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ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-30665
CNB Financial Services, Inc.
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(Exact name of registrant as specified in its charter)
United States of America 55-0773918
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 S. Washington Street, Berkeley Springs, WV 25411
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, ( 304 ) 258 - 1520
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Securities to be registered under Section 12(b) of the Act:
NONE
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Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 24, 2002 was approximately $32,063,360.
As of March 24, 2002, there were 458,048 shares of Common Stock, Par Value $1.00
per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business....................................................................................3
Item 2. Properties..................................................................................6
Item 3. Legal Proceedings...........................................................................6
Item 4. Submission of Matters to a Vote of Security Holders.........................................6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................7
Item 6. Selected Financial Data.....................................................................8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................21
Item 8. Financial Statements and Supplementary Data................................................24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures......51
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................51
Item 11. Executive Compensation.....................................................................53
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................53
Item 13. Certain Relationships and Related Transactions.............................................54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................55
SIGNATURES ...........................................................................................56
FORWARD LOOKING STATEMENTS
In our Annual Report and Form 10-K, we may include certain forward
looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products and
similar matters. The words or phrases "are expected to", "is anticipated",
"project", "will continue", "will likely result", "plans to" or similar
expressions are intended to "identify" forward looking statements. 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 or the effect of future plans and strategies is
inherently uncertain. The risks and uncertainties that may affect the
operations, performance, development and results of CNB Financial Services,
Inc.'s business include:
- - Changes in market interest rates;
- - Local and national economic trends and conditions;
- - Competition for products and services among community, regional and
national financial institutions;
- - New services and product offerings by competitors;
- - Changes in customer preferences;
- - Changes in technology;
- - Legislative and regulatory changes;
- - Delinquency rates on loans;
- - Changes in accounting principles, policies or guidelines;
You should consider these factors in evaluating any forward looking
statements and not place undue reliance on such statements. We are not obligated
to publicly update any forward looking statements we may make in this Form 10-K
or our Annual Report to reflect the impact of subsequent events.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATIONAL HISTORY AND SUBSIDIARIES
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CNB Financial Services, Inc. (the "company") was organized under the
laws of West Virginia in March 2000 at the direction of the Board of Directors
of Citizens National Bank (the "bank") for the purpose of becoming a financial
services holding company. The Company and its subsidiary are collectively
referred to herein as "CNB".
A special meeting of the Bank's shareholders was held on August 4,
2000, and the shareholders approved the Agreement and Plan of Merger between the
Bank and the Company, whereby the Bank became a wholly-owned subsidiary of the
Company and the shareholders of the Bank became shareholders of the Company. The
merger became effective on August 31, 2000. Each Bank shareholder received two
shares of the Company stock for each share of the Bank's common stock. On August
31, 2000, the Company consummated its merger with the Bank and subsidiary, in a
tax-free exchange of stock. Shareholders of the Bank received two shares of CNB
Financial Services, Inc. common stock for each of the 229,024 shares of the
Bank's common stock. The merger was accounted for as a pooling of interests.
CNB became a 50% member of a limited liability corporation, Morgan
County Title Insurance Agency, LLC in February 2001, for the purpose of selling
title insurance.
Citizens National Bank of Berkeley Springs, (the Bank or Citizens
National Bank), was organized on June 20, 1934 and has operated in Berkeley
Springs, Morgan County, West Virginia, as a national banking association
continuously since that time. The Bank formed CNB Insurance Services, Inc., a
wholly owned subsidiary, which is a property and casualty insurance agency
selling primarily personal lines of insurance.
EMPLOYEES
As of December 31, 2001 and 2000, CNB employed 80 and 70 full-time
equivalent employees, respectively.
BUSINESS OF CNB FINANCIAL SERVICES, INC. AND CITIZENS NATIONAL BANK
The Company's primary function is to direct, plan and coordinate the
business activities of the Bank and its subsidiary.
Citizens National Bank is a full-service commercial bank conducting
general banking and trust activities through four full-service offices and five
automated teller machines located in Morgan and Berkeley Counties, West
Virginia. The Bank exercised an option to purchase a parcel of land in
Martinsburg, Berkeley County, West Virginia for the future site of a
full-service branch. The Bank expects the branch to open in the first quarter of
2002. The Bank opened a temporary banking facility near the location in August
2001. The Bank accepts time, demand and savings deposits including NOW accounts,
regular savings accounts, money market accounts, fixed-rate certificates of
deposit and club accounts. In addition, the Bank provides safe deposit box
rentals, wire transfer services and 24-hour ATM services through a regional
network known as STAR. STAR is a participant in the nationwide Cirrus network.
The Bank offers a full spectrum of lending services to its customers,
including commercial loans and lines of credit, residential real estate loans,
consumer installment loans and other personal loans. Commercial loans are
generally secured by various collateral, including commercial real estate,
accounts receivable and business machinery and equipment. Residential real
estate loans consist primarily of mortgages on the borrower's personal
residence, and are typically secured by a first lien on the subject property.
Consumer and personal loans are generally secured, often by first liens on
automobiles, consumer goods or depository accounts. A special effort is made to
keep loan products as flexible as possible within the guidelines of prudent
banking practices in terms of interest rate risk and credit risk. Bank lending
personnel adhere to established lending limits and authorities based on each
individual's lending expertise and experience.
The Bank's trust department acts as trustee under trusts and wills, as
executor of wills and administrator of estates, as guardian for estates of
minors and incompetents and serves in various corporate trust capacities.
COMPETITION
Citizens National Bank faces a high degree of competition for all its
services from local banks. Within its market area of Morgan and Berkeley
Counties in West Virginia and Washington County in Maryland, there exist
numerous competing commercial banks.
Nonbank competition has also increased in recent years locally by the
establishment of finance companies and the expansion of insurance operations and
credit unions, as well as from mutual funds located throughout the country.
3
West Virginia banks are allowed unlimited branch banking throughout
the State. The Interstate Banking and Branch Efficiency Act of 1994 also
authorizes interstate branching by acquisition and consolidation nationwide.
These and similar provisions impacting both the banking and thrift industries
may serve to intensify future competition within the Bank's market.
SUPERVISION AND REGULATION
As a registered bank holding company, CNB is subject to the supervision
of the Federal Reserve Board and is required to file with the Federal Reserve
Board reports and other information regarding its business operations and the
business operations of its subsidiaries. CNB is also subject to examination by
the Federal Reserve Board and is required to obtain Federal Reserve Board
approval prior to acquiring, directly or indirectly, ownership or control of
voting shares of any bank, if, after such acquisition, it would own or control
more than 5% of the voting stock of such bank. In addition, pursuant to federal
law and regulations promulgated by the Federal Reserve Board, CNB may only
engage in, or own or control companies that engage in, activities deemed by the
Federal Reserve Board to be so closely related to banking as to be a proper
incident thereto. Prior to engaging in most new business activities, CNB must
obtain approval from the Federal Reserve Board.
CNB's banking subsidiary has deposits insured by the Bank Insurance
Fund of the FDIC, and is subject to supervision, examination and regulation by
the Office of the Comptroller of the Currency.
The Gramm-Leach-Bliley Act of 1999 was enacted into law on November 12,
1999. The Act removes the Glass-Steagall Act restrictions on affiliation between
banks and securities firms and it authorizes financial holding companies that
own a bank to engage in a full range of insurance activities. The result is that
qualifying bank holding companies may opt to become financial holding companies
and thus to hold subsidiaries that engage in banking, securities underwriting
and dealing, and insurance agency and underwriting. They may also engage in
financial activities listed in the Act, including merchant banking or venture
capital activities, the distribution of mutual funds and securities lending.
Bank holding companies now have the option under the Act to continue to
operate as bank holding companies or, if they qualify, to act as financial
holding companies. CNB has qualified and elected to be a financial holding
company. It is important to note in this regard that both bank holding companies
and financial holding companies and their non-bank operating subsidiaries are
subject to the full panoply of affiliate transaction rules under Sections 23A
and B of the Federal Reserve Act. As a consequence, all transactions between
affiliated depository institutions and these entities will be restricted under
the provisions of those laws.
Under the Act, certain activities are listed as being "financial in
nature" including "underwriting, dealing in, or making a market in securities,"
and "merchant banking". In addition, national banks and state banks (if the
state bank chartering authority permits) may engage in certain "financial in
nature" activities through financial services subsidiaries. Activities
prohibited to financial services subsidiaries include merchant banking but not
securities underwriting and dealing.
To engage in these new activities, all depository institutions and
financial subsidiaries of a financial holding company must be well capitalized,
well managed and have no less than a satisfactory rating under the federal
Community Reinvestment Act. CNB and its subsidiaries meet these requirements.
