Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - CNB FINANCIAL SERVICES INC | l38093exv32w2.htm |
EX-31.2 - EX-31.2 - CNB FINANCIAL SERVICES INC | l38093exv31w2.htm |
EX-32.1 - EX-32.1 - CNB FINANCIAL SERVICES INC | l38093exv32w1.htm |
EX-31.1 - EX-31.1 - CNB FINANCIAL SERVICES INC | l38093exv31w1.htm |
Table of Contents
United States
Securities and Exchange Commission
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
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.
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) |
Issuers telephone number, (304) 258 1520
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one)
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
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
November 13, 2009.
CNB FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 indicates that the disclosure of
forward-looking information is desirable for investors and encourages such disclosure by providing
a safe harbor for forward-looking statements that involve risk and uncertainty. All statements
other than statements of historical fact included in this Form 10-Q including statements in
Managements Discussion and Analysis of Financial Condition and Results of Operations are, or may
be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. In order to comply with the terms
of the safe harbor, CNB notes that a variety of factors could cause CNBs actual results and
experience to differ materially from the anticipated results or other expectations expressed in
those forward-looking statements. These factors could include the following possibilities: (1)
competitive pressures among depository and other financial institutions may increase significantly;
(2) changes in the interest rate environment may reduce margins; (3) general economic conditions
may become more unfavorable than expected resulting in reduced credit quality or demand for loans;
(4) legislative or regulatory changes could increase expenses; (5) competitors may have greater
financial resources and develop products that enable them to compete more successfully than CNB;
(6) additional assessments may be imposed by the FDIC; (7) additional expense to the provision for
loan losses may be greater than anticipated: (8) Loan activity may continue to be soft in the
commercial real estate portfolio with very little generation of new loans; and (9) real estate
activity for 2010 in the Eastern Panhandle of West Virginia may not improve. Additionally,
consideration should be given to the cautionary language contained elsewhere in this Form 10-Q and
in the section on Risk Factors, Item 1A in the companys Annual Report to Shareholders on Form
10-K for the fiscal year ended December 31, 2008.
2
Table of Contents
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 3,792,211 | $ | 4,770,724 | ||||
Federal funds sold |
9,950,000 | | ||||||
Certificates of deposit |
3,671,963 | | ||||||
Securities available for sale
(at approximate market value) |
65,776,958 | 62,604,735 | ||||||
Federal Home Loan Bank stock, at cost |
2,321,300 | 2,321,300 | ||||||
Loans and lease receivable, net |
194,947,099 | 200,752,202 | ||||||
Accrued interest receivable |
1,315,101 | 1,272,742 | ||||||
Foreclosed real estate (held for sale), net |
284,329 | 253,300 | ||||||
Premises and equipment, net |
5,635,459 | 5,842,368 | ||||||
Deferred income taxes |
1,503,179 | 1,889,746 | ||||||
Cash surrender value of life insurance |
1,566,078 | 1,617,055 | ||||||
Intangible assets |
190,507 | 274,145 | ||||||
Other assets |
760,181 | 658,665 | ||||||
TOTAL ASSETS |
$ | 291,714,365 | $ | 282,256,982 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Demand |
$ | 40,973,675 | $ | 39,469,377 | ||||
Interest-bearing demand |
38,035,888 | 35,554,781 | ||||||
Savings |
25,295,717 | 23,476,255 | ||||||
Time, $100,000 and over |
70,407,956 | 55,269,424 | ||||||
Other time |
75,817,335 | 74,125,229 | ||||||
$ | 250,530,571 | $ | 227,895,066 | |||||
Accrued interest payable |
1,127,652 | 1,126,219 | ||||||
FHLB borrowings |
10,000,000 | 25,445,000 | ||||||
Accrued expenses and other liabilities |
4,322,473 | 4,572,907 | ||||||
TOTAL LIABILITIES |
$ | 265,980,696 | $ | 259,039,192 | ||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, $1 par value; 5,000,000 shares
authorized; 458,048 shares issued at September 30, 2009 and
December 31, 2008 and 445,448 outstanding at
September 30, 2009 and 449,151 outstanding at December 31,
2008 |
$ | 458,048 | $ | 458,048 | ||||
Capital surplus |
4,163,592 | 4,163,592 | ||||||
Retained earnings |
22,538,531 | 21,015,652 | ||||||
Accumulated other comprehensive income (loss) |
(683,694 | ) | (1,848,990 | ) | ||||
$ | 26,476,477 | $ | 23,788,302 | |||||
Less treasury stock, at cost, 12,600 shares in 2009 and 8,897
shares in 2008 |
(742,808 | ) | (570,512 | ) | ||||
TOTAL SHAREHOLDERS EQUITY |
$ | 25,733,669 | $ | 23,217,790 | ||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 291,714,365 | $ | 282,256,982 | ||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
3
Table of Contents
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Interest and fees on loans |
$ | 3,227,137 | $ | 3,442,160 | $ | 9,701,834 | $ | 10,503,590 | ||||||||
Interest and dividends on securities
U.S. Government agencies and
corporations |
48,362 | 150,103 | 189,552 | 512,385 | ||||||||||||
Corporate bonds |
86,655 | 99,964 | 283,586 | 246,681 | ||||||||||||
Mortgage backed securities |
327,452 | 370,876 | 1,038,813 | 1,033,890 | ||||||||||||
State and political subdivisions |
202,095 | 135,292 | 539,114 | 378,439 | ||||||||||||
Interest on certificates of deposit |
5,517 | | 14,142 | | ||||||||||||
Dividend income from FHLB stock |
| 19,641 | | 70,018 | ||||||||||||
Interest on FHLB deposits |
4 | 460 | 33 | 2,540 | ||||||||||||
Interest on federal funds sold |
2,750 | | 3,288 | | ||||||||||||
$ | 3,899,972 | $ | 4,218,496 | $ | 11,770,362 | $ | 12,747,543 | |||||||||
INTEREST EXPENSE |
||||||||||||||||
Interest on interest bearing demand,
savings and time deposits |
$ | 1,280,828 | $ | 1,319,813 | $ | 3,808,924 | $ | 4,240,298 | ||||||||
Interest on FHLB borrowings |
73,161 | 211,251 | 234,052 | 656,037 | ||||||||||||
$ | 1,353,989 | $ | 1,531,064 | $ | 4,042,976 | $ | 4,896,335 | |||||||||
NET INTEREST INCOME |
$ | 2,545,983 | $ | 2,687,432 | $ | 7,727,386 | $ | 7,851,208 | ||||||||
PROVISION FOR LOAN LOSSES |
400,000 | 160,000 | 1,165,000 | 385,000 | ||||||||||||
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES |
$ | 2,145,983 | $ | 2,527,432 | $ | 6,562,386 | $ | 7,466,208 | ||||||||
NONINTEREST INCOME |
||||||||||||||||
Service charges on deposit accounts |
$ | 344,025 | $ | 363,041 | $ | 970,759 | $ | 1,037,847 | ||||||||
Other service charges, commissions
and fees |
206,890 | 202,258 | 593,998 | 613,690 | ||||||||||||
Other operating income |
17,575 | 15,385 | 115,915 | 52,445 | ||||||||||||
Income from title company |
| 2,312 | 5,061 | 9,042 | ||||||||||||
Net gain on sales of loans |
12,628 | 15,812 | 32,952 | 51,782 | ||||||||||||
Net gain (loss) on sales and calls of securities |
