592 | $ | 22,476,562 | $ | (642,839 | ) | $ | 25,630,295 | ||||||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
41
Table of Contents
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
Net income |
$ | 2,149,731 | $ | 2,715,211 | $ | 2,504,256 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization on premises, equipment and
software |
505,206 | 547,736 | 579,761 | |||||||||
Amortization of intangible assets |
111,517 | 111,516 | 111,517 | |||||||||
Provision for loan losses |
1,852,726 | 940,500 | 168,999 | |||||||||
Deferred income taxes |
(603,173 | ) | (286,984 | ) | (42,015 | ) | ||||||
Net (gain) loss on sales and calls of securities |
(35,444 | ) | (119,550 | ) | 2,688 | |||||||
Other than temporary impairment on investment securities |
| 86,468 | | |||||||||
Loss on sale of real estate owned |
148,921 | 69,264 | | |||||||||
Deferred gains on sale of real estate owned |
(26,514 | ) | | | ||||||||
(Gain) loss on disposal of premises, equipment and software |
7,575 | 49,212 | (225 | ) | ||||||||
Net (gain) on loans sold |
(36,125 | ) | (51,782 | ) | (86,871 | ) | ||||||
Loans originated for sale |
(7,776,218 | ) | (4,239,250 | ) | (5,314,950 | ) | ||||||
Proceeds from loans sold |
7,812,168 | 4,291,032 | 5,401,821 | |||||||||
(Gain) on sale of stock |
| | (59,369 | ) | ||||||||
(Increase) decrease in accrued interest receivable |
(61,962 | ) | 134,062 | (52,763 | ) | |||||||
(Increase) decrease in other assets |
(1,712,600 | ) | 299,867 | (86,477 | ) | |||||||
Increase (decrease) in accrued interest payable |
44,198 | (154,947 | ) | 209,176 | ||||||||
(Increase) in cash surrender value on life insurance in excess
of premiums paid |
(123,641 | ) | (67,528 | ) | (38,138 | ) | ||||||
Increase (decrease) in accrued expenses and other liabilities |
(144,079 | ) | 924,764 | (394,537 | ) | |||||||
Amortization of deferred loan (fees) cost |
172,404 | 71,137 | 82,770 | |||||||||
Amortization (accretion) of premium and discount on investments |
52,012 | 12,375 | 13,254 | |||||||||
Amortization (accretion) of premium and discount on
certificates of deposit |
(380 | ) | | | ||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
$ | 2,336,322 | $ | 5,333,103 | $ | 2,998,897 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||||
Net decrease in loans |
$ | 3,073,475 | $ | 229,039 | $ | 1,252,722 | ||||||
Proceeds from sales of securities |
3,809,934 | 2,803,399 | 3,796,972 | |||||||||
Proceeds from maturities, repayments and calls of securities |
18,319,500 | 35,569,701 | 4,250,091 | |||||||||
Proceeds from maturities of certificates of deposit |
4,660,000 | | | |||||||||
Purchases of securities |
(30,298,214 | ) | (35,230,720 | ) | (22,177,257 | ) | ||||||
Purchases of certificates of deposit |
(6,648,620 | ) | | | ||||||||
Purchases of Federal Home Loan Bank stock |
| (1,697,000 | ) | (2,598,500 | ) | |||||||
Redemptions of Federal Home Loan Bank stock |
| 1,999,300 | 1,727,900 | |||||||||
Redemptions of Federal Reserve Bank stock |
| | | |||||||||
Purchases of premises, equipment and software |
(194,502 | ) | (400,745 | ) | (408,326 | ) | ||||||
Proceeds from sales of premises and equipment |
| | 1,270 | |||||||||
Proceeds from sale of real estate owned |
725,430 | 471,282 | | |||||||||
Proceeds from life insurance death benefits |
194,184 | | | |||||||||
Costs to acquire foreclosed real estate |
(34,491 | ) | (17,034 | ) | (5,188 | ) | ||||||
Proceeds from sale of stock |
| | 59,369 | |||||||||
Investment in and/or return of capital from title company |
1,173 | 70 | (123 | ) | ||||||||
Net decrease in federal funds sold |
| | 9,000 | |||||||||
Premiums paid on life insurance |
(55,208 | ) | (58,434 | ) | (58,434 | ) | ||||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
$ | (6,447,339 | ) | $ | 3,668,858 | $ | (14,150,504 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||||
Net increase (decrease) in demand and savings deposits |
$ | 5,371,582 | $ | (2,931,661 | ) | $ | (21,417,803 | ) | ||||
Net increase in time deposits |
19,025,206 | 4,182,013 | 14,979,777 | |||||||||
Net increase (decrease) in FHLB borrowings |
(19,045,000 | ) | (12,055,000 | ) | 19,000,000 | |||||||
Purchase of treasury stock |
(254,556 | ) | (362,879 | ) | (207,633 | ) | ||||||
Cash dividends paid |
(688,821 | ) | (854,803 | ) | (770,414 | ) | ||||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
$ | 4,408,411 | $ | (12,022,330 | ) | $ | 11,583,927 | |||||
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS |
$ | 297,394 | $ | (3,020,369 | ) | $ | 432,320 | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
4,770,724 | 7,791,093 | 7,358,773 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | 5,068,118 | $ | 4,770,724 | $ | 7,791,093 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||||||
Cash paid during the year: |
||||||||||||
Interest paid on deposits and borrowed funds |
$ | 5,367,384 | $ | 6,462,313 | $ | 7,516,032 | ||||||
Income taxes |
$ | 1,217,700 | $ | 1,577,750 | $ | 1,165,500 | ||||||
Net transfer to foreclosed real estate, held for sale
from loans receivable |
$ | 1,395,474 | $ | 767,341 | $ | 145,657 | ||||||
Unrealized gain (loss) on investment securities
available for sale (net of tax) |
$ | 943,578 | $ | (183,569 | ) | $ | 645,060 |
The Notes to Consolidated Financial Statements are an integral part of these statements.
42
Table of Contents
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 on March 20, 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 operated as a national banking association until October 16, 2006 at
which time it became a West Virginia state chartered bank. Concurrent with the charter
change, the bank began operating under the legal name of CNB Bank, Inc.
CNB Bank, Inc. (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, three locations in Berkeley County, West Virginia and one 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 CNBs membership making
each members share 33%. On August 31, 2009, Morgan County Title Insurance Agency, LLC was
dissolved and the final distribution was made during the fourth quarter 2009.
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, CNB Bank, Inc. 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. CNBs most significant estimates are the allowance for
loan losses, depreciable lives of fixed assets and actuarial and other assumptions used in
determining pension expense and liability, liability for postretirement benefits, liability
for deferred compensation and liability for current and deferred taxes.
Securities and Mortgage-Backed Securities:
Investments in equity securities that have readily determinable fair values and 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.
43
Table of Contents
CNB classifies all investments as available for sale, except for stock in the 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. The Financial Accounting Standards Board (FASB) issued guidance
now codified as ASC Topic 310, Accounting by Creditors for Impairment of a Loan, which
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. At December 31, 2009, there are
eleven loans considered to be impaired with an unguaranteed balance of $904,000. At
December 31, 2008, there are ten loans considered to be impaired with an unguaranteed
balance of $1.2 million. See Note 4: Loans and Leases Receivable in the Notes to
Consolidated Financial Statements for additional discussion.
Allowance for Loan Losses:
The allowance for loan losses is maintained at a level which, in managements judgment, is
adequate to absorb credit losses inherent in the loan portfolio. The amount of the
allowance is based on managements 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 loan losses on 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 are charged or credited to the provision for loan
losses. Because of uncertainties inherent in the estimation process, managements 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 secondary market investors and
other commercial banks. Beginning in January 2007, all fixed rate residential mortgage
loans were sold to secondary market investors. At December 31, 2009, the bank had no loans
held for sale.
Intangible Assets:
Intangible assets represent the $780,616 premium from the purchase of core deposit
relationships as part of the Hancock branch acquisition. The core deposit intangible
relationships from the Hancock branch acquisition are being amortized over seven years on a
straight line basis.
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 CNBs loan servicing portfolio allows for all loans
to be defined by one risk category. As of December 31, 2009 and 2008, there were no
mortgage servicing assets or liabilities. See Note 5: Loan Servicing in the Notes to
Consolidated Financial Statements for additional discussion.
44
Table of Contents
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 managements judgment 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 unless management determines the
loan should remain on nonaccrual status.
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.
When tax returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject to
uncertainty about the merits of the position taken or the amount of the position that would
be ultimately sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence, management believes
it is more likely than not that the position will be sustained upon examination, including
the resolution of appeals or litigation processes, if any. Tax positions taken are not
offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of tax
benefit that is more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with tax positions
taken that exceeds the amount measured as described above would be reflected as a liability
for unrecognized tax benefits in the accompanying balance sheet along with any associated
interest and penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits would be classified as
additional income taxes in the statement of income.
At December 31, 2009 and 2008, there was no liability for unrecognized tax benefits.
Pension Plan:
Pension plan costs are funded by annual contributions as required by applicable
regulations.
45
Table of Contents
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. Included in Cash and Due From Banks are interest
bearing deposits with FHLB in the amount of $46,834 and $80,115 at December 31, 2009 and
2008, respectively and deposits with the Federal Reserve Bank of Richmond in the amount of
$2,507,147 and $0 at December 31, 2009 and 2008, respectively.
Earnings and Dividends Per Share:
Basic earnings and dividends per share are computed on the basis of the weighted average
number of 446,029 shares of common stock outstanding in 2009, 451,686 shares of common
stock outstanding in 2008 and 457,274 shares of common stock outstanding in 2007.
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.
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. At December 31, 2009 and 2008, CNB owned
properties acquired through loan foreclosure with a carrying value of $386,500 and
$253,300, respectively.