DIVIDEND RESTRICTIONS
There are statutory limits on the amount of dividends the bank can pay
to CNB without regulatory approval. Under applicable federal regulations,
appropriate bank regulatory agency approval is required if the total of all
dividends declared by a bank in any calendar year exceeds the available retained
earnings and exceeds the aggregate of the bank's net profits (as defined by
regulatory agencies) for that year and its retained net profits for the
preceding two years, less any required transfers to surplus or a fund for the
retirement of any preferred stock.
FDIC INSURANCE
The FDIC has the authority to raise the insurance premiums for
institutions in the Bank Insurance Fund to a level necessary to achieve a target
reserve level of 1.25% of insured deposits within not more than 15 years. In
addition, the FDIC has the authority to impose special assessments in certain
circumstances. The level of deposit premiums affects the profitability of the
bank and thus the potential flow of dividends to parent companies.
Under the risk-based insurance assessment system that became effective
January 1, 1994, the FDIC places each insured depository institution in one of
nine risk categories based on its level of capital and other relevant
information (such as supervisory evaluations).
4
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
makes revisions to several other federal banking statutes.
Among other things, FDICIA requires federal bank regulatory authorities
to take "prompt corrective action", with respect to depository institutions
that do not meet minimum capital requirements. For these purposes, FDICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
Rules adopted by the Federal banking agencies under FDICIA provide that
an institution is deemed to be: "well capitalized" if the institution has a
total (Tier I plus Tier II) risk-based capital ratio of 10.0% or greater, a Tier
I risk-based ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater,
and the institution is not subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
level for any capital measure; "adequately capitalized" if the institution has a
Total risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital
ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater (or a leverage
ratio of 3.0% or greater if the institution is rated composite 1 in its most
recent report of examination, subject to appropriate Federal banking agency
guidelines), and the institution does not meet the definition of a
well-capitalized institution; "undercapitalized" if the institution has a Total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (or a
leverage ratio that is less than 3.0% if the institution is rated composite 1 in
its most recent report of examination, subject to appropriate Federal banking
agency guidelines) and the institution does not meet the definition of a
significantly undercapitalized or critically undercapitalized institution;
"significantly undercapitalized" if the institution has a Total risk-based
capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is
less than 3.0%, or a leverage ratio that is less than 3.0% and the institution
does not meet the definition of a critically undercapitalized institution; and
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets that is equal to or less than 2%.
At December 31, 2001, CNB qualified as a well-capitalized institution
based on the ratios and guidelines noted above. A bank's capital category,
however, is determined solely for the purpose of applying the prompt corrective
action rules and may not constitute an accurate representation of that bank's
overall financial condition or prospects.
The appropriate Federal banking agency may, under certain
circumstances, reclassify a well-capitalized insured depository institution as
adequately capitalized. The appropriate agency is also permitted to require an
adequately capitalized or undercapitalized institution to comply with the
supervisory provisions as if the institutions were in the next lower category
(but not treat a significantly undercapitalized institution as critically
undercapitalized) based on supervisory information other than the capital levels
of the institution.
The statute provides that an institution may be reclassified if the
appropriate Federal banking agency determines (after notice and opportunity for
hearing) that the institution is in an unsafe and unsound condition or deems the
institution to be engaging in an unsafe or unsound practice.
FDICIA generally prohibits a depository institution from making any
capital distributions (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan. The Federal
banking agencies may not accept a capital restoration plan without determining,
among other things, that the plan is based on realistic assumptions and is
likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of (i) an amount equal to 5% of the
depository institution's total assets at the time it became undercapitalized,
and (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards applicable with
respect to such institution as of the time it fails to comply with the plan. If
a depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of
receiver or conservator.
FDICIA also contains a variety of other provisions that may affect the
operation of CNB, including reporting requirements, regulatory standards for
real estate lending, "truth in savings" provisions, and the requirement that a
depository institution give 90 days' prior notice to customers and regulatory
authorities before closing any branch.
5
CAPITAL REQUIREMENTS
The risk-based capital guidelines for bank holding companies and banks
adopted by the Federal banking agencies were phased in at the end of 1992. The
minimum ratio of qualifying total capital to risk-weighted assets (including
certain off-balance sheet items, such as standby letters of credit) under the
fully phased-in guidelines is 8%. At least half of the total capital is to be
comprised of common stock, retained earnings, noncumulative perpetual preferred
stocks, minority interests and, for bank holding companies, a limited amount of
qualifying cumulative perpetual preferred stock, less goodwill and certain other
intangibles ("Tier I capital"). The remainder ("Tier II capital") may consist of
other preferred stock, certain other instruments, and limited amounts of
subordinated debt and the reserve for credit losses.
In addition, the Federal Reserve Board has established minimum leverage
ratio (Tier I capital to total average assets less goodwill and certain other
intangibles) guidelines for bank holding companies and banks. These guidelines
provide for a minimum leverage ratio of 3.0% for bank holding companies and
banks that meet certain specified criteria, including that they have the highest
regulatory rating. All other banking organizations are required to maintain a
leverage ratio of 3.0% plus an additional cushion of at least 100 to 200 basis
points. The guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the Federal Reserve Board will continue to consider a "tangible Tier I
leverage ratio" in evaluating proposals for expansion or new activities. The
tangible Tier I leverage ratio is the ratio of Tier I capital, less intangibles
not deducted from Tier I capital, to total assets, less all intangibles.
As of December 31, 2001, the bank had capital in excess of all
applicable requirements. Additional information relating to risk-based capital
calculations is set forth under the heading "Note 23 Regulatory Matters" of the
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 2. PROPERTIES
CNB FINANCIAL SERVICES, INC.
CNB's headquarters are located at the main office of Citizens National
Bank located at 101 South Washington Street, Berkeley Springs, West Virginia.
CITIZENS NATIONAL BANK
The principal executive office and main banking office is located at
101 South Washington Street, Berkeley Springs, West Virginia. In addition, the
bank has owned and operated a full service branch bank located at 2450 Valley
Road, Berkeley Springs, West Virginia since 1991. In October 1998, the bank
opened an additional full service branch located at 2646 Hedgesville Road,
Martinsburg, West Virginia. In August 2001, the bank purchased land and is the
process of constructing a branch bank at 14994 Apple Harvest Drive, Martinsburg,
West Virginia. In August 2001, the bank opened a temporary banking facility in
Martinsburg, West Virginia near the location of the permanent branch bank. Each
location provides ATM services, in addition to traditional lobby and drive-in
services. During 1998, the bank purchased two cash machines and placed them at
Cacapon State Park Lodge and the Woods Resort. In November of 1998, the bank
acquired CNB Insurance Services, Inc. which is operated out of the main office
in Berkeley Springs. The main office and branches are owned free and clear of
any indebtedness. The net book value of the bank's premises and equipment as of
December 31, 2001 is $4.3 million.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the company and its subsidiary
are involved in various legal proceedings.
In the opinion of the management of CNB, there are no proceedings
pending to which CNB is a party or to which its property is subject, which, if
determined adversely to CNB, would be material in relation to CNB's financial
condition. There are no proceedings pending other than ordinary routine
litigation incident to the business of CNB. In addition, no material proceedings
are pending or are known to be threatened or contemplated against CNB by
government authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2001.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The price of CNB's common stock ranged from $66.75 to $135.00 in 2001
and from $75.00 to $285.00 in 2000. The prices listed below represent the high
and low market prices for stock trades reported during each quarter.
PER SHARE
HIGH LOW DIVIDEND
------------ ------------ ------------
2001
First quarter $ 135.00 $ 115.00
Second quarter $ 100.00 $ 100.00 $ 0.36
Third quarter $ 66.75 $ 66.75
Fourth quarter $ 100.00 $ 50.00 $ 0.66
2000
First quarter $ 75.00 $ 75.00
Second quarter $ 75.00 $ 75.00 $ 0.36
Third quarter $ 150.00 $ 150.00
Fourth quarter $ 285.00 $ 85.00 $ 0.66
CNB's stock is not traded on an established exchange and there are no
known market makers, therefore there is no established public trading market for
CNB's stock. The prices listed above are based upon information available to
management through discussions with shareholders, and to the best of
management's knowledge, accurately represent the amount at which its stock was
traded during the periods indicated. Prices reflect amounts paid by purchasers
of the stock and, therefore, may include commissions or fees. The amounts of
such commissions or fees, if any, are not known to management. No attempt was
made by management to ascertain the prices for every sale made during these
periods.
The ability of CNB to pay dividends is subject to certain limitations
imposed by national banking laws. As of March 8, 2002, the number of record
holders was 588.