568 | | 32,591 | 94,256 | ||||||||||||
Net (loss) on other real estate owned |
(38,308 | ) | (10,000 | ) | (86,744 | ) | (10,484 | ) | ||||||||
$ | 543,378 | $ | 588,808 | $ | 1,664,532 | $ | 1,848,578 | |||||||||
NONINTEREST EXPENSES |
||||||||||||||||
Salaries |
$ | 690,747 | $ | 702,662 | $ | 2,029,127 | $ | 2,155,389 | ||||||||
Employee benefits |
264,747 | 320,170 | 842,383 | 1,008,962 | ||||||||||||
Occupancy of premises |
126,526 | 129,393 | 362,466 | 371,259 | ||||||||||||
Furniture and equipment expense |
163,529 | 199,651 | 482,674 | 606,922 | ||||||||||||
Other operating expenses |
635,606 | 639,337 | 2,086,862 | 1,733,470 | ||||||||||||
$ | 1,881,155 | $ | 1,991,213 | $ | 5,803,512 | $ | 5,876,002 | |||||||||
INCOME BEFORE INCOME TAXES |
$ | 808,206 | $ | 1,125,027 | $ | 2,423,406 | $ | 3,438,784 | ||||||||
PROVISION FOR INCOME TAXES |
193,886 | 372,497 | 664,227 | 1,137,182 | ||||||||||||
NET INCOME |
$ | 614,320 | $ | 752,530 | $ | 1,759,179 | $ | 2,301,602 | ||||||||
BASIC EARNINGS PER SHARE |
$ | 1.38 | $ | 1.67 | $ | 3.94 | $ | 5.09 | ||||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
4
Table of Contents
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
Accumulated | ||||||||||||||||||||||||
Other | Total | |||||||||||||||||||||||
Common | Treasury | Capital | Retained | Comprehensive | Shareholders | |||||||||||||||||||
Stock | Stock | Surplus | Earnings | Income | Equity | |||||||||||||||||||
BALANCE, JANUARY 1, 2008 |
$ | 458,048 | $ | (207,633 | ) | $ | 4,163,592 | $ | 19,155,244 | $ | (747,806 | ) | $ | 22,821,445 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income for nine months
ended September 30, 2008 |
| | | 2,301,602 | | 2,301,602 | ||||||||||||||||||
Change in unrealized gains
(losses) on securities
available for sale (net of tax of
$633,210) |
| | | | (1,033,132 | ) | (1,033,132 | ) | ||||||||||||||||
Total Comprehensive Income |
1,268,470 | |||||||||||||||||||||||
Acquisition of teasury stock, at cost,
4,720 shares |
| (309,057 | ) | | | | (309,057 | ) | ||||||||||||||||
Cash dividends ($.53 per share) |
| | | (239,056 | ) | | (239,056 | ) | ||||||||||||||||
BALANCE, SEPTEMBER 30, 2008 |
$ | 458,048 | $ | (516,690 | ) | $ | 4,163,592 | $ | 21,217,790 | $ | (1,780,938 | ) | $ | 23,541,802 | ||||||||||
BALANCE, JANUARY 1, 2009 |
$ | 458,048 | $ | (570,512 | ) | $ | 4,163,592 | $ | 21,015,652 | $ | (1,848,990 | ) | $ | 23,217,790 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income for nine months
ended September 30, 2009 |
| | | 1,759,179 | | 1,759,179 | ||||||||||||||||||
Change in unrealized gains
(losses) on securities
available for sale (net of tax of
$714,213) |
| | | | 1,165,296 | 1,165,296 | ||||||||||||||||||
Total Comprehensive Income |
2,924,475 | |||||||||||||||||||||||
Acquisition of treasury stock, at cost,
3,703 shares |
| (172,296 | ) | | | | (172,296 | ) | ||||||||||||||||
Cash dividends ($.53 per share) |
(236,300 | ) | (236,300 | ) | ||||||||||||||||||||
BALANCE, SEPTEMBER 30, 2009 |
$ | 458,048 | $ | (742,808 | ) | $ | 4,163,592 | $ | 22,538,531 | $ | (683,694 | ) | $ | 25,733,669 | ||||||||||
The Notes to Consolidated Financial Statements are an integral part of these statements.
5
Table of Contents
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 1,759,179 | $ | 2,301,602 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Depreciation and amortization on premises, equipment and software |
380,255 | 416,556 | ||||||
Provision for loan losses |
1,165,000 | 385,000 | ||||||
Deferred income taxes |
(327,645 | ) | (144,913 | ) | ||||
Net (gain) on sale of securities |
(32,591 | ) | (94,256 | ) | ||||
Loss on sale of real estate owned |
86,744 | 10,484 | ||||||
Net (gain) on loans sold |
(32,952 | ) | (51,782 | ) | ||||
Loans originated for sale |
(7,141,400 | ) | (4,239,250 | ) | ||||
Proceeds from loans sold |
7,174,177 | 4,291,032 | ||||||
(Increase) decrease in accrued interest receivable |
(42,359 | ) | 90,650 | |||||
(Increase) decrease in other assets |
(40,007 | ) | 350,324 | |||||
Increase (decrease) in accrued interest payable |
1,433 | (292,548 | ) | |||||
(Increase) in cash surrender value on life insurance in excess
of premiums paid |
(87,999 | ) | (85,085 | ) | ||||
Proceeds from life insurance death benefits |
194,184 | | ||||||
Increase (decrease) in accrued expenses and other liabilities |
(250,434 | ) | 738,293 | |||||
Amortization of deferred loan (fees) cost |
136,126 | 45,249 | ||||||
Amortization (accretion) of premium and discount on securities |
11,005 | 7,442 | ||||||
Amortization (accretion) of premium and discount on certificates of deposit |
(380 | ) | | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
$ | 2,952,336 | $ | 3,728,798 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Net decrease in loans, not originated for sale |
$ | 3,818,107 | $ | 1,771,981 | ||||
Proceeds from sales of securities |
2,327,895 | 2,803,399 | ||||||
Proceeds from maturities, repayments and calls of securities |
13,060,660 | 28,073,757 | ||||||
Proceeds from maturities of certificates of deposit |
1,238,000 | | ||||||
Purchases of securities |
(16,660,699 | ) | (30,015,024 | ) | ||||
Purchases of certificates of deposit |
(4,908,620 | ) | | |||||
Purchases of Federal Home Loan Bank stock |
| (1,459,000 | ) | |||||
Redemptions of Federal Home Loan Bank stock |
| 1,640,500 | ||||||
Purchases of premises, equipment and software |
(151,165 | ) | (207,289 | ) | ||||
Proceeds from sale of real estate owned |
588,695 | 150,361 | ||||||
Costs to acquire foreclosed real estate |
(20,423 | ) | (12,437 | ) | ||||
Net (increase) in federal funds sold |
(9,950,000 | ) | | |||||
Premiums paid on life insurance |
(55,208 | ) | (58,434 | ) | ||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
$ | (10,712,758 | ) | $ | 2,687,814 | |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net increase (decrease) in demand and savings deposits |
$ | 5,804,867 | $ | (1,287,197 | ) | |||
Net increase (decrease) in time deposits |
16,830,638 | (1,862,829 | ) | |||||
Net (decrease) in FHLB borrowings |
(15,445,000 | ) | (3,150,000 | ) | ||||
Purchase of treasury stock |
(172,296 | ) | (309,057 | ) | ||||
Cash dividends paid |
(236,300 | ) | (239,056 | ) | ||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
$ | 6,781,909 | $ | (6,848,139 | ) | |||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
$ | (978,513 | ) | $ | (431,527 | ) | ||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
4,770,724 | 7,791,093 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 3,792,211 | $ | 7,359,566 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the period: |
||||||||
Interest |
$ | 4,041,543 | $ | 5,188,883 | ||||
Income taxes |
$ | 840,900 | $ | 1,188,550 | ||||
Net transfer to foreclosed real estate, held for sale
from loans receivable |
$ | 686,045 | $ | 562,071 | ||||
Unrealized gain (loss) on investment securities
available for sale (net of tax) |
$ | 1,165,296 | $ | (1,033,132 | ) |
The Notes to Consolidated Financial Statements are an integral part of these statements.