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 the cash
basis which is not significantly different from amounts that would have been recognized on
the accrual basis.
Advertising Costs:
The Company expenses advertising costs in the period in which they are incurred.
Advertising costs amounted to $124,751, $185,769 and $205,444 for the years ended December
31, 2009, 2008 and 2007, 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 pension
liability adjustment.
46
Table of Contents
The components of the change in other comprehensive income were as follows:
2009 | 2008 | 2007 | ||||||||||
Additional pension liability adjustment
arising during the year |
$ | 423,506 | $ | (1,480,023 | ) | $ | 528,893 | |||||
Unrealized holding gains (losses) arising during
the year on securities available for sale and
certificates of deposit |
1,557,342 | (176,529 | ) | 1,037,731 | ||||||||
Reclassification adjustment for (gains) losses
realized in net income on sale of securities |
(35,444 | ) | (119,550 | ) | 2,688 | |||||||
Net change in accumulated other comprehensive
income before taxes |
$ | 1,945,404 | $ | (1,776,102 | ) | $ | 1,569,312 | |||||
Tax effect |
(739,253 | ) | 674,918 | (596,338 | ) | |||||||
Net change |
$ | 1,206,151 | $ | (1,101,184 | ) | $ | 972,974 | |||||
Recently Issued Accounting Standards
FASB Accounting Standards Codification (ASC) Topic 105 Generally Accepted Accounting
Principles (Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162)
(ASC 105). This accounting guidance was originally issued in June 2009 and is now included
in ASC 105. The guidance identifies the FASB Accounting Standards Codification
(Codification) as the single source of authoritative U.S. Generally Accepted Accounting
Principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. The
Codification reorganizes all previous GAAP pronouncements into roughly 90 accounting topics
and displays all topics using a consistent structure. All existing standards that were used
to create the Codification have been superseded, replacing the previous references to
specific Statements of Financial Accounting Standards (SFAS) with numbers used in the
Codifications structural organization. The guidance is effective for interim and annual
periods ending after September 15, 2009. After September 15, only one level of
authoritative GAAP exists, other than guidance issued by the Securities and Exchange
Commission (SEC). All other accounting literature excluded from the Codification is
considered non-authoritative. The adoption of the Codification does not have a material
impact on CNBs consolidated financial statements.
ASC Topic 855 Subsequent Events (Statement No. 165, Subsequent Events) (ASC 855). This
accounting guidance was originally issued in May 2009 and is now included in ASC 855. The
guidance establishes general standards of accounting for and disclosure of subsequent
events. Subsequent events are events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The guidance is effective
for interim or annual periods ending after June 15, 2009. The adoption of this guidance was
not material to CNBs consolidated financial statements.
ASC Topic 860 Transfers and Servicing (Statement No. 166, Accounting for Transfers of
Financial Assets an amendment of FASB Statement No. 140) (ASC 860). This accounting
guidance was originally issued in June 2009 and is now included in ASC 860. The guidance
removes the concept of a qualifying special purpose entity and changes the requirements for
derecognizing financial assets. Many types of transferred financial assets that would have
been derecognized previously are no longer eligible for derecognition. The guidance is
effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2009, and early adoption is prohibited. The guidance applies
prospectively to transfers of financial assets occurring on or after the effective date.
The guidance will impact structuring of securitizations and other transfers of financial
assets in order to meet the amended sale treatment criteria.
ASC Topic 810 Consolidation (Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51) (ASC 810). This accounting
guidance was originally issued in December 2007 and is now included in ASC 810. The
guidance requires that noncontrolling interests in subsidiaries be initially measured at
fair value and classified as a separate component of equity. The guidance is effective for
fiscal years beginning on or after December 15, 2008. The adoption of this guidance did not
have a material impact on CNBs consolidated financial statements.
47
Table of Contents
ASC Topic 810 Consolidation (Statement No. 167, Amendments to FASB Interpretation No.
46R) (ASC 810) This accounting guidance was originally issued in June 2009 and is now
included in ASC 810. The guidance amends the consolidation guidance applicable for variable
interest entities (VIE). The guidance is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2009, and early adoption is
prohibited. The adoption of this guidance did not have a material impact on CNBs
consolidated financial statements.
ASC Topic 820 Fair Value Measurements and Disclosures (Staff Position (FSP) FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly) (ASC 820).
This accounting guidance was originally issued in April 2009 and is now included in ASC
820. The guidance reaffirms the exit price fair value measurement concept and also provides
additional guidance for estimating fair value when the volume and level of activity for the
asset or liability have significantly decreased. The guidance was effective for interim
reporting periods ending after June 15, 2009. The adoption of this guidance did not have a
material impact on CNBs consolidated financial statements.
ASC Topic 825 Financial Instruments (FSP FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments) (ASC 825). This accounting guidance was
originally issued in April 2009 and is now included in ASC 825. The guidance requires
disclosures about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. CNB adopted this topic
in the second quarter of 2009.
ASC Topic 320 Investments Debt and Equity Securities (FSP FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments) (ASC 320). This
accounting guidance was originally issued in April 2009 and is now included in ASC 320. The
guidance amends the previous other-than-temporary impairment (OTTI) guidance for debt
securities and included additional presentation and disclosure requirements for both debt
and equity securities. The guidance is effective for interim reporting periods ending after
June 15, 2009. The adoption of this guidance requires an adjustment to retained earnings
and other comprehensive income (OCI) in the period of adoption to reclassify non-credit
related impairment to OCI for securities that the Company does not intend to sell (and will
not more likely than not be required to sell). CNB adopted this topic in the second quarter
2009, however, the adoption had no material impact on its consolidated financial
statements.
ASC Topic 805 Business Combinations (Statement No. 141 (Revised 2008), Business
Combinations) (ASC 805). This accounting guidance was originally issued in December 2007
and is now included in ASC 805. The guidance requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited exceptions.
The guidance requires prospective application for business combinations consummated in
fiscal years beginning on or after December 15, 2008. The adoption of this guidance did not
have a material impact on CNBs consolidated financial statements.
ASC Topic 944 Financial Services Insurance (Statement No. 163, Accounting for
Financial Guarantee Insurance Contracts an interpretation of FASB Statement No. 60) (ASC
944). This accounting guidance was originally issued in May 2008 and is now included in ASC
944. This guidance requires that an insurance enterprise recognize a claim liability prior
to an event of default (insured event) when there is evidence that credit deterioration has
occurred in an insured financial obligation. The guidance also clarifies the recognition
and measurement criteria to be used to account for premium revenue and claim liabilities in
financial guarantee insurance contracts. The guidance also requires expanded disclosures
about financial guarantee insurance contracts. The guidance is effective for financial
statements issued for fiscal years and interim periods beginning after December 15, 2008.
The adoption of this guidance did not have a material impact on CNBs consolidated
financial statements.
ASC Topic 715 Compensation Retirement Benefits (FSP FAS 132R-1, Employers
Disclosures about Postretirement Benefit Plan Assets) (ASC 715). This accounting guidance
was originally issued in December 2008 and is now included in ASC 715. The guidance
requires additional disclosures about plan assets in an employers defined benefit pension
and other postretirement plans. The required disclosures have been included in Note 11.
48
Table of Contents
Accounting Standards Update (ASU) 2010-6 Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements. The ASU amends Subtopic 820-10
with new disclosure requirements and clarification of existing disclosure requirements. New
disclosures required include the amount of significant transfers in and out of levels 1 and
2 fair value measurements and the reasons for the transfers. In addition, the
reconciliation for level 3 activity will be required on a gross rather than net basis. The
ASU provides additional guidance related to the level of disaggregation in determining
classes of assets and liabilities and disclosures about inputs and valuation techniques.
The amendments are effective for annual or interim reporting periods beginning after
December 15, 2009, except for the requirement to provide the reconciliation for level 3
activity on a gross basis which will be effective for fiscal years beginning after December
15, 2010.
In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update No. 2009-12 (ASU 2009-12), Fair Value Measurements and Disclosures (Topic
820): Investments in Certain Entities That Calculate Net Asset Value per Share (or its
Equivalent). ASU 2009-12 provides guidance on estimating the fair value of alternative
investments. ASU 2009-12 if effective for interim and annual periods ending after December
15, 2009. CNB does not expect the adoption of ASU 2009-12 to have a material impact on its
consolidated financial statements.
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update No. 2009-15 (ASU 2009-15), Accounting for Own-Share Lending Arrangements
in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends
Subtopic 470-20 to expand accounting and reporting guidance for own-share lending
arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is
effective for fiscal years beginning on or after December 15, 2009 and interim periods
within those fiscal years for arrangements outstanding as of the beginning of those fiscal
years. CNB does not expect the adoption of ASU 2009-15 to have a material impact on its
consolidated financial statements.
In October 2009, the Securities and Exchange Commission issued Release No. 33-99072,
Internal Control over Financial Reporting in Exchange Act Periodic Reports of
Non-Accelerated Files. Release No. 33-99072 delays the requirement for non-accelerated
files to include an attestation report of their independent auditor on internal control
over financial reporting with their annual report until the fiscal year ending on or after
June 15, 2010.