7
ITEM 6. SELECTED FINANCIAL DATA
TABLE 1. FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
2001 2000 1999 1998 1997
-------------- --------------- --------------- --------------- ---------------
In thousands except for per share data
AT YEAR-END
Total assets $ 171,541 $ 149,982 $ 138,648 $ 129,600 $ 115,402
Securities available for sale 49,668 35,374 31,187 33,594 28,944
Loans and lease, net of
unearned income 111,874 105,220 98,272 86,377 81,084
Deposits 154,381 133,996 124,510 115,320 102,250
Shareholders' equity 14,926 13,864 12,249 12,518 11,644
SIGNIFICANT RATIOS
Return on average assets 0.77% 0.91% 0.90% 1.07% 1.16%
Return on average
shareholders' equity 8.49 10.16 9.66 10.60 11.76
Average shareholders' equity
to average assets 9.12 9.00 9.35 10.13 9.89
Net interest margin 3.73 4.03 4.01 4.21 4.26
SUMMARY OF OPERATIONS
Interest income $ 11,868 $ 11,035 $ 9,945 $ 9,243 $ 8,651
Interest expense 5,937 5,365 4,597 4,171 3,820
Net interest income 5,931 5,670 5,348 5,072 4,831
Provision for loan losses 226 170 118 196 174
Net interest income after
provision for loan losses 5,705 5,500 5,230 4,876 4,657
Non-interest income 1,025 843 565 415 304
Non-interest expense 4,794 4,279 3,954 3,372 3,008
Income before income taxes 1,936 2,064 1,841 1,919 1,953
Income tax expense 700 758 621 618 636
Net income 1,236 1,306 1,220 1,301 1,317
PER SHARE DATA (1)(2)
Net income $ 2.70 $ 2.85 $ 2.66 $ 2.84 $ 2.88
Cash dividends 1.02 1.02 1.00 1.00 0.94
Net book value 32.59 30.27 26.74 27.33 25.42
(1) Adjusted to reflect 100% stock dividend on March 1, 1998
(2) Restated to reflect the formation of CNB Financial Services, Inc. and the
acquisition of Citizens National Bank and subsidiary on August 31, 2000
and accounted for as a pooling of interests.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis presents the significant changes
in financial condition and results of operations of CNB, for the years ended
December 31, 2001 and 2000. This discussion and analysis should be read in
conjunction with the audited, consolidated financial statements and the
accompanying notes thereto. This discussion may include forward looking
statements based upon management's expectations; actual results may differ.
Amounts and percentages used in this discussion have been rounded. All average
balances are based on monthly averages.
EARNINGS SUMMARY
CNB had net income totaling $1.2 million or $2.70 per share, $1.3
million or $2.85 per share and $1.2 million or $2.66 per share for fiscal years
2001, 2000 and 1999, respectively. Annualized return on average assets and
average equity were .77% and 8.5%, respectively for 2001 compared to .91% and
10.2% for 2000 and .90% and 9.7% for 1999.
NET INTEREST INCOME
Net interest income represents the primary component of the Bank's
earnings. It is the difference between interest and fee income related to
earning assets and interest expense incurred to carry interest-bearing
liabilities. Net interest income is impacted by changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, as well as by changing
interest rates. In order to manage these changes, their impact on net interest
income and the risk associated with them, the Bank utilizes an ongoing
asset/liability management program. This program includes analysis of the
difference between rate sensitive assets and rate sensitive liabilities,
earnings sensitivity to rate changes, and source and use of funds. A discussion
of net interest income and the factors impacting it is presented below.
Net interest income in 2001 increased by $260,000 or 4.6% over 2000.
Interest income in 2001 increased by $833,000 or 7.6% compared to 2000, while
interest expense increased by $573,000 or 10.7% during 2001 as compared to 2000.
Interest income increased during 2001 compared to 2000 as a result of an
increase in the average balance of loans, securities and federal funds sold
offset by a decrease in the average rates earned thereon. Interest expense
increased during 2001 compared to 2000 as a result of an increase in the average
balance of time deposits and the rates paid thereon and the average balance of
NOW accounts offset by lower rates paid on deposit products other than time
deposits.
Net interest income in 2000 increased by $322,000 or 6.0% over 1999.
Interest income in 2000 increased by $1.1 million or 11.0% compared to 1999,
while interest expense increased by $767,000 or 16.7% during 2000 as compared to
1999. Interest income increased during 2000 compared to 1999 as a result of an
increase in the average balance of loans and an increase in the average rates
earned thereon. Interest expense increased during 2000 compared to 1999 as a
result of an increase in the average balance of time deposits and an increase in
the average rates paid thereon.
During both 2001 and 2000, the Bank used funds generated from deposit
account growth to fund loan commitments and to increase the average balance of
investment securities, especially high quality U.S. government agency
securities.
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 declined slightly from 2000 to 2001. See Table 1 -
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and
Interest Differential.
9
TABLE 2. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------------------- -------------------------------------
YTD YTD YIELD/ YTD YTD YIELD/
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ ----------- ------------ ------------------------ ------------
In thousands
Interest earning assets:
Federal funds sold $ 4,298 $ 160 3.79 % $ 1,026 $ 95 6.12 %
Securities:
Taxable 38,385 2,312 6.02 31,098 2,016 6.48
Tax-exempt (1) 302 14 7.02 825 45 8.26
Loans (net of unearned
interest) (2) (4) (5) 108,526 9,096 8.38 102,096 8,646 8.47
------------ ----------- ------------ ------------------------ ------------
Total interest
earning assets (1) $ 151,511 $ 11,582 7.64 % $ 135,045 $10,802 8.00 %
------------ ----------- ------------ ------------------------ ------------
Nonearning assets:
Cash and due
from banks $ 3,609 $ 3,457
Bank premises and
equipment, net 3,700 3,221
Other assets 2,202 2,226
Allowance for
loan losses (1,277) (1,169)
------------ ------------
Total assets $ 159,745 $ 142,780
============ ============
Interest bearing
liabilities:
Savings deposits $ 16,614 $ 272 1.64 % $ 16,080 $ 323 2.01 %
Time deposits 84,987 5,094 5.99 73,522 4,360 5.93
NOW accounts 19,321 476 2.46 17,984 564 3.14
Money market
accounts 4,802 93 1.94 5,001 113 2.26
Borrowings 44 2 4.55 69 5 7.25
------------ ----------- ------------ ------------------------- ------------
Total interest
bearing liabilities $ 125,768 $ 5,937 4.72 % $ 112,656 $ 5,365 4.76 %
------------ ----------- ------------ ------------------------ ------------
Noninterest bearing
liabilities:
Demand deposits $ 17,469 $ 16,004
Other liabilities 1,944 1,269
Shareholders' equity 14,564 12,851
------------ ------------
Total liabilities and
shareholders' equity $ 159,745 $ 142,780
============ ============
----------- ------------
Net interest income (1) $ 5,645 $ 5,437
=========== ============
Net interest spread (3) 2.92 % 3.24 %
============ ============
Net interest income to
average interest earning
assets (1) 3.73 % 4.03 %
============ ============
DECEMBER 31, 1999
-------------------------------------
YTD YTD YIELD/
AVERAGE
BALANCE INTEREST RATE
------------ ----------- ------------
Interest earning assets:
Federal funds sold $ 1,202 $ 61 5.07 %
Securities:
Taxable 30,637 1,934 6.31
Tax-exempt (1) 3,337 171 7.76
Loans (net of unearned
interest) (2) (4) (5) 91,717 7,516 8.19
------------ ----------- ------------
Total interest
earning assets (1) $ 126,893 $ 9,682 7.63 %
------------ ----------- ------------
Nonearning assets:
Cash and due
from banks $ 3,666
Bank premises and
equipment, net 3,427
Other assets 2,117
Allowance for
loan losses (1,155)
------------
Total assets $ 134,948
============
Interest bearing
liabilities:
Savings deposits $ 17,272 $ 373 2.16 %
Time deposits 65,607 3,638 5.55
NOW accounts 17,512 459 2.62
Money market
accounts 5,591 125 2.24
Borrowings 25 2 -
------------ ----------- ------------
Total interest
bearing liabilities $ 106,007 $ 4,597 4.34 %
------------ ----------- ------------
Noninterest bearing
liabilities:
Demand deposits $ 14,947
Other liabilities 1,371
Shareholders' equity 12,623
------------
Total liabilities and
shareholders' equity $ 134,948
============
-----------
Net interest income (1) $ 5,085
===========
Net interest spread (3) 3.29 %
============
Net interest income to
average interest earning
assets (1) 4.01 %
============
(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 $285,000 in 2001, $233,000 in
2000 and $263,000 in 1999.
(5) Interest income on loans includes fees of $200,039 in 2001, $141,729 in
2000 and $78,891 in 1999 from the Business Manager Program, student loans
and lease receivables.