6
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation and Contingencies
In the opinion of CNB Financial Services, Inc. (CNB or the Company), the accompanying
unaudited consolidated financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of CNBs financial condition as of September
30, 2009 and the results of operations for the three and nine months ended September 30, 2009 and
2008, changes in shareholders equity and cash flows for the nine months ended September 30, 2009
and 2008.
The accompanying unaudited financial statements have been prepared in accordance with the
instructions for Form 10-Q. These financial statements should be read in conjunction with the
audited consolidated financial statements and the notes included in CNBs Annual Report for the
year ended December 31, 2008.
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 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.
Earnings per share have been computed based on the following weighted average shares
outstanding:
9/30/2009 | 9/30/2008 | |||||||
Quarter ending |
445,774 | 450,619 | ||||||
Year to date ending |
446,669 | 452,374 |
7
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2. Securities
The amortized cost and estimated market value of debt securities at September 30, 2009 and
December 31, 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 are summarized as follows:
Weighted | ||||||||||||||||||||
September 30, 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 |
||||||||||||||||||||
After 1 but within 5 years |
$ | 2,404,704 | $ | 20,436 | $ | | $ | 2,425,140 | 2.32 | % | ||||||||||
After 5 but within 10 years |
4,875,671 | 55,432 | | 4,931,103 | 3.40 | |||||||||||||||
$ | 7,280,375 | $ | 75,868 | $ | | $ | 7,356,243 | 3.05 | % | |||||||||||
Corporate Bonds |
||||||||||||||||||||
After 1 but within 5 years |
$ | 2,233,003 | $ | 38,418 | $ | 29,876 | $ | 2,241,545 | 5.22 | % | ||||||||||
After 5 but within 10 years |
3,983,524 | 82,426 | 44,502 | 4,021,448 | 5.55 | |||||||||||||||
$ | 6,216,527 | $ | 120,844 | $ | 74,378 | 6,262,993 | 5.43 | % | ||||||||||||
States and political subdivisions |
||||||||||||||||||||
Within one year |
$ | 2,659,905 | $ | 11,760 | $ | | $ | 2,671,665 | 1.52 | % | ||||||||||
After 1 but within 5 years |
8,318,277 | 270,909 | 2,530 | 8,586,656 | 3.04 | |||||||||||||||
After 5 but within 10 years |
14,092,941 | 434,895 | 12,620 | 14,515,216 | 4.20 | |||||||||||||||
$ | 25,071,123 | $ | 717,564 | $ | 15,150 | $ | 25,773,537 | 3.53 | % | |||||||||||
Mortgage backed securities: |
||||||||||||||||||||
Government issued or
guaranteed |
$ | 13,597,929 | $ | 674,321 | $ | | $ | 14,272,250 | 5.35 | % | ||||||||||
Collateralized mortgage obligations: |
||||||||||||||||||||
Government issued or
guaranteed |
$ | 10,600,358 | $ | 354,735 | $ | 4,719 | $ | 10,950,374 | 4.68 | % | ||||||||||
Privately issued |
1,444,798 | | 283,237 | 1,161,561 | 7.44 | |||||||||||||||
$ | 12,045,156 | $ | 354,735 | $ | 287,956 | $ | 12,111,935 | 5.01 | % | |||||||||||
Total securities available for sale |
$ | 64,211,110 | $ | 1,943,332 | $ | 377,484 | $ | 65,776,958 | 4.32 | % | ||||||||||
Restricted: |
||||||||||||||||||||
Federal Home Loan Bank stock |
$ | 2,321,300 | $ | | $ | | $ | 2,321,300 | | % | ||||||||||
Certificates of deposit |
$ | 3,671,000 | $ | 1,015 | $ | 52 | 3,671,963 | 0.62 | % | |||||||||||
8
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2. Securities (continued)
Weighted | ||||||||||||||||||||
December 31, 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 fair value of securities pledged to secure public deposits and for other purposes as
required or permitted by law totaled $22,930,747 at September 30, 2009 and $19,462,597 at December
31, 2008.
Proceeds from sales of securities available for sale (excluding maturities and calls) during
the nine months ended September 30, 2009 and 2008 were $2,327,895 and $2,803,399, respectively.
Gross gains (losses) of $34,987 and $(0) during the nine months ended September 30, 2009 on
respective sales of securities and $55,278 and $(0) for the nine months ended September 30, 2008
were realized on the respective sales. Gross gains (losses) of $23 and ($2,419) and $38,978 and
($0) during the nine months ended September 30, 2009 and 2008, respectively were realized on called
securities.
9
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2. Securities (continued)
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 September 30, 2009 and December 31, 2008.