NOTE 2. 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 CNBs membership making each members share 33%. On August 31,
2009, Morgan County Title Insurance Agency, LLC was dissolved and the final distribution
was made during the fourth quarter 2009. CNB accounted 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 companys financial information:
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
DECEMBER 31, 2009 AND 2008
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
DECEMBER 31, 2009 AND 2008
2009 | 2008 | |||||||
ASSETS |
||||||||
Cash |
$ | | $ | 3,474 | ||||
TOTAL ASSETS |
$ | | $ | 3,474 | ||||
MEMBERS EQUITY |
$ | | $ | 3,474 | ||||
TOTAL MEMBERS EQUITY |
$ | | $ | 3,474 | ||||
49
Table of Contents
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF INCOME
(Unaudited)
YEARS ENDED DECEMBER 31, 2009, 2008AND 2007
STATEMENTS OF INCOME
(Unaudited)
YEARS ENDED DECEMBER 31, 2009, 2008AND 2007
2009 | 2008 | 2007 | ||||||||||
INCOME |
||||||||||||
Insurance commissions |
$ | 35,688 | $ | 39,005 | $ | 65,653 | ||||||
TOTAL INCOME |
$ | 35,688 | $ | 39,005 | $ | 65,653 | ||||||
EXPENSES |
||||||||||||
Management fees |
$ | 7,665 | $ | 14,695 | $ | 26,776 | ||||||
Other expenses |
3,193 | 3,220 | 2,908 | |||||||||
TOTAL EXPENSES |
$ | 10,858 | $ | 17,915 | $ | 29,684 | ||||||
NET INCOME |
$ | 24,830 | $ | 21,090 | $ | 35,969 | ||||||
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
STATEMENTS OF CASH FLOWS
(Unaudited)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
Net income |
$ | 24,830 | $ | 21,090 | $ | 35,969 | ||||||
NET CASH PROVIDED BY OPERATING
ACTIVITIES |
$ | 24,830 | $ | 21,090 | $ | 35,969 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||||
Profit and capital distributed |
$ | (28,304 | ) | $ | (21,300 | ) | $ | (35,700 | ) | |||
NET CASH (USED IN) FINANCING ACTIVITIES |
$ | (28,304 | ) | $ | (21,300 | ) | $ | (35,700 | ) | |||
NET INCREASE IN CASH AND CASH
EQUIVALENTS |
$ | (3,474 | ) | $ | (210 | ) | $ | 269 | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
3,474 | 3,684 | 3,415 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | | $ | 3,474 | $ | 3,684 | ||||||
50
Table of Contents
NOTE 3. SECURITIES
The amortized cost and estimated market value of debt securities at December 31, 2009
and 2008 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 as of December 31 are summarized as follows:
Weighted | ||||||||||||||||||||
2009 | 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 |
$ | 864,592 | $ | 18,441 | $ | | $ | 883,033 | 3.68 | % | ||||||||||
After 1 but within 5 years |
2,006,039 | 1,077 | 17,468 | 1,989,648 | 1.60 | |||||||||||||||
After 5 but within 10 years |
5,742,908 | 29,965 | 22,737 | 5,750,136 | 3.27 | |||||||||||||||
$ | 8,613,539 | $ | 49,483 | $ | 40,205 | $ | 8,622,817 | 2.92 | % | |||||||||||
Corporate Bonds |
||||||||||||||||||||
Within one year |
$ | 252,711 | $ | | $ | 7,614 | $ | 245,097 | 6.76 | % | ||||||||||
After 1 but within 5 years |
1,490,853 | 47,318 | 7,029 | 1,531,142 | 4.84 | |||||||||||||||
After 5 but within 10 years |
2,997,344 | 57,064 | 19,138 | 3,035,270 | 5.60 | |||||||||||||||
$ | 4,740,908 | $ | 104,382 | $ | 33,781 | $ | 4,811,509 | 5.42 | % | |||||||||||
States and political subdivisions |
||||||||||||||||||||
Within one year |
$ | 2,898,507 | $ | 19,824 | $ | | $ | 2,918,331 | 1.92 | % | ||||||||||
After 1 but within 5 years |
9,567,178 | 314,547 | 357 | 9,881,368 | 2.98 | |||||||||||||||
After 5 but within 10 years |
19,656,673 | 216,197 | 139,565 | 19,733,305 | 4.20 | |||||||||||||||
$ | 32,122,358 | $ | 550,568 | $ | 139,922 | $ | 32,533,004 | 3.63 | % | |||||||||||
Mortgage backed securities: |
||||||||||||||||||||
Government issued or
guaranteed |
$ | 12,775,369 | $ | 640,601 | $ | | $ | 13,415,970 | 5.35 | % | ||||||||||
Collateralized mortgage obligations: |
||||||||||||||||||||
Government issued or
guaranteed |
$ | 11,489,702 | $ | 346,900 | $ | 21,947 | $ | 11,814,655 | 4.12 | % | ||||||||||
Privately issued |
1,321,605 | | 246,895 | 1,074,710 | 7.17 | |||||||||||||||
$ | 12,811,307 | $ | 346,900 | $ | 268,842 | $ | 12,889,365 | 4.43 | % | |||||||||||
Total securities available for sale |
$ | 71,063,481 | $ | 1,691,934 | $ | 482,750 | $ | 72,272,665 | 4.12 | % | ||||||||||
Restricted: |
||||||||||||||||||||
Federal Home Loan Bank stock |
$ | 2,321,300 | $ | | $ | | $ | 2,321,300 | | % | ||||||||||
Certificates of deposit |
$ | 1,989,000 | $ | 209 | $ | 192 | $ | 1,989,017 | 0.33 | % | ||||||||||
51
Table of Contents
Weighted | ||||||||||||||||||||
2008 | 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 |
$ | 3,714,859 | $ | 4,957 | $ | | $ | 3,719,816 | 3.90 | % | ||||||||||
After 1 but within 5 years |
1,592,342 | 368 | | 1,592,710 | 3.15 | |||||||||||||||
After 5 but within 10 years |
5,394,502 | 96,724 | | 5,491,226 | 4.56 | |||||||||||||||
$ | 10,701,703 | $ | 102,049 | $ | | $ | 10,803,752 | 4.12 | % | |||||||||||
Corporate Bonds |
||||||||||||||||||||
After 1 but within 5 years |
$ | 1,735,480 | $ | | $ | 173,968 | $ | 1,561,512 | 5.64 | % | ||||||||||
After 5 but within 10 years |
5,478,377 | | 448,115 | 5,030,262 | 5.47 | |||||||||||||||
$ | 7,213,857 | $ | | $ | 622,083 | 6,591,774 | 5.51 | % | ||||||||||||
States and political subdivisions |
||||||||||||||||||||
Within one year |
$ | 874,070 | $ | 5,303 | $ | | $ | 879,373 | 2.80 | % | ||||||||||
After 1 but within 5 years |
4,635,138 | 46,652 | 5,120 | 4,676,670 | 3.33 | |||||||||||||||
After 5 but within 10 years |
11,581,159 | 35,359 | 207,323 | 11,409,195 | 3.72 | |||||||||||||||
$ | 17,090,367 | $ | 87,314 | $ | 212,443 | $ | 16,965,238 | 3.57 | % | |||||||||||
Mortgage backed securities: |
||||||||||||||||||||
Government issued or
guaranteed |
$ | 17,278,086 | $ | 511,216 | $ | 5,937 | $ | 17,783,365 | 5.35 | % | ||||||||||
Collateralized mortgage obligations: |
||||||||||||||||||||
Government issued or
guaranteed |
$ | 8,942,326 | $ | 141,517 | $ | 41,825 | $ | 9,042,018 | 5.06 | % | ||||||||||
Privately issued |
1,691,093 | | 272,505 | 1,418,588 | 7.01 | |||||||||||||||
$ | 10,633,419 | $ | 141,517 | $ | 314,330 | $ | 10,460,606 | 5.37 | % | |||||||||||
Total securities available for sale |
$ | 62,917,432 | $ | 842,096 | $ | 1,154,793 | $ | 62,604,735 | 4.68 | % | ||||||||||
Restricted: |
||||||||||||||||||||
Federal Home Loan Bank stock |
$ | 2,321,300 | $ | | $ | | $ | 2,321,300 | 2.35 | % | ||||||||||
The carrying value of securities pledged to secure public deposits and for other purposes
as required or permitted by law totaled $24,761,434 at December 31, 2009, and $19,462,597
at December 31, 2008.
Proceeds from sales of securities available for sale (excluding maturities and calls) for
the years ended December 31, 2009, 2008 and 2007 were $3,809,934, $2,803,399 and
$3,796,972, respectively. Gross gains and (losses) of $65,346 and $(27,137) in 2009,
$55,279 and $(0) in 2008, and $5,537 and $(8,282) in 2007 were realized on the respective
sales. Gross gains (losses) of $24 and ($2,789), $64,271 and ($0) and $57 and ($0) were
realized on called securities during 2009, 2008 and 2007, respectively.
52
Table of Contents
The following tables show 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, 2009 and 2008, respectively.