10
Table 3 sets forth a summary of the changes in interest earned and
interest expense detailing the amounts attributable to (i) changes in volume
(change in average volume times the prior year's average rate), (ii) changes in
rate (change in the average rate times the prior year's average volume). The
changes in rate/volume (change in the average volume times the change in the
average rate), had been allocated to the changes in volume and changes in rate
in proportion to the relationship of the absolute dollar amounts of the change
in each. During 2001, net interest income increased $380,000 due to changes in
volume and decreased $172,000 due to changes in interest rates. Also, net
interest income was affected by a $52,000 increase in loan fees. In 2000, net
interest income increased $310,000 due to changes in volume and increased
$42,000 due to changes in interest rates. Also, net interest income was affected
by a $30,000 decrease in loan fees.
TABLE 3. VOLUME AND RATE ANALYSIS OF CHANGES IN INTEREST INCOME
---------------------------------- -----------------------------------
(Taxable equivalent basis) 2001 OVER 2000 2000 OVER 1999
---------------------------------- -----------------------------------
CHANGE DUE TO CHANGE DUE TO
--------------------- TOTAL -------------------- TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
------- ------- ------- ------- ------- -------
In thousands
Interest earned on:
Federal funds sold $ 150 $ (85) $ 65 $ 2 $ 32 $ 34
Taxable securities 446 (150) 296 47 35 82
Tax-exempt securities (25) (6) (31) (128) 2 (126)
Loans 540 (90) 450 869 261 1,130
------- ------- ------- ------- ------- -------
Total interest earned $ 1,111 $ (331) $ 780 $ 790 $ 330 $ 1,120
------- ------- ------- ------- ------- -------
Interest expense on:
Savings deposits $ 10 $ (61) $ (51) $ (25) $ (25) $ (50)
Time deposits 686 48 734 474 248 722
NOW accounts 40 (128) (88) 49 56 105
Money market accounts (4) (16) (20) (18) 6 (12)
Other borrowing (1) (2) (3) -- 3 3
------- ------- ------- ------- ------- -------
Total interest expense $ 731 $ (159) $ 572 $ 480 $ 288 $ 768
------- ------- ------- ------- ------- -------
Net interest income $ 380 $ (172) $ 208 $ 310 $ 42 $ 352
======= ======= ======= ======= ======= =======
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 4 is the difference
between the average rate earned on earning assets and the average rate on
interest bearing liabilities. The net interest margin takes into account the
benefit derived from assets funded by interest free sources such as non-interest
bearing demand deposits and capital.
11
TABLE 4. INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS
(Taxable equivalent basis) 2001 2000 1999
-------------------------- -------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------------------------- ------------ ------------ ------------ ------------
In thousands
Earning assets $151,511 7.64 % $135,045 8.00 % $126,893 7.63 %
============ ============ ============
Interest bearing liabilities $125,768 4.72 % $112,656 4.76 % $106,007 4.34 %
-------------- --------------- --------------
Interest rate spread 2.92 % 3.24 % 3.29 %
Interest free sources used
to fund earning assets(1) 25,743 0.81 % 22,389 0.79 % 20,886 0.72 %
------------ -------------- ------------ --------------- ------------ --------------
Total sources of funds $151,511 $135,045 $126,893
============ ============ ============
Net interest margin 3.73 % 4.03 % 4.01 %
============== =============== ==============
(1) Non-interest bearing liabilities and shareholders' equity less non-interest
earning assets.
The following discussion analyzes changes in the Bank's spreads and
margins in terms of basis points. A basis point is a unit of measure for
interest rates equal to .01%. One hundred basis points equals 1%.
Interest rate spread decreased 32 basis points in 2001 while the net
interest margin declined 30 basis points. Both the interest rate spread and
margin were negatively impacted by a 36 basis point decrease in earning asset
yields offset by a 4 basis point decrease in interest bearing liability costs.
Although the prime rate decreased 475 basis points in 2001, loan yields only
decreased 9 basis points because a significant portion of the loan portfolio are
fixed rate loans which are not directly affected by changes in the prime rate.
The decrease in liability costs is primarily the result of the lower cost of
funds on savings, NOW and money market accounts during the year.
Interest rate spread decreased 5 basis points in 2000 while the net
interest margin increased 2 basis points. The interest rate spread was
negatively impacted by a 42 basis point increase in interest bearing liability
costs and offset by a 37 basis point increase in earning asset yields. The
interest rate margin was positively affected by higher average earning assets
offset by a 5 basis point decrease in net interest rate spread. Although the
prime rate increased 100 basis points in 2000, loan yields only increased 28
basis points due to intense competition in our market area. The increase in
liability costs is primarily the result of higher rates on interest bearing
checking and time deposit accounts during the year.
PROVISION FOR LOAN LOSSES
The amount charged to provision for loan losses is based on
Management's evaluation of the loan portfolio. Management determines the
adequacy of the allowance for loan losses based on past loan loss experience,
current economic conditions, composition of the loan portfolio. The allowance
for loan losses is the best estimate by Management of the probable losses which
have been incurred as of the balance sheet date. See Nonperforming Loans and
Allowance for Loan Losses for a comprehensive analysis.
NONINTEREST INCOME
Noninterest income increased $183,000 or 21.7% during 2001 over the
prior comparable period. The increase in 2001 was attributable to insurance
operations, a new service the Bank began to offer to checking deposit account
holders in April 2001, debit cards and trust fees. Income from CNB's insurance
operations increased, including the investment in the title company. Bounce
Protection is a form of overdraft protection which enables the customer to have
their insufficient funds checks paid instead of returned. The customer is
charged a fee for each check paid.
12
Fees generated from the Bounce Protection program and debit card
income offset by the decrease in gain on stock received from the demutualization
of an insurance company in the first quarter of 2000 accounted for the increase
in noninterest income. There was also an increase in other fees, which included
trust fees. Fees generated from trust assets under management increased as the
level of assets being managed reached $24.1 million at December 31, 2001, a
12.1% increase from $21.5 million at December 31, 2000.
Noninterest income increased $278,000 or 49.0% during 2000 over the
prior comparable period. The increase in 2000 was primarily due to a gain
recognized on stock received from the demutualization of an insurance company of
$196,000. The Bank received the stock in exchange for its previous membership
interest as a participating policyholder. Also, the Bank continues to see
increased revenue associated with debit card and automated teller machines (ATM)
usage. In July 1999, the Bank increased the service charge assessed for
insufficient funds, which has provided additional revenue from service charges
on deposit accounts. Fees generated from trust assets under management increased
as the level of assets being managed reached $21.5 million at December 31, 2000,
a 5.9% increase from $20.3 million at December 31, 1999.
NONINTEREST EXPENSES
Noninterest expenses increased $515,000 or 12.0% during 2001 over the
prior comparable period. The increase was primarily due to an increase in
occupancy expense, salaries and employee benefits and other operating expenses.
Higher health insurance costs, normal recurring merit increases and additional
hiring for the south Martinsburg branch facility accounted for the additional
costs of salaries and benefits in 2001.
Components of other operating expense, which significantly increased
during 2001, included stationary, supplies and printing, data processing fees,
postage, professional fees and business manager program expenses. Expenses
related to the opening and operation of the temporary banking facility in south
Martinsburg, Berkeley County West Virginia beginning in August 2001 attributed
to the increase in occupancy expense and stationery, supplies and printing
expense. Also, contributing to the slight increase in occupancy expense was the
main Bank renovations, offset by the 2000 write-off of the fixed asset
abandonment related to the Bank not pursuing main office expansion plans.
Maintenance expense related to technology systems caused data processing expense
to increase. Professional fees increased due to holding company regulatory
financial reporting expenses. An increase in the volume of the Business Manager
program caused the expenses related to this program to increase.
Noninterest expenses increased $326,000 or 8.2% during 2000 over the
prior comparable period. The increase was primarily due to an increase in
salaries and employee benefits, occupancy of premises and other operating
expenses.
Higher health insurance costs, normal employee merit increases and
increased employer contributions to retirement and profit sharing plans
accounted for the additional costs of salaries and benefits in 2000.
A loss associated with the abandonment of fixed assets, routine
building repairs and maintenance and the painting of the Main Office branch were
the primary reasons for higher occupancy of premises expense. In 1997, the
Bank's management began the process of developing plans for expansion of the
main office facility on the adjacent parking lot, incurring costs associated
with surveys and architect fees. In 2000, management decided to abandon the
original plans due to constraints on parking, and to consider enclosing the
office space between the original building and the drive-up facility. The Bank
wrote off the survey and architect fees since the original drawings were no
longer part of the plan the Bank intends to pursue.