Securities are summarized as follows:
September 30, 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 |
$ | | $ | | $ | 2,652,584 | $ | 74,378 | $ | 2,652,584 | $ | 74,378 | ||||||||||||
State and political subdivisions |
784,833 | 2,530 | 935,200 | 12,620 | 1,720,033 | 15,150 | ||||||||||||||||||
Collateralized mortgage
obligations: |
||||||||||||||||||||||||
Government issued or guaranteed |
| | 381,201 | 4,719 | 381,201 | 4,719 | ||||||||||||||||||
Privately issued |
| | 1,161,562 | 283,237 | 1,161,562 | 283,237 | ||||||||||||||||||
Certificates of deposit |
248,948 | 52 | | | 248,948 | 52 | ||||||||||||||||||
Total temporarily impaired
securities |
$ | 1,033,781 | $ | 2,582 | $ | 5,130,547 | $ | 374,954 | $ | 6,164,328 | $ | 377,536 | ||||||||||||
December 31, 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 | ||||||||||||
10
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Loans and Leases Receivable
Major classifications of loans at September 30, 2009 and December 31, 2008, were as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Loans: |
||||||||
Real estate |
$ | 129,706,983 | $ | 137,770,172 | ||||
Commercial real estate |
42,735,409 | 40,613,894 | ||||||
Consumer |
17,442,972 | 16,665,647 | ||||||
Commercial |
7,349,630 | 7,931,399 | ||||||
Overdrafts |
102,715 | 91,515 | ||||||
$ | 197,337,709 | $ | 203,072,627 | |||||
Leases |
605,657 | 105,219 | ||||||
$ | 197,943,366 | $ | 203,177,846 | |||||
Net deferred loan fees, costs,
premiums and discounts |
372,335 | 325,742 | ||||||
Allowance for loan losses |
(3,368,602 | ) | (2,751,386 | ) | ||||
$ | 194,947,099 | $ | 200,752,202 | |||||
An analysis of the allowance for possible loan losses is as follows:
September 30, | December 31, | |||||||||||
2009 | 2008 | 2008 | ||||||||||
Balance, Beginning |
$ | 2,751,386 | $ | 2,144,461 | $ | 2,144,461 | ||||||
Provision charged to
operations |
1,165,000 | 385,000 | 940,500 | |||||||||
Recoveries |
54,341 | 120,032 | 188,860 | |||||||||
Loans charged off |
(602,125 | ) | (357,896 | ) | (522,435 | ) | ||||||
Balance, Ending |
$ | 3,368,602 | $ | 2,291,597 | $ | 2,751,386 | ||||||
11
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Loans and Leases Receivable (continued)
The following is a summary of information pertaining to impaired loans:
September 30, | December 31, | |||||||||||
2009 | 2008 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Impaired loans without a valuation allowance |
$ | | $ | | $ | | ||||||
Impaired loans with a valuation allowance (1) |
1,236,885 | 1,935,974 | 1,227,068 | |||||||||
Total impaired loans |
$ | 1,236,885 | $ | 1,935,974 | $ | 1,227,068 | ||||||
Valuation allowance related to impaired loans |
$ | 275,430 | $ | 453,788 | $ | 383,350 |
(1) | Some of these loans have government agency guarantees reducing the banks exposure by $38,435 for September 30, 2009, $66,431 at September 30, 2008 and $57,611 for December 31, 2008 |
September 30, | December 31, | |||||||||||
2009 | 2008 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Average investment in impaired loans |
$ | 1,231,977 | $ | 1,673,037 | $ | 1,318,584 | ||||||
Interest income recognized on impaired loans |
$ | 49,571 | $ | 50,693 | $ | 52,430 | ||||||
Interest income recognized on a cash basis on
impaired loans |
$ | 49,571 | $ | 50,693 | $ | 52,430 | ||||||
Loans are placed on nonaccrual status when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further accrual. When interest
accruals are discontinued, interest credited to income is reversed. Nonaccrual loans are restored
to accrual status when all delinquent principal and interest becomes current or the loan is
considered secured and in the process of collection. Certain loans that are determined to be
sufficiently collateralized may continue to accrue interest after reaching 90 days past due. A
summary of nonperforming assets is as follows:
September 30, | December 31, | |||||||||||
2009 | 2008 | 2008 | ||||||||||
Foreclosed real estate (other real estate owned) |
$ | 284,329 | $ | 523,134 | $ | 253,300 | ||||||
Impaired loans, not on nonaccrual |
654,404 | 692,871 | 130,905 | |||||||||
Nonaccrual loans, impaired (1) |
582,481 | 1,243,103 | 1,096,163 | |||||||||
Nonaccrual loans, not impaired |
258,019 | 779,254 | 402,520 | |||||||||
Loans past due 90 days or more still accruing interest |
| | | |||||||||
Total non-performing assets |
$ | 1,779,233 | $ | 3,238,362 | $ | 1,882,888 | ||||||
(1) | Some of these loans have government agency guarantees reducing the banks exposure by $38,435 at September 30, 2009, $66,431 at September 30, 2008 and $57,611 at December 31, 2008. |
12
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Time Deposits
At September 30, 2009, the scheduled maturities of time deposits are as follows:
Time Deposits | All Time | |||||||
$100,000 and Over | Deposits | |||||||
Within 3 months |
$ | 9,544,364 | $ | 16,466,780 | ||||
3 months thru 6 months |
6,227,909 | 12,086,320 | ||||||
6 months thru 12 months |
5,770,578 | 14,026,828 | ||||||
Over 12 months |
48,865,105 | 103,645,363 | ||||||
$ | 70,407,956 | $ | 146,225,291 | |||||
Note 5. Federal Home Loan Bank Borrowings
September 30, | December 31, | |||||||||||
2009 | 2008 | 2008 | ||||||||||
Federal Home Loan Bank
advances |
$ | 10,000,000 | $ | 34,350,000 | $ | 25,445,000 |
CNB Bank, Inc. is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh and, as such,
can take advantage of the FHLB program for overnight and term advances at published daily rates.
At September 30, 2009, the Bank has long term advances with FHLB. Under the terms of a blanket
collateral agreement, advances from the FHLB are collateralized by qualifying mortgages and US
government agencies and mortgage-backed securities. In addition, all of the 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.
Note 6. Pension Plan
CNB Bank, Inc. has an obligation under a defined benefit plan covering all eligible employees.
See Note 11 Pension Plan to our consolidated financial statements in our most recently filed
Annual Report on Form 10-K for further information.
The components of net periodic plan cost charged to operations are as follows:
September 30, | ||||||||
2009 | 2008 | |||||||
Service cost |
$ | 177,299 | $ | 181,731 | ||||
Interest cost |
237,185 | 230,511 | ||||||
Expected return on plan assets |
(245,631 | ) | (226,971 | ) | ||||
Amortization of prior service costs |
9,258 | 9,258 | ||||||
Recognized net actuarial loss |
54,964 | 38,926 | ||||||
Net periodic plan cost |
$ | 233,075 | $ | 233,455 | ||||
Employer contributions paid during the periods ended September 30, 2009 and 2008 were $477,092
and $250,000, respectively.