2009 | ||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Description of Securities | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
Corporate bonds |
$ | 990,185 | $ | 19,138 | $ | 723,796 | $ | 14,643 | $ | 1,713,981 | $ | 33,781 | ||||||||||||
U.S. Government agencies
and corporations |
$ | 3,207,366 | $ | 40,205 | $ | | $ | | $ | 3,207,366 | $ | 40,205 | ||||||||||||
State and political
subdivisions |
8,689,560 | 124,471 | 929,785 | 15,451 | 9,619,345 | 139,922 | ||||||||||||||||||
Collateralized mortgage
obligations: |
||||||||||||||||||||||||
Government issued or
guaranteed |
1,995,305 | 19,204 | 370,595 | 2,742 | 2,365,900 | 21,946 | ||||||||||||||||||
Privately issued |
| | 1,074,651 | 246,896 | 1,074,651 | 246,896 | ||||||||||||||||||
Certificates of deposit |
499,808 | 192 | | | 499,808 | 192 | ||||||||||||||||||
Total temporarily impaired
securities |
$ | 15,382,224 | $ | 203,210 | $ | 3,098,827 | $ | 279,732 | $ | 18,481,051 | $ | 482,942 | ||||||||||||
2008 | ||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Description of Securities | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
Corporate bonds |
$ | 6,591,774 | $ | 622,083 | $ | | $ | | $ | 6,591,774 | $ | 622,083 | ||||||||||||
State and political
subdivisions |
7,296,127 | 210,761 | 217,773 | 1,682 | 7,513,900 | 212,443 | ||||||||||||||||||
Mortgage backed securities: |
||||||||||||||||||||||||
Government issued or
guaranteed |
296,216 | 271 | 492,011 | 5,666 | 788,227 | 5,937 | ||||||||||||||||||
Collateralized mortgage
obligations: |
||||||||||||||||||||||||
Government issued or
guaranteed |
1,130,704 | 9,320 | 393,802 | 32,505 | 1,524,506 | 41,825 | ||||||||||||||||||
Privately issued |
1,418,529 | 272,505 | | | 1,418,529 | 272,505 | ||||||||||||||||||
Total temporarily impaired
securities |
$ | 16,733,350 | $ | 1,114,940 | $ | 1,103,586 | $ | 39,853 | $ | 17,836,936 | $ | 1,154,793 | ||||||||||||
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, 2009, there were 44 available for sale securities that have unrealized
losses with aggregate depreciation of 2.7% from their amortized cost basis. The unrealized
losses relate principally to privately issued collateralized mortgage obligations. In
analyzing these collateralized mortgage obligations, management considers the collateral
composition, prepayment history and the overall credit worthiness of the investment. Some
of the unrealized losses relate to government agencies, municipal obligations and corporate
bonds and it is more likely than
53
Table of Contents
not that management will not be required to sell the securities before the market value has recovered. At December 31, 2009, management
analyzed the investment portfolio and determined no other-than-temporary losses were needed
at the present time. At December 31, 2008, management analyzed their portfolio noting two
collateralized mortgage obligations to be performing very poorly and the loans within the
portfolio have increased delinquencies and foreclosures. Therefore, management recorded an
other-than-temporary loss on these two collateralized mortgage obligations of $86,468, a
9.8% reduction in the book value. In accordance with generally accepted accounting
principles, all other-than-temporary losses were recognized through earnings in 2008.
There were no other-than-temporary losses recognized through other comprehensive income.
NOTE 4. LOANS AND LEASES RECEIVABLE
Major classifications of loans at December 31, 2009 and 2008 were as follows:
2009 | 2008 | |||||||
Loans: |
||||||||
Real estate |
$ | 129,509,117 | $ | 137,770,172 | ||||
Commercial real estate |
43,972,033 | 40,613,894 | ||||||
Consumer |
16,683,611 | 16,665,647 | ||||||
Commercial |
7,276,430 | 7,931,399 | ||||||
Overdrafts |
203,337 | 91,515 | ||||||
$ | 197,644,528 | $ | 203,072,627 | |||||
Leases |
585,393 | 105,219 | ||||||
$ | 198,229,921 | $ | 203,177,846 | |||||
Net deferred loan fees, costs, premiums and discounts |
380,025 | 325,742 | ||||||
Allowance for loan losses |
(3,902,720 | ) | (2,751,386 | ) | ||||
$ | 194,707,226 | $ | 200,752,202 | |||||
An analysis of the allowance for loan losses was as follows:
2009 | 2008 | 2007 | ||||||||||
Balance, beginning |
$ | 2,751,386 | $ | 2,144,461 | $ | 2,131,523 | ||||||
Provision charged to
operations |
1,852,726 | 940,500 | 168,999 | |||||||||
Recoveries |
116,135 | 188,860 | 183,281 | |||||||||
Loans charged off |
(817,527 | ) | (522,435 | ) | (339,342 | ) | ||||||
Balance, ending |
$ | 3,902,720 | $ | 2,751,386 | $ | 2,144,461 | ||||||
54
Table of Contents
The following is a summary of information pertaining to impaired loans:
December 31, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Impaired loans without a valuation allowance |
$ | | $ | | ||||
Impaired loans with a valuation allowance (1) |
935,785 | 1,227,068 | ||||||
Total impaired loans |
$ | 935,785 | $ | 1,227,068 | ||||
Valuation allowance related to impaired loans |
$ | 235,073 | $ | 383,350 |
(1) | Some of these loans have government agency guarantees reducing the banks exposure by $31,379 for December 31, 2009 and $57,611 for December 31, 2008. |
Years Ended December 31, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Average investment in impaired loans |
$ | 1,081,427 | $ | 1,318,584 | ||||
Interest income recognized on impaired loans |
$ | 56,662 | $ | 52,430 | ||||
Interest income recognized on a cash basis on
impaired loans |
$ | 56,662 | $ | 52,430 | ||||
Loans are placed on nonaccrual status at the time the loan becomes 90 days past due,
unless in managements judgment collectibility is assured. A summary of nonperforming
loans and foreclosed assets is as follows:
December 31, | ||||||||
2009 | 2008 | |||||||
Foreclosed real estate (other real estate owned) |
$ | 386,500 | $ | 253,300 | ||||
Impaired loans, not on nonaccrual |
826,658 | 130,905 | ||||||
Nonaccrual loans, impaired (1) |
109,127 | 1,096,163 | ||||||
Nonaccrual loans, not impaired |
1,456,367 | 402,520 | ||||||
Loans past due 90 days or more still accruing interest |
| | ||||||
Total non-performing assets |
$ | 2,778,652 | $ | 1,882,888 | ||||
(1) | Some of these loans have government agency guarantees reducing the banks exposure by $31,379 for December 31, 2009 and $57,611 for December 31, 2008. |
The contractual amount of interest that would have been recorded on nonaccrual and impaired
loans during 2009, 2008 and 2007 was $170,458, $111,145 and $73,023, respectively. The
amount of interest income that was recorded on nonaccrual and impaired loans during 2009,
2008 and 2007 was $114,591, $58,336 and $116,070, respectively.
The bank is not committed to lend additional funds to debtors whose loans are
nonperforming.
55
Table of Contents
NOTE 5. 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
$1,095,221 and $2,055,847 at December 31, 2009 and 2008, respectively.
Custodial balances maintained in connection with the foregoing loan servicing, and included
in demand deposits, were $22,695 and $9,251 at December 31, 2009 and 2008, respectively.
The bank did not capitalize or have any amortization of mortgage servicing rights in 2009,
2008 or 2007. There were no assets or liabilities for mortgage servicing rights at
December 31, 2009 or 2008.
NOTE 6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 were as follows:
2009 | 2008 | |||||||
Land and land improvements |
$ | 2,077,658 | $ | 2,077,658 | ||||
Banking house Main |
1,559,630 | 1,528,011 | ||||||
Banking house Valley Road branch |
552,628 | 547,936 | ||||||
Banking house Hedgesville branch |
783,368 | 783,368 | ||||||
Banking house Martinsburg branch |
697,006 | 697,006 | ||||||
Banking house Hancock branch |
239,870 | 235,589 | ||||||
Banking house Spring Mills branch |
885,697 | 885,697 | ||||||
Bank owned automobiles |
66,027 | 49,752 | ||||||
Furniture, fixtures and equipment |
2,954,057 | 2,961,545 | ||||||
$ | 9,815,941 | $ | 9,766,562 | |||||
Less accumulated depreciation |
4,261,014 | 3,924,194 | ||||||
$ | 5,554,927 | $ | 5,842,368 | |||||
Depreciation expense amounted to $433,595, $481,661 and $514,141 in 2009, 2008 and 2007,
respectively.
Computer software, net of accumulated amortization, included in the statement of financial
condition caption Other Assets amounted to $187,138 and $217,976 at December 31, 2009 and
2008, respectively. Amortization expense on computer software amounted to $71,611, $66,075
and $65,620 in 2009, 2008 and 2007, respectively.
NOTE 7. INTANGIBLE ASSETS
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 $617,988 and $506,471 at December 31, 2009 and 2008, respectively. This
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 $111,517, $111,516 and $111,517 in
2009, 2008 and 2007, respectively.
The estimated amortization expense for the next two succeeding years will be:
2010 |
$ | 111,516 | ||
2011 |
$ | 51,112 |
56
Table of Contents
NOTE 8. TIME DEPOSITS
At December 31, 2009, the scheduled maturities of time deposits are as follows:
Time Deposits | All Time | |||||||
$100,000 and over | Deposits | |||||||
2010 |
$ | 34,241,940 | $ | 63,331,289 | ||||
2011 |
23,910,310 | 48,547,818 | ||||||
2012 |
10,159,088 | 25,122,085 | ||||||
2013 |
1,843,252 | 5,263,224 | ||||||
2014 |
2,827,606 | 6,155,443 | ||||||
$ | 72,982,196 | $ | 148,419,859 | |||||
NOTE 9. FEDERAL HOME LOAN BANK BORROWINGS
December 31, | ||||||||
2009 | 2008 | |||||||
Federal Home Loan Bank advances |
$ | 6,400,000 | $ | 25,445,000 |
CNB Bank, Inc. 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, 2009, the bank has short term and long term advances with
FHLB. FHLB short term advances mature within one year and carry an interest rate of .6% at
December 31, 2009. The bank has a two year convertible select long term loan with a one
year lock out period carrying an interest rate of 1.89% at December 31, 2009. Under the
terms of a blanket collateral agreement, term advances from the FHLB are collateralized by
qualifying mortgages and U.S. Government agencies and mortgage-backed securities. In
addition, all of the banks stock in the FHLB is pledged as collateral for such debt. Term
advances available under this agreement are limited by available and qualifying collateral
and the amount of FHLB stock held by the borrower.
2009 | 2008 | |||||||
Maximum balance outstanding
at any month-end during the year |
$ | 25,200,000 | $ | 34,900,000 | ||||
Average balance for the year |
12,663,041 | 30,549,453 | ||||||
Weighted average rate for the year |
2.35 | % | 2.47 | % | ||||
Weighted average rate at year-end |
1.61 | % | 1.47 | % |
NOTE 10. UNUSED LINES OF CREDIT
The bank entered into a line of credit with SunTrust Bank for $4,500,000 for federal
fund purchases. Funds issued under this agreement are at the SunTrust Bank federal funds
rate effective at the time of borrowing. The bank had not drawn on these funds at December
31, 2009.