Components of other operating expense, which significantly increased
during 2000, included professional fees, data processing fees, advertising and
public relations expenses, FDIC insurance premiums, ATM and debit card expenses
and business manager program expenses. A larger deposit account assessment base
and rate changes contributed to increased FDIC insurance premiums. A new
advertising program focused on public awareness that began in the third quarter
of 2000, and the continuing promotion of the Hedgesville branch location caused
advertising and public relations costs to increase during 2000. Professional
fees increased due to the formation of the holding company. Maintenance expense
related to technology systems caused data processing expense to increase.
Increased usage by customers generated additional debit card and ATM expenses. A
growing number of merchants in the Business Manager program caused the expenses
related to this program to increase.
INCOME TAXES
Provision for income tax totaled $700,000 in 2001, $758,000 in 2000
and $621,000 in 1999. The effective tax rate was 36.1% in 2001 compared to 36.7%
and 33.7% in 2000 and 1999, respectively. The Bank's income tax expense differs
from the amount computed at statutory rates primarily due to the tax-exempt
earnings from certain investment securities. See Note 19 of the Notes to
Consolidated Financial Statements for a comprehensive analysis of income tax
expense.
13
FINANCIAL CONDITION
Table 5 examines Citizens National Bank's financial condition in terms
of its sources and uses of funds. Average funding uses increased $16.5 million
or 12.2% in 2001 compared with an increase of $8.2 million or 6.4% in 2000.
TABLE 5. SOURCES AND USES OF FUNDS
2001 2000 1999
----------------------------------- ------------------------------- --------
INCREASE (DECREASE) INCREASE (DECREASE)
AVERAGE ----------------------- AVERAGE ------------------- AVERAGE
BALANCE AMOUNT % BALANCE AMOUNT % BALANCE
-------- -------- -------- -------- -------- --- --------
In thousands
Funding uses:
Federal funds
sold $ 4,298 $ 3,272 318.9 % $ 1,026 $ (176) (14.6)% $ 1,202
Securities available
for sale 38,687 6,764 21.2 31,923 (2,051) (6.0) 33,974
Loans 108,526 6,430 6.3 102,096 10,379 11.3 91,717
-------- -------- -------- -------- --------
Total uses $151,511 $ 16,466 12.2 % $135,045 $ 8,152 6.4 % $126,893
======== ======== ===== ======== ======== ===== ========
Funding sources:
Interest-bearing
demand deposits $ 24,123 $ 1,138 5.0 % $ 22,985 $ (118) (0.5)% $ 23,103
Savings deposits 16,614 534 3.3 16,080 (1,192) (6.9) 17,272
Time deposits 84,987 11,465 15.6 73,522 7,915 12.1 65,607
Short-term
borrowings 44 (25) (36.2) 69 44 176.0 25
Noninterest bearing
funds, net(1) 25,743 3,354 15.0 22,389 1,503 7.2 20,886
-------- -------- -------- -------- --------
Total sources $151,511 $ 16,466 12.2 % $135,045 $ 8,152 6.4 % $126,893
======== ======== ===== ======== ======== ===== ========
(1) Noninterest bearing liabilities and shareholders' equity less noninterest
earning assets.
Total assets increased $21.6 million or 14.4% to $171.5 million from
December 31, 2000 to December 31, 2001, due primarily to a $6.5 million increase
in loans, a $14.3 million increase in securities available for sale and a
$490,000 increase in cash and cash equivalents and a $1.1 million increase in
premises and equipment, net, which were partially offset by a $1.2 million
decrease in federal funds sold.
Total liabilities increased $20.5 million or 15.1% to $156.6 million
from December 31, 2000 to December 31, 2001 substantially due to the increase in
deposits. Shareholders' equity increased $1.1 million to $14.9 million at
December 31, 2001 primarily due to net income of $1.2 million and a $293,000
increase in accumulated other comprehensive income, offset by cash dividends of
$467,000.
The increase in accumulated other comprehensive income was due to the
unrealized market value appreciation of the available for sale investment
security portfolio. The only component of accumulated other comprehensive income
at December 31, 2001 was unrealized gains and losses on available for sale
securities net of deferred income taxes. The unrealized gains and losses are
primarily a function of available market interest rates relative to the yield
being generated on the available for sale portfolio. No earnings impact results,
however, unless the securities are actually sold.
14
LOAN PORTFOLIO
At December 31, 2001, total loans increased $6.5 million or 6.3% to
$110.5 million from $104.0 million at December 31, 2000. The loan mix changed
slightly compared with December 31, 2000. The Bank's commercial real estate and
business loans grew as a direct result of the Bank hiring a commercial lender
and continued efforts to develop new commercial lending relationships especially
in the Berkeley County, West Virginia market. Also, the Bank's semi-annual auto
loan sales generated an increase in consumer loans. The Bank's management
believes additional growth in all lending areas is possible into year 2002.
Management's intent is to control the loan volume in a manner which would
produce a loan to deposit ratio between 75% and 80% and maintain credit quality.
The loan to deposit ratio was 71.6% at December 31, 2001 and 77.6% at December
31, 2000. The Bank had substantial deposit growth and slower loan demand in 2001
resulting in a lower loan to deposit ratio. Management continued to fund the
loan growth with deposits and the excess deposit growth was invested in high
quality US government agencies securities. The ratio of net charge-offs to
average loans outstanding was .10% in 2001 and .10% in 2000.
Growth recorded in the commercial loan area resulted in increases of
15.6% to $7.0 million outstanding at December 31, 2001 and 16.4% to $6.0 million
outstanding at December 31, 2000. The Bank participates in the Business Manager
program, commercial lines of credit collateralized by accounts receivable, which
has generated an increase in commercial loans during 2001. The Bank's market
area was expanded to Berkeley County, West Virginia in 1999 which provides a
much larger area for commercial lending. Additional growth in both commercial
business and commercial real estate is possible in 2002.
Real estate mortgage loans comprised mainly of one to four family
residences continued to be the Bank's dominant loan category. Mortgage lending
comprises approximately 61% or $67.9 million of the total loan portfolio at
December 31, 2001 compared to 62% or $65.3 million at December 31, 2000.
Demand for the Bank's primary mortgage products, variable rate loans
carrying annual interest rate adjustments based on one, three and five year
Treasury rates, continues to increase and have become more attractive to the
Bank's customers because these loans usually have lower rates, lower closing
costs and quicker settlement. The Bank continues to see demand for fixed rate
mortgage products, and for all loan products, as the Bank penetrates the
Berkeley County, West Virginia real estate market. As of December 31, 2001,
66.6% of the Bank's mortgage loans were adjustable rate loans and 33.4% were
fixed rate loans. Currently, the Bank has approximately $1.4 million in fixed
rate loans in the portfolio which were originated under terms that would allow
them to be sold on the secondary market, although there is no present intent to
sell these loans.
The consumer loan portfolio slowed a slight increase. In the first half
of 2001, the Bank's auto loan sale generated an increase. However, during the
third quarter, new auto loans were considerably affected by the dealer incentive
programs offered by the competition.
Additional information on the composition of the loan portfolio may be
found in Note 6 of the Notes to the Consolidated Financial Statements.
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, 2001 and 2000, nonaccrual loans approximated
.02% of total loans (net) in each year.
15
TABLE 6. LOANS AND LEASE RECEIVABLE
DECEMBER 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ -------------
In thousands
Real estate $ 67,860 $ 65,278 $ 61,625
Commercial real estate 12,459 9,944 9,569
Consumer 24,198 23,708 21,778
Commercial 6,978 6,037 5,185
Overdrafts 87 20 28
------------ ------------ -------------
$111,582 $104,987 $ 98,185
Lease: 139 143 -
------------ ------------ -------------
111,721 105,130 98,185
Net deferred loan fees,
premiums and discounts 153 90 88
Allowance for loan losses (1,337) (1,216) (1,148)
------------ ------------ -------------
$110,537 $104,004 $ 97,125
============ ============ =============
TABLE 7. LOAN MATURITIES AND INTEREST SENSITIVITY (1)
DECEMBER 31, 2001
--------------------------------------------------
ONE YEAR ONE THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
------- ------- ------- -------
In thousands
Commercial, financial and agricultural $ 6,996 $ 1,153 $11,287 $19,436
Real estate - construction 2,636 -- -- $ 2,636
------- ------- ------- -------
Total $ 9,632 $ 1,153 $11,287 $22,072
======= ======= ======= =======
Loans with predetermined interest rate $ 5,567 $ 996 $ 2,181 $ 8,744
Loans with variable interest rate 4,065 157 9,106 $13,328
------- ------- ------- -------
Total $ 9,632 $ 1,153 $11,287 $22,072
======= ======= ======= =======
(1) Excludes residential mortgages and consumer loans.
NONPERFORMING LOANS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming loans consist of loans in nonaccrual status, loans which
are past due 90 days or more and still accruing interest and restructured loans.