13
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7. Supplemental Retirement Plan
On January 2, 2004, the Bank entered into a nonqualified supplemental retirement benefit
agreement with the President which when fully vested would pay the President or his beneficiary an
amount of $30,000 per year for 10 years beginning September 11, 2011, if he retires on or after May
29, 2011. Termination of employment prior to that date other than by reasons of death or
disability will result in a reduced benefit. The expense for the nine months ended September 30,
2009 and 2008 was $20,107 and $29,569, respectively.
Note 8. Health Insurance Plan
Effective January 1, 2005, the Bank changed its health insurance program to a high deductible
plan and concurrently established health reimbursement accounts for each employee in the plan. The
Bank has committed to fund $750 for each participant in 2009 and 2008. The expense incurred for
the health reimbursement accounts for the nine months ended September 30, 2009 and 2008 was $39,938
and $40,556, respectively.
Note 9. Fair Value Measurements
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. | ||
| 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 September 30, 2009, all of
CNBs securities and certificates of deposit investments are considered to be Level 2 investments.
14
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Fair Value Measurements (continued)
The following table presents the balances of financial assets and liabilities measured at fair
value on a recurring basis as of September 30, 2009:
Fair Value Measurements at September 30, 2009 Using Quoted Prices | ||||||||||||||||
(In Thousands) | ||||||||||||||||
Significant | ||||||||||||||||
In Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Balance at | Identical Assets | Inputs | Inputs | |||||||||||||
Description | September 30, 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Available-for-sale securities |
$ | 65,777 | $ | | $ | 65,777 | $ | | ||||||||
Certificates of deposit investments |
3,672 | | 3,672 | |
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.
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 September 30, 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 quarter ended September 30, 2009.
15
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Fair Value Measurements (continued)
Other Real Estate Owned
Certain assets such as other real estate owned (OREO) are measured at fair value less cost to
sell. CNB had $15,000 of fair value adjustments during the quarter ended September 30, 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.
The following table summarized CNBs financial and nonfinancial assets that were measured at
fair value on a nonrecurring basis during the period.
Carrying Value at September 30, 2009 | ||||||||||||||||
(In Thousands) | Quoted Prices | |||||||||||||||
In Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Balance at September | Assets | Inputs | Inputs | |||||||||||||
Description | 30, 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Impaired loans, net of government
agency
guarantees and reserve for losses |
$ | 923 | $ | | $ | 923 | $ | | ||||||||
Other real estate owned |
$ | 284 | $ | | $ | 284 | $ | |
The fair value is the current amount that would be exchanged between willing parties, other
than in a forced liquidation. Fair value is best determined based upon quoted market prices.
However, in many instances, there are no quoted market prices for the Companys various financial
assets. In cases where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash flows. Accordingly,
the fair value estimates may not be realized in an immediate settlement of the assets.
The estimated fair values of the Companys financial instruments at September 30, 2009 and
December 31, 2008 are summarized below. The fair values of a significant portion of these
financial instruments are estimates derived using present value techniques and may not be
indicative of the net realizable or liquidation values. Also, the calculation of estimated fair
values is based on market conditions at a specific point in time and may not reflect current or
future fair values.
16
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Fair Value Measurements (continued)
September 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Financial Assets: |
||||||||||||||||
Cash, due from banks and
federal funds sold |
$ | 3,792,211 | $ | 3,792,211 | $ | 4,770,724 | $ | 4,770,724 | ||||||||
Securities available for
sale |
65,776,958 | 65,776,958 | 62,604,735 | 62,604,735 | ||||||||||||
Loans |
194,947,099 | 199,636,219 | 200,752,202 | 201,347,332 | ||||||||||||
Accrued interest receivable |
1,315,101 | 1,315,101 | 1,272,742 | 1,272,742 | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Demand deposits |
$ | 104,305,280 | $ | 104,305,280 | $ | 98,500,413 | $ | 98,500,413 | ||||||||
Time deposits |
146,225,291 | 153,823,506 | 129,394,653 | 137,539,118 | ||||||||||||
Accrued interest payable |
1,127,652 | 1,127,652 | 1,126,219 | 1,126,219 | ||||||||||||
FHLB borrowings |
10,000,000 | 10,000,000 | 25,445,000 | 25,445,000 | ||||||||||||
Off-Balance Sheet |
||||||||||||||||
Financial Instruments: |
||||||||||||||||
Letters of credit |
$ | | $ | 1,800 | $ | | $ | 2,149 |
Note 10. Recently Issued Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued ASC 105-10. (formerly
Statement No. 168,) The FASB Accounting Standards Codification (Codification) and the
Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162.
The Codification has become the source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be applied by non-governmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On its effective date,
the Codification superseded all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the Codification became
non-authoritative. This codification is effective for financial statements issued for interim and
annual periods ending after September 15, 2009.
In May 2009, the Financial Accounting Standards Board (FASB) issued guidance now codified as
ASC Topic 855, Subsequent Events which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued or available to be issued. ASC 855 sets forth (i) the period after the balance sheet date
during which management of a reporting entity should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements, (ii) the circumstances under
which an entity should recognize events or transactions occurring after the balance sheet date in
its financial statements and (iii) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. This pronouncement became effective for
the period ended June 30, 2009 and did not have a significant impact on the Companys consolidated
financial statements.
In June 2009, the Financial Accounting Standards Board (FASB) issued guidance now codified as
ASC Topic 860, Transfers and Servicing, that defines the term participating interest to establish
specific conditions for reporting a transfer of a portion of a financial asset as a sale. If the
transfer does not meet those conditions, a transferor should account for the transfer as a sale
only if it transfers an entire financial asset or a group of entire financial assets and surrenders
control over the entire
transferred asset(s) in accordance with the conditions in this topic. Under the revised
standards guaranteed mortgage securitizations are removed to require those securitizations to be
treated the same as any other transfer of financial assets within
the scope of the topic. If such a transfer does not meet the requirements for sale accounting, the
securitized mortgage loans should continue to be classified as loans in the transferors statement
of financial position. This topic requires that a transferor recognize and initially measure at
fair value all assets obtained (including a transferors beneficial interest and liabilities
incurred as a result of a transfer of financial assets accounted for as a sale. The newly issued
guidance under ASC Topic 860 is effective as of the beginning of each reporting entitys first
annual reporting period that begins after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter. CNB does not
expect that these revisions will have a material impact on the Companys consolidated financial
statements.