57
Table of Contents
NOTE 11. PENSION PLAN
The bank is a member of The Allegheny Group Retirement Plan (formerly 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.
The following table sets forth information about the banks plan:
December 31, | December 31, | October 31, | ||||||||||
2009 (2) | 2008 | 2007 | ||||||||||
Change in benefit obligation: |
||||||||||||
Benefit obligation at
beginning of year |
$ | 5,372,411 | $ | 5,014,903 | $ | 4,859,682 | ||||||
Adjustment for plan changes |
| | | |||||||||
Service cost |
236,398 | 257,310 | 247,821 | |||||||||
Interest cost |
316,247 | 333,188 | 267,244 | |||||||||
Actuarial (gain) loss |
138,183 | (11,106 | ) | (181,949 | ) | |||||||
Benefits paid |
(199,674 | ) | (221,884 | ) | (177,895 | ) | ||||||
Benefit obligation at end of
year |
$ | 5,863,565 | $ | 5,372,411 | $ | 5,014,903 | ||||||
Change in plan assets: |
||||||||||||
Fair value of plan assets at
beginning of year |
$ | 2,923,037 | $ | 4,097,489 | $ | 3,365,278 | ||||||
Actual return on plan assets |
793,121 | (1,202,568 | ) | 522,339 | ||||||||
Employer contribution |
477,092 | 250,000 | 387,767 | |||||||||
Benefits paid |
(199,674 | ) | (221,884 | ) | (177,895 | ) | ||||||
Fair value of plan assets
at end of year |
$ | 3,993,576 | $ | 2,923,037 | $ | 4,097,489 | ||||||
Funded status |
$ | (1,869,989 | ) | $ | (2,449,374 | ) | $ | (917,414 | ) | |||
Unrecognized net actuarial
(gain) loss |
2,145,217 | 2,545,932 | 1,061,955 | |||||||||
Unrecognized prior service
cost |
100,821 | 113,165 | 127,566 | |||||||||
Prepaid (accrued) benefit cost |
$ | 376,049 | $ | 209,723 | $ | 272,107 | ||||||
The accumulated benefit obligation for the defined benefit pension plan was $4,640,085 and
$4,540,456 at December 31, 2009 and December 31, 2008, respectively.
58
Table of Contents
December 31, | December 31, | October 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Components of net periodic cost: |
||||||||||||
Service cost |
$ | 236,398 | $ | 220,551 | $ | 247,821 | ||||||
Interest cost |
316,247 | 285,590 | 267,244 | |||||||||
Expected return on plan assets |
(327,508 | ) | (302,628 | ) | (267,153 | ) | ||||||
Amortization of prior service costs |
12,344 | 12,344 | 12,344 | |||||||||
Recognized net actuarial loss |
73,285 | 51,902 | 79,414 | |||||||||
Adjustment due to change in measurement date (1) |
| 44,625 | | |||||||||
Net periodic plan cost |
$ | 310,766 | $ | 312,384 | $ | 339,670 | ||||||
(1) | - This amount was run through current net periodic pension costs rather than directly to retained earnings as the | |
amount is not considered significant or material. | ||
(2) | - The disclosure information shown below as of December 31, 2009 was estimated by projecting employee data forward | |
from November 1, 2009 to December 31, 2009, assuming no experience gains or losses. |
December 31, | December 31, | October 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Weighted average assumptions used to
determine benefit obligations for the years ended: |
||||||||||||
Discount rate |
6.0 | % | 6.0 | % | 6.0 | % | ||||||
Expected return on plan
assets |
8.0 | % | 8.0 | % | 8.0 | % | ||||||
Rate of compensation increase |
3.0 | % | 3.0 | % | 3.5 | % | ||||||
Weighted average assumptions used to determine
net periodic benefit cost for the years ended: |
||||||||||||
Discount rate |
6.00 | % | 6.00 | % | 5.75 | % | ||||||
Expected return on plan
assets |
8.0 | % | 8.0 | % | 8.0 | % | ||||||
Rate of compensation increase |
3.0 | % | 3.0 | % | 3.5 | % | ||||||
Amounts recognized in the statement of financial
condition
consist of: |
||||||||||||
Accrued benefit cost |
$ | (1,869,989 | ) | $ | (2,449,374 | ) | $ | (917,414 | ) | |||
Accumulated other comprehensive income |
2,246,038 | 2,659,097 | 1,189,521 | |||||||||
Net amount recognized |
$ | 376,049 | $ | 209,723 | $ | 272,107 | ||||||
Plan assets
Target | Allowable | Percentage of Plan Assets at | ||||||||||||||
Allocation | Allocation | December 31, | December 31, | |||||||||||||
2009 | Range | 2009 | 2008 | |||||||||||||
Plan assets |
||||||||||||||||
Equity securities |
70 | % | 40-80 | % | 63 | % | 64 | % | ||||||||
Debt securities |
25 | % | 20-40 | % | 32 | % | 30 | % | ||||||||
Real estate |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Other |
5 | % | 3-10 | % | 5 | % | 6 | % | ||||||||
Total |
100 | % | 100 | % | ||||||||||||
59
Table of Contents
Investment Policy and Strategy
The investments are pooled with the pension assets of other members of the plan and are
allocated based on a formula established by the pension committee.
The policy, as established by the Pension Committee, is to invest in 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 U.S.
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 plans 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
Expected contributions for fiscal year ending December 31, 2010 |
||||
Expected employer contributions |
$ | 304,000 | ||
Expected employee contributions |
$ | | ||
Estimated future benefit payments reflecting expected
future service for the fiscal year(s) ending |
||||
12/31/2010 |
$ | 204,040 | ||
12/31/2011 |
$ | 219,947 | ||
12/31/2012 |
$ | 276,722 | ||
12/31/2013 |
$ | 279,305 | ||
12/31/2014 |
$ | 293,253 | ||
12/31/2015 - 12/31/2019 |
$ | 1,732,014 |
As discussed in section Recently Issued Accounting Standards in Note 1, the bank is
required to disclose the estimated fair value for its Pension Plan assets. The Pension
Plan assets include cash equivalents, such as money funds, certificates of deposit and
mutual funds. Based on these inputs, the following table summarizes the fair value of the
Pension Plans investments in the Master Trust as of December 31, 2009.
60
Table of Contents
December 31, | Fair Value Measurements Using | |||||||||||||||
2009 | Level 1 | Level 2 | Level 3 | |||||||||||||
($ in Thousands) | ||||||||||||||||
Pension Plan Master Trust Investments: |
||||||||||||||||
Cash |
$ | 97 | $ | 97 | $ | | $ | | ||||||||
Money fund |
1,738 | 1,738 | | | ||||||||||||
Certificates of deposit |
429 | 429 | | | ||||||||||||
Mutual funds |
6,195 | 6,195 | | | ||||||||||||
U.S. government securities |
2,936 | 2,936 | | | ||||||||||||
Mortgage-backed securities |
7,060 | | 7,060 | | ||||||||||||
Common stock and options |
26,331 | 26,331 | | | ||||||||||||
Exchange traded and closed end funds |
5,369 | 5,369 | | | ||||||||||||
Total Pension Plan Master Trust Investments |
$ | 50,155 | $ | 43,095 | $ | 7,060 | $ | | ||||||||
The banks funding policy is to pay at least the minimum amount required by the funding
requirements of federal law and regulations, with consideration given to the maximum
funding amounts allowed. The bank contributed $477,092 and $250,000 in 2009 and 2008,
respectively. The bank regularly reviews the funding of its pension plan. The bank has
made a contribution of $304,000 for 2010.
NOTE 12. 401(k) PROFIT SHARING PLAN
All employees are eligible to participate in the banks 401(k) Profit Sharing Plan
after completing one year of service. Employees may defer up to 15% of their salary in
2009, 2008 and 2007. The bank may, at the discretion of the Board of Directors, match all
or part of the employee deferrals. For 2009, the bank matched 40% of employee deferrals up
to 5% of salary. For 2008, the bank matched 50% of employee deferrals up to 5% of salary.
For 2007, the bank matched 40% of employee deferrals up to 5% of salary. The percentage of
match varies based on the banks profit level. The assets of the 401(k) Profit Sharing
Plan are managed by the banks trust department.
The banks contribution charged to income during 2009, 2008 and 2007 was $36,243, $43,247
and $40,938, respectively.
NOTE 13. 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 was $42,576, $30,928 and $49,517 for 2009, 2008 and 2007, respectively.
NOTE 14. INCOME TAXES
CNB and its subsidiary, the Bank, file income tax returns in the U.S. federal
jurisdiction and the State of West Virginia. The bank also files an income tax return in
the State of Maryland.
CNB adopted the provisions of ASC Topic 740-10, Accounting for Uncertainty in Income
Taxes as of January 1, 2007. The provision provides guidance on accounting for
uncertainty in income taxes recognized in an enterprises financial statements. The
guidance prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a
tax return, and also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
Included in the balance sheet at December 31, 2009 and 2008, are tax positions related to
loan charge offs for which the ultimate deductibility is highly certain but for which there
is uncertainty about the timing of such deductibility. Because of the impact of deferred
tax accounting, other than interest and penalties, the disallowance of the shorter
deductibility period would not affect the annual effective tax rate but would accelerate
the payment of cash to the taxing authority to an earlier period.
61
Table of Contents
As of December 31, 2009 or 2008, CNB had no uncertain tax positions that qualify for either
recognition or disclosure in CNBs financial statements. CNBs policy is to recognize interest and
penalties on unrecognized tax benefits in income tax expense in the financial statements. No
interest and penalties were recorded during the year ended December 31, 2009, 2008 or 2007.