The Bank has no loans which are considered to be impaired as of December 31,
2001 and 2000. As of December 31, 2001, management is aware of two commercial
loans with aggregate uninsured balances of $280,739 which the borrowers have
exhibited weaknesses. A specific allowance of $100,000 related to these loans
has been established as part of the allowance for loan losses. The loans are
collateralized and any additional potential loss would be minimal.
16
TABLE 8. NON-PERFORMING ASSETS
DECEMBER 31,
-----------------------------
2001 2000 1999
---- ---- ----
In thousands
Nonaccrual loans $ 25 $ 22 $ 22
Loans past due 90 days or more
still accruing interest 450 360 79
Restructured loans -- -- --
---- ---- ----
Total nonperforming loans $475 $382 $101
---- ---- ----
Other real estate owned $ 15 $-- $ 67
---- ---- ----
Total nonperforming assets $490 $382 $168
==== ==== ====
Ratios:
Nonperforming loans/Total loans 0.43% 0.37% 0.10%
Nonperforming assets/Total assets 0.29% 0.25% 0.12%
Allowance for loan losses/Total loans 1.21% 1.17% 1.18%
The allowance for loan losses is the best estimate by management of
the probable losses which have been incurred as of the respective balance sheet
date. Management makes a determination quarterly by analyzing overall loan
quality, changes in the mix and size of the loan portfolio, previous loss
experience, general economic conditions, information about specific borrowers
and other factors. The Bank's methodology for determining the allowance for loan
losses establishes both an allocated and an unallocated component. The allocated
portion of the allowance represents the results of analyses of individual loans
that are being monitored for potential credit problems and pools of loans within
the portfolio. The allocated portion of the allowance for loans is based
principally on current loan risk ratings, historical loan loss rates adjusted to
reflect current conditions, as well as analyses of other factors that may have
affected the collectibility of loans in the portfolio. The Bank analyzes all
commercial loans that are being monitored as potential credit problems to
determine whether such loans are impaired, with impairment measured by reference
to the borrowers' collateral values and cash flows. The unallocated portion of
the allowance for loan losses represents the results of analyses that measure
probable losses inherent in the portfolio that are not adequately captured in
the allocated allowance analyses. These analyses include consideration of
unidentified losses inherent in the portfolio resulting from changing
underwriting criteria, changes in the types and mix of loans originated,
industry concentrations and evaluations, allowance levels relative to selected
overall credit criteria and other economic indicators used to estimate probable
incurred losses. At December 31, 2001 and 2000, the allowance for loan losses
totaled $1.3 million and $1.2 million, respectively. The allowance for loan
losses as a percentage of loans was 1.20% and 1.16% as of December 31, 2001 and
2000. The provision for loan losses exceeded net charge-offs by $121,000 and
$68,000 in 2001 and 2000. An analysis of the allowance for loan losses for the
years ended December 31, 2001 and 2000 may be found in Note 6 of the Notes to
the Consolidated Financial Statements.
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 2001, 2000 and
1999, the provision totaled $226,000, $170,000 and $118,000, respectively. While
loan quality remains good and past due and nonaccrual loans are minimal,
management increased the provision for loan losses in 2001 based on the
declining general economic conditions as evidenced by the slowdown in the
economy as cited in various financial publications. Having increased the
provision for loan losses, management believes the allowance for loan losses to
be adequate and is not aware of any information relating to the loan portfolio
which it expects will materially impact future operating results, liquidity or
capital resources. In addition, federal regulators may require additional
reserves as a result of their examination of the Bank. The allowance for loan
losses reflects what management currently believes is an adequate level of
allowance, although there can be no assurance that future losses will not exceed
the estimated amounts, thereby adversely affecting future results of operations.
17
TABLE 9. ALLOWANCE FOR LOAN LOSSES
2001 2000 1999
------- ------- -------
In thousands
Balance, beginning of year $ 1,216 $ 1,148 $ 1,122
------- ------- -------
Provision charged to expense $ 226 $ 170 $ 118
------- ------- -------
Loans charged off:
Commercial, financial and agricultural $ 3 $ 6 $ 7
Consumer 133 115 97
Mortgage -- -- 14
------- ------- -------
Total loans charged off $ (136) $ (121) $ (118)
------- ------- -------
Recoveries:
Commercial, financial and agricultural $ 2 $ 1 $ 5
Consumer 29 18 21
------- ------- -------
Total recoveries $ 31 $ 19 $ 26
------- ------- -------
Net charge-offs $ (105) $ (102) $ (92)
------- ------- -------
Balance, end of year $ 1,337 $ 1,216 $ 1,148
======= ======= =======
TABLE 10. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31
----------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------- ----------------------------------- ----------------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
---------------- ------------- ---------------- ------------------- -------------- ------------------
In thousands
Commercial, financial
and agriculture $ 363 6% $ 206 6% $ 89 5%
Real estate - mortgage 294 72 257 72 284 73
Installment and other 370 22 351 22 558 22
Unallocated 310 N/A 402 N/A 217 N/A
------ -------- ------ -------- ------ -------
Total $1,337 100% $1,216 100% $1,148 100%
====== ======== ====== ======== ====== =======
SECURITIES PORTFOLIO AND FEDERAL FUNDS SOLD
The Bank's securities portfolio consists of only available for sale
securities. 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 $14.3 million to $49.7 million at December
31, 2001 from 2000.
The composition of the portfolio continues to reflect the Bank's
conservative philosophy which places greater importance on safety and liquidity
than on yield. At December 31, 2001, approximately 97.4% of the portfolio is
comprised of US Treasury and Agency securities and 1.1% in State and Political
Subdivision securities. The term to maturity is limited to seven years for
Treasury and Agency bonds and 10 years for Municipal bonds. Typically,
investments in Agency bonds contain a call feature. These bonds generally have a
somewhat higher yield. The average term to maturity of the portfolio as of
December 31, 2001 was 4.4 years.
The Bank generally participates in the overnight federal funds sold
market. Depending upon specific investing or funding strategies and/or normal
fluctuations in loan and deposit balances, the Bank may need, on occasion, to
purchase funds on an overnight basis. In 2001 and 2000, the average balance in
federal funds sold was $4.3 million and $1.0 million, respectively.
18
DEPOSITS AND OTHER FUNDING SOURCES
Total deposits were $154.4 million at December 31, 2001, an increase
of $20.4 million or 15.2% over deposits at December 31, 2000. Average deposits,
however, showed a $14.6 million, or 11.3% growth, to $143.2 million in 2001.
Deposits at the Hedgesville branch totaled $20.6 million at December 31, 2001,
an increase of $6.6 million over December 31, 2000. Deposits at the temporary
banking facility located in south Martinsburg totaled $1.3 million at December
31, 2001. The Bank has experienced a slight change in the deposit account mix
during 2001. A shift from time deposits to jumbo certificates of deposit is a
direct result of customers making deposits to the 36-month Ultimate Certificate
of Deposit throughout the year. The increase in jumbo certificates of deposit
and other certificates of deposit are primarily due to the continued growth in
the 36-month Ultimate Certificate of Deposit. The Bank's 36-month Ultimate
Certificate of Deposit allows the customer to withdraw all or a portion of the
CD on the first or second year anniversary date without penalty. Deposits may
also be made to this CD at any time.
Noninterest-bearing deposits also grew by $3.0 million or 18.6%,
during 2001, from $16.2 million at December 31, 2000, to $19.2 million at
December 31, 2001. At December 31, 2001, noninterest-bearing deposits
represented 12.4% of total deposits, compared to 12.1% for 2000. Average
noninterest-bearing deposits increased 9.2% from $16.0 million in 2000 to $17.5
million in 2001. The Bank's noninterest-bearing deposit account with no minimum
balance and check truncation continues to grow since its introduction in 1999.
Interest-bearing deposits increased by $17.4 million or 14.8% to
$135.2 million at December 31, 2001. Interest-bearing checking increased by
$867,000 in 2001. Included in this category are NOW accounts and Money Market
accounts. Savings accounts increased $2.3 million in 2001 from the previous year
to $17.9 million, while the average savings deposits increased only $534,000 or
3.3% to $16.6 million at December 31, 2001. The Bank's largest source of
interest-bearing funds is certificates of deposit. These accounts totaled $92.5
million at December 31, 2001, an increase of $14.2 million or 18.2%. The
increase is primarily due to the continue growth in the 36-month Ultimate
Certificate of Deposit which was first offered as a promotional certificate of
deposit with the grand opening of the Hedgesville branch location in 1998.
The Bank's institutional advertising campaign which began in 2000 has
generated an influx of new noninterest-bearing and interest-bearing deposit
accounts especially at the Hedgesville and south Martinsburg branches.
Table 11 is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 2000.