17
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Recently Issued Accounting Standards (continued)
In June 2009, the Financial Accounting Standards Board (FASB) issued guidance now codified as
ASC Topic 810-10 Consolidation, to require an enterprise to perform an analysis to determine
whether the enterprises variable interest or interests give it a controlling financial interest in
a variable interest entity. This analysis identifies the primary beneficiary of a variable
interest entity as the enterprise that has both of the following characteristics:
a. | The power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance |
b. | The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. |
Additionally, an enterprise is required to assess whether it has an implicit financial
responsibility to ensure that a variable interest entity operates as designed when determining
whether it has the power to direct the activities of the variable interest entity that most
significantly impact the entitys economic performance. This revision of ASC Topic 810-10 is
effective as of the beginning of each reporting entitys first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. CNB does not expect that adoption of this
guidance will have a material impact on the Companys consolidated financial statements.
In April 2009, the Financial Accounting Standards Board (FASB) issued 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, now codified as ASC
Topic 820-10-65-4. This standard emphasizes that even if there has been a significant decrease in
the volume and level of activity, the objective of a fair value measurement remains the same. Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale) between market
participants. Topic 820-10-65-4 provides a number of factors to consider when evaluating whether
there has been a significant decrease in the volume and level of activity for an asset or liability
in relation to normal market activity. In addition, when transactions or quoted prices are not
considered orderly, adjustments to those prices based on the weight of available information may be
needed to determine the appropriate fair value. The standard also requires increased disclosures.
This topic is effective for interim and annual reporting periods ending after June 15, 2009, and
shall be applied prospectively. CNB adopted this topic 820-10-65-4 in the second quarter of 2009,
however, the adoption had no material impact on its consolidated financial statements.
In April 2009, the Financial Accounting Standards Board (FASB) issued guidance now codified as
ASC Topic 825, Financial Instruments, which amended previous Topic 825 guidance to require
disclosures about fair value of financial instruments for interim reporting periods of publicly
traded companies that were previously only required in annual financial statements. This guidance
became effective for interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. CNB adopted this topic in the second quarter of
2009.
In April 2009, the Financial Accounting Standards Board (FASB) issued guidance now codified as
ASC Topic 320-10-35, Investments Debt and Equity Securities, Subsequent Measurements, which
amends existing guidance for determining whether impairment is other-than-temporary for debt
securities. The standard requires an entity to assess whether it intends to sell, or it is more
likely than not that it will be required to sell a security in an unrealized loss position before
recovery of its amortized cost basis. If either of these criteria is met, the entire difference
between amortized cost and fair value is recognized in earnings. For securities that do not meet
the aforementioned criteria, the amount of impairment recognized in earnings is limited to the
amount related to credit losses, while impairment related to other factors is recognized in other
comprehensive income. Additionally, the ASC Topic 320-10-35 expands and increases the frequency of
existing disclosures about other-than-temporary impairments for debt and equity securities. This
topic became effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
CNB adopted this topic in the second quarter, however, the adoption had no material impact on its
consolidated financial statements.
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R),
Business Combinations (SFAS 141(R)) (ASC Business Combinations). The Standard significantly
changed the financial accounting and reporting of business combination transactions. SFAS 141(R)
establishes principles for how an acquirer recognizes and measures the identifiable assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose
18
Table of Contents
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Recently Issued Accounting Standards (continued)
to enable users of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of
an entitys first year that begins after December 15, 2008.
CNB does not expect the implementation of SFAS No. 141(R) to have a material impact on its
consolidated financial statements, at this time.
In April 2009, the Financial Accounting Standards Board (FASB) issued Financial Statement
Position (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies (ASC 805 Business Combinations). FSP FAS
141(R)-1 amends and clarifies SFAS 141(R) to address application issues on initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and liabilities
arising from contingencies in a business combination. The FSP is effective for assets and
liabilities arising from contingencies in business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after December 15,
2008. CNB does not expect the adoption of FSP FAS 141(R)-1 to have a material impact on its
consolidated financial statements.
In August 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update No. 2009-05 (ASU 2009-05), Fair Value Measurements and Disclosures (Topic 820) Measuring
Liabilities at Fair Value. ASU 2009-05 amends Subtopic 820-10, Fair Value Measurements and
Disclosures Overall, and provides clarification for the fair value measurement of liabilities.
ASU 2009-05 is effective for the first reporting period including interim period beginning after
issuance. CNB does not expect the adoption of ASU 2009-05 to have a material impact on its
consolidated financial statements.
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 11. Subsequent Events
The Company has evaluated events and transactions subsequent to September 30, 2009 through
November 13, 2009, the date these consolidated financial statements were included in this Form 10-Q
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 September 30, 2009
and through November 13, 2009, that require recognition or disclosure in the consolidated financial
statements.
19
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
GENERAL
CNB Financial Services, Inc. (CNB or the Company) was organized under the laws of West
Virginia in March 2000 at the direction of the Board of Directors of CNB Bank, Inc. formerly
Citizens National Bank, (the Bank) for the purpose of becoming a financial services holding
company. The Companys primary function is to direct, plan and coordinate the business activities
for the Bank and its subsidiary. We refer to the Company and its subsidiary as CNB.
On August 31, 2000, the Bank, via merger, became a wholly-owned subsidiary of the Company and
the shareholders of the Bank became shareholders of the Company. Each Bank shareholder received
two shares of the Company stock for each share of the Banks common stock. The merger was
accounted for as a pooling of interests.
The Bank was organized on June 20, 1934, and has operated in Berkeley Springs in Morgan
County, West Virginia, as a national banking association continuously until October 16, 2006, at
which time the Bank obtained a West Virginia state charter and began operating as a state banking
association.
The Bank 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.
The following discussion and analysis presents the significant changes in financial condition
and results of operations of CNB for the three and nine months ended September 30, 2009 and 2008.
This discussion may include forward-looking statements based upon managements expectations.
Actual results may differ. We have rounded amounts and percentages used in this discussion and
have based all average balances on daily averages.
CRITICAL ACCOUNTING POLICIES
CNB has established various accounting policies which govern the application of accounting
principles generally accepted in the United States of America in the preparation and presentation
of CNBs consolidated financial statements. The significant accounting policies of CNB are
described in Item 1, Critical Accounting Policies and Note 1: Summary of Significant Accounting
Policies of the Consolidated Financial Statements on Form 10-K as of December 31, 2008, and along
with the disclosures presented in other financial statement notes, provide information on how
significant assets and liabilities are valued in the financial statements and how those values are
determined. Certain accounting policies involve significant judgments, assumptions and estimates
by management that have a material impact on the carrying value of certain assets and liabilities,
which management considers to be critical accounting policies. The judgments, assumptions and
estimates used by management are based on historical experience, knowledge of the accounts and
other factors, which are believed to be reasonable under the circumstances. Because of the nature
of the judgment and assumptions made by management, actual results could differ from these
judgments and estimates, which could have a material impact on the carrying values of assets and
liabilities and the results of operations of the Company.
CNB views the determination of the allowance for loan losses as a critical accounting policy
that requires the most significant judgments, assumptions and estimates used in the preparation of
its consolidated financial statements. For a more detailed discussion on the allowance for loan
losses, see Nonperforming Loans and Allowance For Loan Losses in the 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 in the Form
10-K for December 31, 2008.