Generally, the tax years before 2006 are no longer subject to examination by federal, state or
local taxing authorities.
The 2009 reduction in the effective tax rate is due in part to a significant increase in tax exempt
interest income, tax exempt life insurance proceeds and an adjustment to deferred tax liability
related to the bank changing its estimate of the likelihood of the taxability for the cash
surrender value life insurance related to the deferred compensation plan. Included in the balance
sheet at December 31, 2009 are tax positions related to loan charge offs for which the ultimate
deductibility is highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax accounting, other than interest and
penalties, the disallowance of the shorter deductibility period would not affect the annual
effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier
period.
Income taxes reflected in the statements of income are as follows:
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Federal: |
||||||||||||
Current |
$ | 1,009,704 | $ | 1,414,802 | $ | 1,114,801 | ||||||
Deferred |
(552,946 | ) | (252,298 | ) | (35,201 | ) | ||||||
State: |
||||||||||||
Current |
159,085 | 179,462 | 118,005 | |||||||||
Deferred |
(50,225 | ) | (34,686 | ) | (6,814 | ) | ||||||
Provision for income taxes |
$ | 565,618 | $ | 1,307,280 | $ | 1,190,791 | ||||||
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, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Income tax expense at the
statutory rate (34%) |
$ | 923,219 | $ | 1,367,647 | $ | 1,256,316 | ||||||
Increases (decreases) resulting
from: |
||||||||||||
Nontaxable interest income,
net of non-deductible interest
expense |
(239,097 | ) | (164,855 | ) | (116,607 | ) | ||||||
State income taxes, net of
federal income tax benefit |
81,945 | 112,366 | 102,085 | |||||||||
Tax exempt life insurance proceeds and cash
surrender value |
(172,189 | ) | | | ||||||||
Other |
(28,260 | ) | (7,878 | ) | (51,003 | ) | ||||||
Provision for income taxes |
$ | 565,618 | $ | 1,307,280 | $ | 1,190,791 | ||||||
Effective income tax rate |
20.83 | % | 32.50 | % | 32.23 | % | ||||||
Federal and state income taxes receivable included in the balance sheet as other assets was
$163,486 and $114,950 at December 31, 2009 and 2008, respectively.
62
Table of Contents
The components of deferred taxes included in the statement of financial condition as of
December 31 are as follows:
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Provision for loan losses |
$ | 1,340,617 | $ | 926,135 | ||||
Deferred compensation plan |
431,036 | 383,808 | ||||||
Postretirement benefits |
99,173 | 103,705 | ||||||
Intangible asset |
118,653 | 97,242 | ||||||
Unrecognized pension costs |
853,494 | 1,014,427 | ||||||
Net unrealized (gain) loss on securities
available for sale |
(459,497 | ) | 118,825 | |||||
$ | 2,383,476 | $ | 2,644,142 | |||||
Deferred tax liabilities: |
||||||||
CSV life insurance |
$ | (172,269 | ) | $ | (323,411 | ) | ||
Defined benefit plan |
(135,378 | ) | (75,500 | ) | ||||
Depreciation |
(322,164 | ) | (355,485 | ) | ||||
$ | (629,811 | ) | $ | (754,396 | ) | |||
Net deferred tax asset (liability) |
$ | 1,753,665 | $ | 1,889,746 | ||||
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 15. LEASE AGREEMENT
CNB leases land in Hancock, Maryland on which its Hancock branch is located. This
lease was transferred to CNB from Fidelity Bank, a Maryland commercial bank upon the
purchase of the Hancock Maryland branch. CNB owns the building which is situated on the
leased land. The lease, as amended, expires on May 1, 2017 with the lessee having the
right to renew the lease for two additional 5-year optional terms for a total optional
renewal right of up to 10 years. The lease payments for the twelve months beginning May
2008 were $21,420 annually. Each year subsequent until May 1, 2017, the lease payments
will increase by 2%. The lease payments for the two additional 5-year optional terms will
be based, for the first year of each of the optional 5-year terms, on an increase of 2%
from the previous years rent plus the average annual increase in the Consumer Price Index
as published by the United States Department of Labor during the preceding five years. For
each year thereafter of each of the optional 5-year terms, the payment will increase by 2%.
The building owned by CNB will revert to and become the property of the lessor in the event
of default or termination of the lease.
Minimum future rental payments under the lease are as follows:
2010 |
$ | 22,171 | ||
2011 |
$ | 22,614 | ||
2012 |
$ | 23,066 | ||
2013 |
$ | 23,528 | ||
2014 |
$ | 23,998 | ||
2015 |
$ | 24,478 | ||
2016 |
$ | 24,968 | ||
2017 |
$ | 8,378 |
Lease expense for the years ended December 31, 2009, 2008 and 2007 was $21,726, $21,280 and
$17,369, respectively.
63
Table of Contents
NOTE 16. OTHER OPERATING EXPENSES
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Stationery, supplies and printing |
$ | 159,637 | $ | 190,764 | $ | 194,794 | ||||||
Data processing |
301,193 | 100,305 | 118,212 | |||||||||
Directors fees and deferred
compensation |
257,564 | 253,491 | 261,667 | |||||||||
Postage |
133,577 | 130,675 | 130,305 | |||||||||
Telephone |
109,253 | 113,422 | 105,471 | |||||||||
Professional fees |
342,070 | 376,252 | 408,285 | |||||||||
Regulatory assessment fees |
406,798 | 102,917 | 45,550 | |||||||||
Outside service fees |
10,003 | 8,012 | 29,354 | |||||||||
ATM and debit card fees |
267,005 | 265,795 | 250,814 | |||||||||
Advertising |
124,751 | 185,769 | 205,444 | |||||||||
Amortization of intangible |
111,517 | 111,516 | 111,516 | |||||||||
Amortization of software |
71,611 | 66,075 | 65,620 | |||||||||
Other |
607,352 | 615,951 | 608,214 | |||||||||
Total other operating expenses |
$ | 2,902,331 | $ | 2,520,944 | $ | 2,535,246 | ||||||
NOTE 17. 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.
CNBs 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 customers 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 managements 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.
64
Table of Contents
A summary of off-balance sheet instruments as of December 31 is as follows:
2009 | 2008 | |||||||
Commitments to originate: |
||||||||
Fixed rate loans: |
||||||||
Residential real estate loans to be sold |
$ | 363,300 | $ | 478,700 | ||||
Other residential real estate |
14,000 | 358,726 | ||||||
Adjustable rate loans: |
||||||||
Other commerical real estate and
construction |
1,054,330 | 862,500 | ||||||
Other residential real estate |
254,500 | 278,400 | ||||||
Commerical and other |
| 765,000 | ||||||
Letters of credit |
3,000 | 227,237 | ||||||
Undisbursed portion of construction
loans |
1,312,571 | 882,893 | ||||||
Available credit granted on commercial
loans |
6,840,488 | 6,106,161 | ||||||
Available credit on personal lines
of credit |
157,980 | 279,112 | ||||||
Undisbursed portion of home equity loans |
4,436,185 | 4,937,093 | ||||||
Commitments to sell real estate loans |
268,000 | | ||||||
$ | 14,704,354 | $ | 15,175,822 | |||||
NOTE 18. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
CNBs primary business is mortgage loans, which consists of originating residential,
construction, multi-family and commercial real estate loans and consumer and commercial
loans. CNBs 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 also invested in mortgage backed securities and collateralized mortgage obligations.
See Note 3: Securities.
CNB evaluates each customers 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
managements 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 19. 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 banks consolidated
financial statements.
NOTE 20. REGULATORY MATTERS
The primary source of funds for the dividends paid by CNB Financial Services, Inc. is
dividends received from its banking subsidiary. The payment of dividends by banking
subsidiaries is subject to various banking regulations. The most restrictive provision
requires regulatory approval if dividends declared in any calendar year exceed the total
net profits, as defined, of that year plus the retained net profits, as defined, of the
preceding two years. At January 1, 2010, CNB has $5,744,000 available for dividends.
The bank is subject to various regulatory capital requirements administered by the banking
regulatory agencies. Pursuant to capital adequacy guidelines, the bank must meet specific
capital guidelines that involve various quantitative measures of the banks assets,
liabilities, and certain off-balance-sheet items as calculated under
65
Table of Contents
regulatory accounting
practices. The banks capital amounts and classifications 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, 2009, that the bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2009 and 2008, the most recent notification from the banking regulatory
agencies 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 institutions
category.
The banks actual capital amounts and ratios are presented in the table.
Minimum | Minimum To Be Well Capitalized | |||||||||||||||||||||||
Actual | Capital Requirements | Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Amount | Amount | ||||||||||||||||||||||
in | in | in | ||||||||||||||||||||||
Thousands | Ratio | Thousands | Ratio | Thousands | Ratio | |||||||||||||||||||
As of December 31,
2009: |
||||||||||||||||||||||||
Total Capital
(to Risk Weighted
Assets) |
$ | 27,958 | 15.91 | % | $ | 14,058 | 8.0 | % | $ | 17,573 | 10.0 | % | ||||||||||||
Tier I Capital
(to Risk Weighted
Assets) |
$ | 25,740 | 14.65 | % | $ | 7,028 | 4.0 | % | $ | 10,542 | 6.0 | % | ||||||||||||
Tier I Capital
(to Average Assets) |
$ | 25,740 | 8.78 | % | $ | 11,727 | 4.0 | % | $ | 14,658 | 5.0 | % | ||||||||||||
As of December 31,
2008: |
||||||||||||||||||||||||
Total Capital
(to Risk Weighted
Assets) |
$ | 26,616 | 15.19 | % | $ | 14,017 | 8.0 | % | $ | 17,522 | 10.0 | % | ||||||||||||
Tier I Capital
(to Risk Weighted
Assets) |
$ | 24,419 | 13.94 | % | $ | 7,007 | 4.0 | % | $ | 10,510 | 6.0 | % | ||||||||||||
Tier I Capital
(to Average Assets) |
$ | 24,419 | 8.56 | % | $ | 11,411 | 4.0 | % | $ | 14,263 | 5.0 | % |
NOTE 21. 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 $2.9 million at December
31, 2009.