TABLE 11. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
AMOUNT PERCENT
-------------- ------------
In thousands
Three months or less $ 3,991 14.54 %
Three through six months 1,924 7.01
Six through twelve months 3,607 13.14
Over twelve months 17,929 65.31
-------- -----
Total $ 27,451 100 %
======== ======
CAPITAL RESOURCES
The Bank remains well capitalized. Total shareholders' equity at
December 31, 2001 of $14.9 million represents 8.7% of total assets. This
compares to $13.9 million or 9.2%, at December 31, 2000. Included in capital at
December 31, 2001 are $178,000 of unrealized gains on available for sale
securities, net of deferred income taxes. At December 31, 2000, the Bank had
unrealized losses on available for sale securities, net of deferred income taxes
of $115,000. Such unrealized gains and losses are recorded net of related
deferred taxes and are primarily a function of available market interest rates
relative to the yield being generated on the available for sale portfolio. No
earnings impact will result, however, unless the securities are actually sold.
The stock of CNB Financial Services, Inc., and prior to the formation
of CNB, the Bank, are not listed on an exchange and are not heavily traded. The
trades that have occurred are those that, to management's knowledge, have been
individually arranged. Based on information that management is aware of, the
majority of shares sold during 2001 were at a price that ranged from $67 to $135
per share. During 2000, information available to management indicates that stock
trades ranged from $75 to $285 per share. Book value per share increased from
$30.74 at December 31, 2000 to $32.59 at December 31, 2001.
19
Dividends which have been declared by the Board of Directors
semiannually, remained the same in 2001 and 2000 at $1.02 per share. All stock
prices and per share amounts have been restated to reflect the formation of CNB
Financial Services, Inc. and the acquisition of Citizens National Bank and
subsidiary on August 31, 2000 and accounted for as a pooling of interests.
The Federal Reserve's risk-based capital guidelines provide for the
relative weighting of both on-balance-sheet and off-balance-sheet items based on
their degree of risk. The Bank continues to exceed all regulatory capital
requirements, and is unaware of any trends or uncertainties, nor do any plans
exist, which may materially impair or alter its capital position.
RETURN ON EQUITY AND ASSETS
Table 12 shows consolidated operating and capital ratios for the
periods indicated.
TABLE 12. OPERATING AND CAPITAL RATIOS
YEARS ENDED DECEMBER 31,
2001 2000
---- ----
Return on average assets .77% .91%
Return on average equity 8.49 10.16
Dividend payout ratio 37.79 35.78
Average equity to average assets ratio 9.12 9.00
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of the Bank's liquidity management program is to ensure
the continuous availability of funds to meet the withdrawal demands of
depositors and the credit needs of borrowers. The basis of the Bank's liquidity
comes from the stability of its core deposits. Liquidity is also available
through the available for sale securities portfolio and short-term funds such as
federal funds sold. At December 31, 2001, these sources totaled $49.7 million,
or 29.0% of total assets. In addition, liquidity may be generated through loan
repayments and over $7.0 million of available borrowing arrangements with
correspondent banks. At December 31, 2001, management considered the Bank's
ability to satisfy its anticipated liquidity needs over the next twelve months.
Management believes that the Bank is well positioned and has ample liquidity to
satisfy these needs. The Bank generated $1.5 million of cash from operations in
2001, which compares to $1.8 million in 2000 and $1.8 million in 1999.
Additional cash of $19.9 million, $9.0 million and $8.7 million was generated
through net financing activities in 2001, 2000 and 1999, respectively. These
proceeds along with proceeds from the sales and maturities of investment
securities were used to fund loans and purchase securities during each year. Net
cash used in investing activities totaled $20.9 million in 2001 compared to
$11.1 million in 2000 and $9.4 million in 1999. Details on both the sources and
uses of cash are presented in the Consolidated Statements of Cash Flows
contained in the financial statements.
The objective of the Bank's interest rate sensitivity management
program, also known as asset/liability management, is to maximize net interest
income while minimizing the risk of adverse effects from changing interest
rates. This is done by controlling the mix and maturities of interest-sensitive
assets and liabilities. The Bank has established an asset/liability committee
for this purpose. Daily management of the Bank's sensitivity of earnings to
changes in interest rates within the Bank's policy guidelines are monitored by
using a combination of off-balance sheet and on-balance sheet financial
instruments. The Bank's Chief Executive Officer, Senior Lending Officer, Chief
Financial Officer and the Chief Operations Officer monitor day to day deposit
flows, lending requirements and the competitive environment. Rate changes occur
within policy guidelines if necessary to minimize adverse affects. Also, the
Bank's policy is intended to ensure that the Bank measures a range of rate
scenarios and patterns of rate movements that are reasonably possible.
In analyzing interest rate sensitivity for policy measurement, the Bank
compares its forecasted earnings in both a "high rate" and "low rate" scenario
to a base-line scenario. The Bank's base-line scenario is that short-term
interest rates over the next 12 months remain at the current rate. The "high
rate" and "low rate" scenarios assume a 200 basis point increase or decrease in
the prime rate from beginning point of the base-line scenario over the most
current 12-month period. The Bank's policy limit for the maximum negative impact
on earnings resulting from "high rate" or "low rate" scenarios is 10 percent.
The policy measurement period is 12 months in length, beginning with the first
month of the forecast.
The Bank's base-line scenario holds the prime rate constant at 4.75
percent through December 2002. Based on the January 2002 outlook, the model
indicates that earnings during the policy measurement period would be affected
by less than 10 percent, in both an increasing or decreasing interest rate
scenario.
One common interest rate risk measure is the gap, or the
difference between rate sensitive assets and rate sensitive liabilities. A
positive gap occurs when rate-sensitive assets exceed rate-sensitive
liabilities. This tends to be beneficial in rising interest rate environments. A
negative gap refers to the opposite situation and tends to be beneficial in
declining interest rate environments. 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.
21
TABLE 13. INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 2001
-----------------------------------------------------------------------
INTEREST SENSITIVITY PERIOD
-----------------------------------------------------------------------
2002 2003 2004 2005 2006
------------ ------------ ------------ ------------ -----------
In thousands
Rate sensitive assets
Loans, net of unearned interest $ 31,567 $ 15,030 $ 17,944 $ 12,818 $ 10,292
Average interest rate 8.08% 8.69% 8.36% 8.35% 7.73%
Securities 1,005 851 8,082 20,628 764
Average interest rate 6.63% 4.29% 4.50% 4.30% 5.60%
------------ ------------------------------------------------------
Total interest sensitive assets $ 32,572 $ 15,881 $ 26,026 $ 33,446 $ 11,056
=========== ======================================================
Interest sensitive liabilities
Non-interest-bearing deposits $ 1,917 $ 1,917 $ 1,917 $ 1,917 $ 1,917
Average interest rate - - - - -
Savings and interest-bearing checking 4,273 4,273 4,273 4,273 4,273
Average interest rate 1.00% 1.00% 1.00% 1.00% 1.00%
Time deposits 40,028 34,039 14,802 1,821 1,786
Average interest rate 2.13% 2.88% 2.75% 3.17% 3.42%
------------ ------------------------------------------------------
Total interest sensitive liabilities $ 46,218 $ 40,229 $ 20,992 $ 8,011 $ 7,976
=========== ======================================================
GAP $(13,646) $(24,348) $ 5,034 $ 25,435 $ 3,080
Cumulative GAP $(13,646) $(37,994) $(19,314) $ 6,121 $ 9,200
GAP to sensitive assets ratio (8.45)% (15.07)% 3.12 % 15.74 % 1.91 %
Cumulative GAP to sensitive
assets ratio (8.45)% (23.52)% (20.40)% (4.66)% (2.75)%
GAP to total assets ratio (7.95)% (14.19)% 2.93 % 14.83 % 1.80 %
Cumulative GAP to total assets ratio (7.95)% (22.15)% (11.26)% 3.57 % 5.36 %
DECEMBER 31, 2001
---------------------------
INTEREST SENSITIVITY PERIOD
THEREAFTER TOTAL FAIR VALUE
---------- ------------ ------------
Rate sensitive assets
Loans, net of unearned interest $ 24,224 $111,874 $110,959
Average interest rate 7.47% 7.70%
Securities 18,338 49,668 49,668
Average interest rate 6.08% 5.29%
----------------------------
Total interest sensitive assets $ 42,562 $161,542
============================
Interest sensitive liabilities
Non-interest-bearing deposits $ 9,589 19,174 $ 19,174
Average interest rate - -
Savings and interest-bearing checking 21,365 42,730 42,730
Average interest rate 1.00% 1.00%
Time deposits - 92,476 95,724
Average interest rate - 2.55%
----------------------------
Total interest sensitive liabilities $ 30,954 $ 19,174
============================
GAP $ 11,608
Cumulative GAP $ 20,808
GAP to sensitive assets ratio 7.19%
Cumulative GAP to sensitive
assets ratio 4.43%
GAP to total assets ratio 6.77%
Cumulative GAP to total assets ratio 12.13%
RECENTLY ISSUED ACCOUNTING STANDARDS
Business Combinations and Intangible Assets - In June 2001, the
Financial Accounting Standards Board (FASB) issued Statements of Financial
Accounting Standards Nos. 141 "Business Combinations" (Statement 141), and 142,
"Goodwill and Other Intangible Assets" (Statement 142). Statement 141 requires
that the purchase method of accounting be used for all business combinations and
eliminated the use of pooling of interests for transactions initiated subsequent
to June 30, 2001. Statement 142 eliminates the amortization to expense of
goodwill recorded as a result of such combinations, but requires periodic
evaluation of the goodwill for impairment. Write-downs of the balance, if
necessary, are to be charged to results of operations. Goodwill existing prior
to the issuance of the statement was required to be amortized through December
31, 2001. At this time, these statements are not expected to have a significant
impact on CNB's future Consolidated Financial Statements.