20
Table of Contents
EARNINGS SUMMARY
Net income for the three months ended September 30, 2009 was $614,000 or $1.38 per share
compared to $753,000 or $1.67 per share for the same period in 2008. Annualized return on average
assets and average equity were .9% and 10.1% respectively, for the three months ended September 30,
2009, compared with 1.1% and 13.0%, respectively, for the three months ended September 30, 2008.
Net income for the nine months ended September 30, 2009 was $1.8 million or $3.94 per share
compared to $2.3 million or $5.09 per share for the same period in 2008. Annualized return on
average assets and average equity were .8% and 9.9% respectively, for the nine months ended
September 30, 2009, compared with 1.1% and 13.2%, respectively, for the nine months ended September
30, 2008.
Earnings projections for the remainder of 2009 are expected to be impacted by the continued
slowing in the Banks loan demand and poor economic conditions. The Bank is anticipating an
additional expense of approximately $450,000 to the provision for loan losses for the remainder of
2009 due to the continued increase in past due loans, loans with weaknesses and impaired loans.
Other significant factors affecting the 2009 net income are increased expenses related to the FDIC
insurance regular assessment and the monthly cost of outsourcing the Banks data processing
services.
NET INTEREST INCOME
Net interest income represents the primary component of CNBs earnings. It is the difference
between interest and fee income related to earning assets and interest expense incurred to carry
interest-bearing liabilities. Changes in the volume and mix of interest earning assets and
interest bearing liabilities, as well as changing interest rates, impact net interest income. To
manage these changes, their impact on net interest income and the risk associated with them, CNB
utilizes an ongoing asset/liability management program. This program includes analysis of the
difference between rate sensitive assets and rate sensitive liabilities, earnings sensitivity to
rate changes, and source and use of funds. A discussion of net interest income and the factors
impacting it is presented below.
Net interest income for the three months ended September 30, 2009 decreased by $141,000 or
5.3% over the same period in 2008. Interest income for the three months ended September 30, 2009
decreased by $318,000 or 7.6% compared to the same period in 2008, while interest expense decreased
by $177,000 or 11.6% during the three months ended September 30, 2009, as compared to the same
period in the prior year.
Net interest income for the nine months ended September 30, 2009 decreased by $124,000 or 1.6%
over the same period in 2008. Interest income for the nine months ended September 30, 2009
decreased by $977,000 or 7.7% compared to the same period in 2008, while interest expense decreased
by $853,000 or 17.4% during the nine months ended September 30, 2009, as compared to the same
period in the prior year.
Although, during the third quarter of 2009, the average balance of interest earning assets
increased at a faster pace than the average balance of interest bearing liabilities decreased, the
interest earned on the assets decreased at a greater pace than the interest expense paid on the
liabilities resulting in an decrease in net interest income for the three month period ending
September 30, 2009. The 56 basis point decrease in rates earned on average interest earning assets
offset by a 30 basis point decrease in rates paid on average interest bearing liabilities
contributed to the 26 basis point decrease in the net interest margin while the ratio of net
interest income to average interest earning assets also decreased by 26 basis points.
During the nine months ended September 30, 2009 compared to the same period in 2008, average
net interest earning assets increased only slightly by $420,000 or 0.2% whereas average net
interest bearing liabilities decreased $2.6 million or 1.2% resulting in a decrease in net interest
income and a decreased net interest margin. The 51 basis point decrease in rates earned on average
interest earning assets offset by a 50 basis point decrease in paid on average interest bearing
liabilities contributed to the decrease in the net interest margin of 1 basis points while the
ratio of net interest income to average interest earning assets decreased 7 basis points
For the three and nine month periods ending September 30, 2009 compared to the same periods in
2008, CNB experienced an increase in the average balance of interest earning assets along with a
shift in the composition of the interest earning assets. The increase in the average balance of
interest earning assets is a result of higher balances in the lower yielding federal funds sold and
certificates of deposit along with tax exempt securities balances offset by a decrease in the
average balance on taxable securities and loans. The reason for the decrease in the average
balance on loans was due to the continued slow housing market and the overall lower loan demand.
The decrease in taxable securities was due to the significant amount of called agency bonds over
these time frames which were reinvested mainly in tax exempt securities, certificates of deposit
and federal funds sold. Along with the shift to lower yielding interest earning assets was the
decrease in the yields of all earning assets. These factors impacted the 56 basis point and the 51
basis point decreases in the average interest earned on these assets for the three and nine month
periods ending September 30, 2009.
21
Table of Contents
For the three and nine month periods ending September 30, 2009 compared to the same periods in
2008, CNB experienced a decrease in the average balance of interest bearing liabilities.
Although, each interest bearing deposit category has shown growth during the three and nine month
periods ending September 30, 2009 compared to the same periods in 2008 except for money market
accounts during the third quarter, the decrease in the average balance of borrowings outweighed the
increases in the deposits. The full impact of the increase in average interest bearing deposit
accounts was significantly reduced by the decreased average balance of borrowings the bank held
during these same periods. For the three month period ending September 30, 2009 compared to the
same period in 2008, the average balance of interest bearing deposits increased by $21.5 million or
11.8% while the average balance of borrowings decreased by $23.6 million or 70.2%. For the nine
month period ending September 30, 2009 compared to the same period in 2008, the average balance of
interest bearing deposits increased by $14.6 million or 8.0% while the average balance of
borrowings decreased by $17.2 million or 55.8%. During the aforementioned time frames, the Bank
has also experienced considerably lower rates paid on these interest bearing liabilities. During
the third quarter of 2009, the Bank experienced a higher rate paid on borrowings due to the fact
that the only borrowings the bank presently have are long term borrowings at an average rate of
2.83%. These factors impacted the 30 basis point and the 50 basis point decreases in the average
interest paid on these liabilities for the three and nine month periods ending September 30, 2009.
See Table 1and Table 2 Distribution of Assets, Liabilities, and Shareholders Equity;
Interest Rates and Interest Differential.
The net interest margin is impacted by the change in the spread between yields on earning
assets and rates paid on interest bearing liabilities.