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 $2.7 million available for loans or
advances to affiliates of the bank as of December 31, 2009, at which time there were no
material loans or advances outstanding.
NOTE 22. FAIR VALUE OF FINANCIAL INSTRUMENTS
The FASB ASC Topic 820, Financial Instruments, requires the disclosure of the
estimated fair value of certain financial instruments. CNBs available for sale investment
portfolio is subject to disclosure for interim reporting. Fair value is the price that
would be received upon sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The following fair value
hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these
are most transparent or reliable.
| Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
66
Table of Contents
| Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | ||
| Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The following describes the valuation techniques used by CNB to measure certain financial
assets and liabilities recorded at fair value on a recurring basis in the financial
statements:
Securities available for sale and certificates of deposit investments
Securities available for sale and certificates of deposit investments are recorded at fair
value on a recurring basis. Fair value measurement is based upon quoted market prices,
when available (Level 1). If quoted market prices are not available, fair values are
measured utilizing independent valuation techniques of identical or similar securities for
which significant assumptions are derived primarily from or corroborated by observable
market data. Third party vendors compile prices from various sources and may determine the
fair value of identical or similar securities by using pricing models that considers
observable market data (Level 2). In certain cases where there is limited activity or less
transparency around inputs to the valuation, securities are classified within Level 3 of
the valuation hierarchy. At December 31, 2009, all of CNBs securities and certificates of
deposit investments are considered to be Level 2 investments.
The following table presents the balances of financial assets and liabilities measured at
fair value on a recurring basis as of December 31, 2009:
Valuation of our Financial Instruments by Fair Value Hierarchy Levels Recurring
Basis
December 31, 2009 | ||||||||||||||||
(In Thousands) | ||||||||||||||||
In Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable Inputs | Unobservable Inputs | ||||||||||||||
Description | Total | Assets (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
U.S. government agencies and corporations |
$ | 8,623 | $ | | $ | 8,623 | $ | | ||||||||
Corporate bonds |
4,812 | | 4,812 | | ||||||||||||
State and municipal securities |
32,533 | | 32,533 | | ||||||||||||
Residential mortage-backed securities |
13,416 | | 13,416 | | ||||||||||||
Collateralized mortgage obligtions |
12,889 | | 12,889 | | ||||||||||||
Certificates of deposit investments |
1,989 | | 1,989 | |
December 31, 2008 | ||||||||||||||||
(In Thousands) | ||||||||||||||||
In Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable Inputs | Unobservable Inputs | ||||||||||||||
Description | Total | Assets (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
U.S. government agencies and corporations |
$ | 10,804 | $ | | $ | 10,804 | $ | | ||||||||
Corporate bonds |
6,592 | | 6,592 | | ||||||||||||
State and municipal securities |
16,965 | | 16,965 | | ||||||||||||
Residential mortage-backed securities |
17,783 | | 17,783 | | ||||||||||||
Collateralized mortgage obligtions |
10,461 | | 10,461 | |
Certain financial assets are measured at fair value on a nonrecurring basis in accordance
with accounting principles generally accepted in the United States (GAAP). Adjustments
to the fair value of these assets usually result from the application of
lower-of-cost-or-market accounting or write-downs of individual assets.
67
Table of Contents
The following describes the valuation techniques used by CNB to measure certain
financial assets recorded at fair value on a nonrecurring basis in the financial
statements:
Loans held for sale
These loans currently consist of one-to-four family residential loans originated for sale
in the secondary market. Fair value is based on the price secondary markets are
currently offering for similar loans using observable market data which is not materially
different than cost due to the short duration between origination and sale (Level 2).
Loans held for sale are required to be measured at lower of cost or fair value. Under
ASC Topic 820, market value is to represent fair value. Management obtains quotes or
bids on all or part of these loans directly from the purchasing financial institutions.
Premiums received or to be received on the quotes or bids are indicative of the fact that
cost is lower than fair value. At December 31, 2009, CNB did not have any loans held for
sale.
Impaired loans
Loans are designated as impaired when, in the judgment of management based on current
information and events, it is probable that all amounts due according to the contractual
terms of the loan agreement will not be collected. The measurement of loss associated
with impaired loans can be based on either the observable market price of the loan or the
fair value of the collateral. Fair value is measured based on the value of the
collateral securing the loans. Collateral may be in the form of real estate or business
assets including equipment, inventory, and accounts receivable. The value of real estate
collateral is determined utilizing an income or market valuation approach based on an
appraisal conducted by an independent, licensed appraiser outside of the Company using
observable market data (Level 2). However, if the collateral is a house or building in
the process of construction or if an appraisal of the real estate property is over two
years old, then the fair value is considered Level 3. The value of business equipment is
based upon an outside appraisal if deemed significant, or the net book value on the
applicable business financial statements if not considered significant using observable
market data. Likewise, values for inventory and accounts receivables collateral are
based on financial statement balances or aging reports (Level 3). Impaired loans
allocated to the Allowance for Loan Loses are measured at fair value on a nonrecurring
basis. Any fair value adjustments are recorded in the period incurred as provision for
loan losses on the Consolidated Statements of Income.
Certain assets such as other real estate owned are measured at the lower of cost or fair
value less the cost to sell. Management believes that the fair value component in its
valuation follows the provisions of ASC Topic 820. CNB had no fair value measurement
adjustments to impaired loans during the year ended December 31, 2009.
Other Real Estate Owned
Certain assets such as other real estate owned (OREO) are measured at fair value less
cost to sell. CNB had $130,800 of fair value adjustments during the year ended December
31, 2009 resulting from the inability to sell a property at its appraised value. We
believe that the fair value component in its valuation follows the provisions of ASC
Topic 820.
68
Table of Contents
The following table summarized CNBs financial and nonfinancial assets that were measured at fair value on a nonrecurring basis during the period. |
Valuation of our Financial Instruments by Fair Value Hierarchy Levels Non-recurring Basis
December 31, 2009 | ||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Quoted Prices | Significant | |||||||||||||||||||
In Active | Other | Significant | ||||||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||||||
Identical Assets | Inputs | Inputs | Recognized Gains | |||||||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | (Losses) | |||||||||||||||
Assets: |
||||||||||||||||||||
Impaired loans, net of government
agency guarantees and reserve for losses |
$ | 669 | $ | | $ | 669 | $ | | $ | | ||||||||||
Other real estate owned |
$ | 387 | $ | | $ | 387 | $ | | $ | (149 | ) |
December 31, 2009 | ||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Quoted Prices | Significant | |||||||||||||||||||
In Active | Other | Significant | ||||||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||||||
Identical Assets | Inputs | Inputs | Recognized Gains | |||||||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | (Losses) | |||||||||||||||
Assets: |
||||||||||||||||||||
Impaired loans, net of government
agency guarantees and reserve for losses |
$ | 786 | $ | | $ | 786 | $ | | $ | | ||||||||||
Other real estate owned |
$ | 253 | $ | | $ | 253 | $ | | $ | (69 | ) |
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.
69
Table of Contents
The estimated fair value of financial instruments at December 31, is summarized as
follows:
2009 | 2008 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Financial Assets: |
||||||||||||||||
Cash, due from banks and federal funds sold |
$ | 5,068,118 | $ | 5,068,118 | $ | 4,770,724 | $ | 4,770,724 | ||||||||
Securities available for sale |
72,272,665 | 72,272,665 | 62,604,735 | 62,604,735 | ||||||||||||
Loans |
194,707,226 | 191,450,941 | 200,752,202 | 201,347,332 | ||||||||||||
Accrued interest receivable |
1,334,704 | 1,334,704 | 1,272,742 | 1,272,742 | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Demand deposits |
$ | 103,871,995 | $ | 103,871,995 | $ | 98,500,413 | $ | 98,500,413 | ||||||||
Time deposits |
148,419,859 | 157,634,463 | 129,394,653 | 137,539,118 | ||||||||||||
Accrued interest payable |
1,170,417 | 1,170,417 | 1,126,219 | 1,126,219 | ||||||||||||
FHLB borrowings |
6,400,000 | 6,400,000 | 25,445,000 | 25,445,000 | ||||||||||||
Off-Balance Sheet |
||||||||||||||||
Financial Instruments: |
||||||||||||||||
Letters of credit |
$ | | $ | | $ | | $ | 2,149 |
NOTE 23. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the bank has granted loans to executive officers,
directors, and their affiliates amounting to $1,989,007 and $2,031,818 at December 31, 2009
and 2008, respectively. During 2009, $704,323 of new loans were made, or became reportable,
and repayments and other decreases totaled $747,134. Deposits from related parties held by
the bank at December 31, 2009 and 2008 amounted to $5,394,865 and $5,241,905, respectively.