Accounting for the Impairment or Disposal of Long-Lived Assets - In
August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement
144). Statement 144 supersedes Statement 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and certain
other related accounting standards. In general, Statement 144 established a
single accounting model for a segment of a business to be accounted for as a
discontinued operation and resolved significant implementation issues related to
Statement 121. Statement 144 was effective for years beginning after December
15, 2001. CNB is evaluating the impact, if any, this statement may have on its
future Consolidated Financial Statements.
22
IMPACT OF INFLATION
The results of operations and financial position of the Bank have been
presented based on historical cost, unadjusted for the effects of inflation,
except for the recording of unrealized gains and losses on securities available
for sale. Inflation could significantly impact the value of the Bank's interest
rate-sensitive assets and liabilities and the cost of noninterest expenses, such
as salaries, benefits and other operating expenses. Management of the money
supply by the Federal Reserve to control the rate of inflation may have an
impact on the earnings of the Bank. Further, changes in interest rates to
control inflation may have a corresponding impact on the ability of certain
borrowers to repay loans granted by the Bank.
As a financial intermediary, the Bank holds a high percentage of
interest rate-sensitive assets and liabilities. Consequently, the estimated fair
value of a significant portion of the Bank's assets and liabilities change more
frequently than those of non-banking entities. The Bank's policies attempt to
structure its mix of financial instruments and manage its interest rate
sensitivity in order to minimize the potential adverse effects of market forces
on its net interest income, earnings and capital.
A comparison of the carrying value of the Bank's financial instruments to their
estimated fair value as of December 31, 2001 and December 31, 2000 is disclosed
in Note 25 of the Notes to the Consolidated Financial Statements.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements are set forth
in this Annual Report of Form 10-K on the following pages:
CNB Financial Services, Inc. and Subsidiary
Independent Auditors' Report.................................. 25
Consolidated Balance Sheets................................... 26
Consolidated Statements of Income............................. 27
Consolidated Statements of Stockholders' Equity............... 28
Consolidated Statements of Cash Flows......................... 29
Notes to Consolidated Financial Statements.................... 30
24
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors
CNB Financial Services, Inc.
Berkeley Springs, West Virginia
We have audited the accompanying consolidated statements of
financial condition of CNB Financial Services, Inc. and subsidiary as of
December 31, 2001 and 2000, 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, 2001. 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 auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of CNB
Financial Services, Inc. and subsidiary as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ SMITH ELLIOTT KEARNS & COMPANY, LLC
Hagerstown, Maryland
January 30, 2002
25
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2001 AND 2000
ASSETS 2001 2000
------------- -------------
Cash and due from banks $ 4,229,810 $ 3,739,854
Federal funds sold -- 1,207,684
Securities available for sale
(at approximate market value) 49,668,479 35,374,293
Loans and lease receivable, net 110,536,744 104,003,931
Accrued interest receivable 1,052,620 1,004,257
Foreclosed real estate (held for sale), net 14,898 --
Premises and equipment, net 4,283,625 3,167,302
Deferred income taxes 225,894 375,509
Cash surrender value of life insurance 883,533 790,807
Intangible assets 105,168 113,853
Other assets 540,672 204,877
------------- -------------
TOTAL ASSETS $ 171,541,443 $ 149,982,367
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 19,174,111 $ 16,164,702
Interest-bearing demand 24,878,709 24,012,083
Savings 17,851,684 15,571,297
Time, $100,000 and over 27,450,519 17,764,825
Other time 65,025,516 60,482,943
------------- -------------
$ 154,380,539 $ 133,995,850
Accrued interest payable 1,148,437 1,038,122
Accrued expenses and other liabilities 1,086,230 1,084,577
------------- -------------
TOTAL LIABILITIES $ 156,615,206 $ 136,118,549
------------- -------------
SHAREHOLDERS' EQUITY
Common stock, $1 par value; 5,000,000 shares
authorized; 458,048 shares outstanding $ 458,048 $ 458,048
Capital surplus 3,863,592 3,863,592
Retained earnings 10,426,618 9,657,422
Accumulated other comprehensive income 177,979 (115,244)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY $ 14,926,237 $ 13,863,818
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 171,541,443 $ 149,982,367
============= =============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
26
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans $ 9,381,949 $ 8,887,114 $ 7,779,359
Interest and dividends on securities:
United States Treasury securities 274 25,232 55,516
U.S. Government agencies and
corporations 2,238,886 1,960,198 1,855,665
State and political subdivisions 29,450 60,002 185,680
Other 57,686 7,779 8,206
Interest on federal funds sold 159,744 94,914 60,968
------------ ------------ ------------
$ 11,867,989 $ 11,035,239 $ 9,945,394
------------ ------------ ------------
INTEREST EXPENSE
Interest on interest bearing demand,
savings and time deposits $ 5,935,078 $ 5,359,871 $ 4,594,966
Interest on federal funds purchased 2,291 5,051 2,607
------------ ------------ ------------
$ 5,937,369 $ 5,364,922 $ 4,597,573
------------ ------------ ------------
NET INTEREST INCOME $ 5,930,620 $ 5,670,317 $ 5,347,821
PROVISION FOR LOAN LOSSES 226,000 170,000 117,999
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 5,704,620 $ 5,500,317 $ 5,229,822
------------ ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts $ 545,882 $ 282,866 $ 247,159
Other service charges, commissions
and fees 259,887 211,982 176,951
Insurance income 124,514 94,691 92,650
Other operating income 49,498 59,148 55,139
Gain on demutualization of insurance company -- 195,889 --
Net gain (loss) on sale of securities 833 (13,991) (4,262)
Income from title company 44,877 -- --
Gain (loss) on sale of other real estate owned -- 12,177 (2,890)
------------ ------------ ------------
$ 1,025,491 $ 842,762 $ 564,747
------------ ------------ ------------
NONINTEREST EXPENSES
Salaries $ 2,013,709 $ 1,760,226 $ 1,713,298
Employee benefits 621,036 562,625 532,762
Occupancy of premises 264,184 249,738 203,442
Furniture and equipment expense 254,232 248,053 262,794
Other operating expenses 1,640,764 1,458,762 1,241,226
------------ ------------ ------------
$ 4,793,925 $ 4,279,404 $ 3,953,522
------------ ------------ ------------
INCOME BEFORE INCOME TAXES $ 1,936,186 $ 2,063,675 $ 1,841,047
PROVISION FOR INCOME TAXES 699,781 757,835 620,818
------------ ------------ ------------
NET INCOME $ 1,236,405 $ 1,305,840 $ 1,220,229
============ ============ ============
BASIC EARNINGS PER SHARE $ 2.70 $ 2.85 $ 2.66
============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
27
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK (1) SURPLUS (1) EARNINGS (1) INCOME EQUITY
------------ ------------- ------------- -------------- --------------
BALANCE, DECEMBER 31, 1998 $ 458,048 $ 3,863,592 $ 8,056,610 $ 140,015 $ 12,518,265
------------
Comprehensive income:
Net income for 1999 -- -- 1,220,229 -- 1,220,229
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $632,348) -- -- -- (1,031,725) (1,031,725)
------------
Total Comprehensive Income -- -- -- -- 188,504
------------
Cash dividends ($1.00 per share) -- -- (458,048) -- (458,048)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 $ 458,048 $ 3,863,592 $ 8,818,791 $ (891,710) $ 12,248,721
------------
Comprehensive income:
Net income for 2000 -- -- 1,305,840 -- 1,305,840
Change in unrealized gains
(losses) on securities
available for sale (net of tax of $475,898) -- -- -- 776,466 776,466
------------
Total Comprehensive Income --