70
Table of Contents
NOTE 24. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following represents parent company only financial information:
STATEMENTS OF FINANCIAL CONDITION (PARENT ONLY)
DECEMBER 31, 2009 AND 2008
DECEMBER 31, 2009 AND 2008
ASSETS | 2009 | 2008 | ||||||
Cash |
$ | 270,750 | $ | 289,968 | ||||
Investment in CNB Bank, Inc. |
25,260,693 | 22,843,976 | ||||||
Investment in Morgan County Title Insurance Agency, LLC |
| 1,173 | ||||||
Other assets |
99,805 | 84,052 | ||||||
TOTAL ASSETS |
$ | 25,631,248 | $ | 23,219,169 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
LIABILITIES |
||||||||
Accrued expenses and other liabilities |
$ | 953 | $ | 1,379 | ||||
TOTAL LIABILITIES |
$ | 953 | $ | 1,379 | ||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, $1 par value; 5,000,000 shares authorized; 458,048 shares issued at December 31, 2009 and 2008 and 443,648 and 449,151 outstanding at December 31, 2009 and 2008, respectively |
$ | 458,048 | $ | 458,048 | ||||
Capital surplus |
4,163,592 | 4,163,592 | ||||||
Retained earnings |
22,476,562 | 21,015,652 | ||||||
Accumulated other comprehensive income (loss) |
(642,839 | ) | (1,848,990 | ) | ||||
$ | 26,455,363 | $ | 23,788,302 | |||||
Less treasury stock, at cost, 14,400 shares in 2009 and 8,897 shares in 2008 |
(825,068 | ) | (570,512 | ) | ||||
TOTAL SHAREHOLDERS EQUITY |
$ | 25,630,295 | $ | 23,217,790 | ||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 25,631,248 | $ | 23,219,169 | ||||
71
Table of Contents
STATEMENTS OF INCOME (PARENT ONLY)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009 | 2008 | 2007 | ||||||||||
Dividend income |
$ | 966,410 | $ | 1,250,000 | $ | 1,154,024 | ||||||
Income from title company |
8,262 | 7,030 | 12,023 | |||||||||
Noninterest expense |
(51,260 | ) | (70,863 | ) | (118,006 | ) | ||||||
INCOME
BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS OF CNB BANK, INC. |
$ | 923,412 | $ | 1,186,167 | $ | 1,048,041 | ||||||
Income tax (benefit) |
(15,752 | ) | (16,207 | ) | (36,884 | ) | ||||||
INCOME
BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF CNB BANK, INC. |
$ | 939,164 | $ | 1,202,374 | $ | 1,084,925 | ||||||
Equity in undistributed earnings of CNB Bank, Inc. |
1,210,567 | 1,512,837 | 1,419,331 | |||||||||
NET INCOME |
$ | 2,149,731 | $ | 2,715,211 | $ | 2,504,256 | ||||||
STATEMENTS OF CASH FLOWS (PARENT ONLY)
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
Net income |
$ | 2,149,731 | $ | 2,715,211 | $ | 2,504,256 | ||||||
Adjustments
to reconcile net income to net cash provided by operating activities: |
||||||||||||
(Increase) decrease in other assets |
(15,752 | ) | (16,207 | ) | (36,884 | ) | ||||||
Increase (decrease) in accrued expenses and other liabilities |
(426 | ) | (23,813 | ) | 26,408 | |||||||
Equity in undistributed earnings of CNB Bank, Inc. |
(1,210,567 | ) | (1,512,837 | ) | (1,419,331 | ) | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
$ | 922,986 | $ | 1,162,354 | $ | 1,074,449 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||||
Investment in title company |
$ | 1,173 | $ | 70 | $ | (123 | ) | |||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
$ | 1,173 | $ | 70 | $ | (123 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||||
Cash dividends paid |
$ | (688,821 | ) | $ | (854,803 | ) | $ | (770,414 | ) | |||
Purchase of treasury stock, cost |
(254,556 | ) | (362,879 | ) | (207,633 | ) | ||||||
NET CASH (USED IN) FINANCING ACTIVITIES |
$ | (943,377 | ) | $ | (1,217,682 | ) | $ | (978,047 | ) | |||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
$ | (19,218 | ) | $ | (55,258 | ) | $ | 96,279 | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
$ | 289,968 | $ | 345,226 | $ | 248,947 | ||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | 270,750 | $ | 289,968 | $ | 345,226 | ||||||
NOTE 25. SUBSEQUENT EVENTS
The Company has evaluated events and transactions subsequent to December 31, 2009
through March 5, 2010, the date these consolidated financial statements were included in
this Form 10-K and filed with the SEC. Based on the definitions and requirements of
Generally Accepted Accounting Principles, we have not identified any events that have
occurred subsequent to December 31, 2009 and through March 5, 2010, that require recognition
or disclosure in the consolidated financial statements.
72
Table of Contents
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(T). CONTROLS AND PROCEDURES
The Companys chief executive officer and chief financial officer have concluded that
as of December 31, 2009, which is the end of the period covered by this Annual Report on
Form 10-K, the Companys 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 Companys filings with the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
During the Companys fourth quarter, there were no significant changes in internal controls
over financial reporting that materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
See Managements Report on Internal Control included in this Annual Report on Form 10-K at
page 38.
Item 9B. OTHER INFORMATION
None.
73
Table of Contents
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to our Directors is hereby
incorporated by reference from the 2010 Proxy Statement under the captions, Election of
Directors and Section 16(a) Beneficial Ownership Reporting Compliance.
The information required by this item with respect to our Executive Officers is hereby
incorporated by reference under the caption, Management and Board Matters.
We have an Audit Committee composed of independent directors. The information required by
this item with respect to the Audit Committee and its members is hereby incorporated by
reference from the 2010 Proxy Statement under the captions, Management and Board Matters
and Audit Related Matters.
The information required by this item with respect to procedures by which shareholders may
recommend nominees to the Board of Directors is hereby incorporated by reference from the
2010 Proxy Statement under the caption, Election of Directors.
The names, ages and position of each executive officer of the company are listed below along
with the positions with CNB Bank, Inc. 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 February 25, | ||||||
Name | 2010 | Position and Experience during the Past 5 Years | ||||
Charles S. Trump IV (1)
|
49 | 2008 to present Chairman of the Board, CNB Financial Services, Inc. | ||||
2000 to present Member of the Board, CNB Financial Services, Inc. | ||||||
1986 to present Member of the Board, CNB Bank, Inc. | ||||||
Thomas F. Rokisky
|
63 | 2000 to present President/CEO, CNB Financial Services, Inc. | ||||
1996 to present President/CEO, CNB Bank, Inc. | ||||||
1990 to 1996 Executive Vice President/COO, CNB Bank, Inc. | ||||||
Rebecca S. Stotler
|
49 | 2007 to present Senior Vice President/CFO, CNB Financial Services, Inc. | ||||
2007 to present Senior Vice President/CFO, CNB Bank, Inc. | ||||||
2000 to 2007 Vice President/CFO, CNB Financial Services, Inc. | ||||||
1999 to 2007 Vice President/CFO, CNB Bank, Inc. | ||||||
1996 to 1999 Vice President of Finance/Cashier, Citizens National Bank | ||||||
Patricia C. Muldoon
|
49 | 2007 to present Executive Vice President/COO, CNB Financial Services, Inc. | ||||
2007 to present Executive Vice President/COO, CNB Bank, Inc. | ||||||
2003 to 2007 Senior Vice President/COO, CNB Financial Services, Inc. | ||||||
2003 to 2007 Senior Vice President/COO, CNB Bank, Inc. | ||||||
2001 to 2003 Vice President/COO, Citizens National Bank |
(1) | Mr. Trump is not an employee of CNB. |
74
Table of Contents
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 CNBs and the banks directors, officers, including the
banks 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 are located
on the banks website at www.cnbwv.com. 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. A copy of CNBs Code of Ethics
covering all employees will be mailed upon request without charge by contacting Rebecca S.
Stotler, Senior Vice President/CFO, CNB Financial Services, Inc. 101 South Washington
Street, Berkeley Springs, West Virginia 25411, (304) 258-1520.
Item 11. EXECUTIVE COMPENSATION
The information required by this item appears in the 2010 Proxy Statement under the
captions, Compensation Plan, Management and Board Matters, and Personnel Committee
Interlocks and Insider Participation and is hereby incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference from our 2010
Proxy Statement under the caption, Section 16(a) Beneficial Ownership Reporting
Compliance.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference from the 2010
Proxy Statement under the caption, Certain Transactions with Directors and Officers and
Their Associates.
Item 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
The information required by this item is hereby incorporated by reference from the 2010
Proxy Statement under the caption, Audit Committee Report.
75
Table of Contents
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 and incorporated by reference herein. | |||
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 and incorporated by reference herein. | |||
2.4 Amendment to Articles of Incorporation of CNB Financial Services, Inc. filed as exhibit 3(i) to the Form 8-K, File No. 000-30665, filed April 29, 2008 with the Securities and Exchange Commission and incorporated by reference herein. | |||
2.5 Amendment to Bylaws of CNB Financial Services, Inc. filed as exhibit 3(ii) to the Form 8-K, File No. 000-30665, filed April 29, 2008 with the Securities and Exchange Commission and incorporated by reference herein. | |||
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 | |||
31.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) | See (a) 3 above. | ||
(c) | See (a) 1 and 2 above. |
76
Table of Contents
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.
|
Date February 25, 2010 | /s/ Thomas F. Rokisky | |||
Thomas F. Rokisky, President/CEO | ||||
Date February 25, 2010 | /s/ Rebecca S. Stotler | |||
Rebecca S. Stotler, Vice President/CFO | ||||
(Principal Financial and Accounting Officer) |
77
Table of Contents
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 25th February 2010.
Signatures | Title | ||
/s/ Charles S. Trump IV
|
Chairman and Director | ||
/s/ Thomas F. Rokisky
|
President/CEO and Director | ||
Thomas F. Rokisky |
|||
/s/ Kenneth W. Apple
|
Director | ||
/s/ J. Robert Ayers
|
Director | ||
/s/ John E. Barker
|
Director | ||
/s/ Margaret S. Bartles
|
Director | ||
/s/ Jay E. Dick
|
Director | ||
/s/ Herbert L. Eppinger
|
Director | ||
/s/ J. Philip Kesecker
|
Director | ||
/s/ Jerald McGraw
|
Director | ||
/s/ Martha H. Quarantillo
|
Director | ||
/s/ Arlie R. Yost
|
Director |
78