22
Table of Contents
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
INTEREST RATES AND INTEREST DIFFERENTIAL
SEPTEMBER 30, 2009 | SEPTEMBER 30, 2008 | |||||||||||||||||||||||
QTR | QTR | |||||||||||||||||||||||
AVERAGE | QTR | YIELD/ | AVERAGE | QTR | YIELD/ | |||||||||||||||||||
BALANCE | INTEREST | RATE(4) | BALANCE | INTEREST | RATE(4) | |||||||||||||||||||
(IN THOUSANDS OF DOLLARS) | ||||||||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Federal funds sold |
$ | 5,645 | $ | 3 | 0.16 | % | $ | | $ | | 1.94 | % | ||||||||||||
Certificates of deposit |
3,599 | 6 | 0.67 | | | | ||||||||||||||||||
Securities: |
||||||||||||||||||||||||
Taxable |
40,921 | 496 | 4.85 | 50,457 | 644 | 5.11 | ||||||||||||||||||
Tax-exempt (1) |
21,032 | 168 | 4.84 | 15,365 | 133 | 5.25 | ||||||||||||||||||
Loans (net of unearned interest) (2)(5)(6) |
199,166 | 3,168 | 6.36 | 200,991 | 3,384 | 6.73 | ||||||||||||||||||
Total interest earning assets (1) |
$ | 270,363 | $ | 3,841 | 5.68 | % | $ | 266,813 | $ | 4,161 | 6.24 | % | ||||||||||||
Nonearning assets: |
||||||||||||||||||||||||
Cash and due from banks |
$ | 6,085 | $ | 6,837 | ||||||||||||||||||||
Bank premises and equipment, net |
5,681 | 5,943 | ||||||||||||||||||||||
Other assets |
6,496 | 5,841 | ||||||||||||||||||||||
Allowance for loan losses |
(3,235 | ) | (2,315 | ) | ||||||||||||||||||||
Total assets |
$ | 285,390 | $ | 283,119 | ||||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Savings deposits |
$ | 25,110 | $ | 6 | 0.10 | % | $ | 23,636 | $ | 18 | 0.30 | % | ||||||||||||
Time deposits |
143,461 | 1,245 | 3.47 | 123,071 | 1,230 | 4.00 | ||||||||||||||||||
NOW accounts |
21,893 | 25 | 0.46 | 21,806 | 44 | 0.81 | ||||||||||||||||||
Money market accounts |
12,833 | 5 | 0.16 | 13,319 | 28 | 0.84 | ||||||||||||||||||
Borrowings |
10,023 | 73 | 2.91 | 33,582 | 211 | 2.51 | ||||||||||||||||||
Total interest bearing liabilities |
$ | 213,320 | $ | 1,354 | 2.54 | % | $ | 215,414 | $ | 1,531 | 2.84 | % | ||||||||||||
Noninterest bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
$ | 41,993 | $ | 40,638 | ||||||||||||||||||||
Other liabilities |
5,752 | 3,918 | ||||||||||||||||||||||
Shareholders equity |
24,325 | 23,149 | ||||||||||||||||||||||
Total liabilities and
shareholders equity |
$ | 285,390 | $ | 283,119 | ||||||||||||||||||||
Net interest income (1) |
$ | 2,487 | $ | 2,630 | ||||||||||||||||||||
Net interest spread (3) |
3.14 | % | 3.40 | % | ||||||||||||||||||||
Net interest income to average
interest earning assets (1) |
3.68 | % | 3.94 | % | ||||||||||||||||||||
(1) | Yields are expressed on a tax equivalent basis using a 34% tax rate. | |
(2) | For the purpose of these computations, nonaccruing loans are included in the amounts of average loans outstanding. | |
(3) | Net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. | |
(4) | Yields/Rates are expressed on an annualized basis. | |
(5) | Interest income on loans excludes fees of $59,168 in 2009 and $57,772 in 2008. | |
(6) | Interest income on loans includes fees of $19,666 in 2009 and $14,630 in 2008 from student loans and lease receivables. |
23
Table of Contents
TABLE 2. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
INTEREST RATES AND INTEREST DIFFERENTIAL
SEPTEMBER 30, 2009 | SEPTEMBER 30, 2008 | |||||||||||||||||||||||
YTD | YTD | |||||||||||||||||||||||
AVERAGE | YTD | YIELD/ | AVERAGE | YTD | YIELD/ | |||||||||||||||||||
BALANCE | INTEREST | RATE(4) | BALANCE | INTEREST | RATE(4) | |||||||||||||||||||
(IN THOUSANDS OF DOLLARS) | ||||||||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Federal funds sold |
$ | 2,291 | $ | 3 | 0.17 | % | $ | | $ | | 2.40 | % | ||||||||||||
Certificates of deposit |
2,371 | 14 | 0.79 | | | | ||||||||||||||||||
Securities: |
||||||||||||||||||||||||
Taxable |
42,539 | 1,566 | 4.91 | 49,832 | 1,874 | 5.01 | ||||||||||||||||||
Tax-exempt (1) |
19,074 | 485 | 5.14 | 14,458 | 370 | 5.17 | ||||||||||||||||||
Loans (net of unearned interest) (2)(5)(6) |
201,142 | 9,529 | 6.32 | 202,707 | 10,349 | 6.81 | ||||||||||||||||||
Total interest earning assets (1) |
$ | 267,417 | $ | 11,597 | 5.78 | % | $ | 266,997 | $ | 12,593 | 6.29 | % | ||||||||||||
Nonearning assets: |
||||||||||||||||||||||||
Cash and due from banks |
$ | 5,950 | $ | 6,753 | ||||||||||||||||||||
Bank premises and equipment, net |
5,749 | 6,004 | ||||||||||||||||||||||
Other assets |
6,613 | 5,233 | ||||||||||||||||||||||
Allowance for loan losses |
(3,044 | ) | (2,252 | ) | ||||||||||||||||||||
Total assets |
$ | 282,685 | $ | 282,735 | ||||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Savings deposits |
$ | 24,667 | $ | 23 | 0.12 | % | $ | 23,671 | $ | 53 | 0.30 | % | ||||||||||||
Time deposits |
138,672 | 3,693 | 3.55 | 125,088 | 3,931 | 4.19 | ||||||||||||||||||
NOW accounts |
21,629 | 74 | 0.46 | 22,145 | 157 | 0.95 | ||||||||||||||||||
Money market accounts |
12,894 | 19 | 0.20 | 12,333 | 99 | 1.07 | ||||||||||||||||||
Borrowings |
13,631 | 234 | 2.29 | 30,829 | 656 | 2.84 | ||||||||||||||||||
Total interest bearing liabilities |
$ | 211,493 | $ | 4,043 | 2.55 | % | $ | 214,066 | $ | 4,896 | 3.05 | % | ||||||||||||
Noninterest bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
$ | 41,837 | $ | 41,454 | ||||||||||||||||||||
Other liabilities |
5,563 | 3,957 | ||||||||||||||||||||||
Shareholders equity |
23,792 | 23,258 | ||||||||||||||||||||||
Total liabilities and
shareholders equity |
$ | 282,685 | $ | 282,735 | ||||||||||||||||||||
Net interest income (1) |
$ | 7,554 | $ | 7,697 | ||||||||||||||||||||
Net interest spread (3) |
3.23 | % | 3.24 | % | ||||||||||||||||||||
Net interest income to average interest earning assets (1) |
3.77 | % | 3.84 | % | ||||||||||||||||||||
(1) | Yields are expressed on a tax equivalent basis using a 34% tax rate. | |
(2) | For the purpose of these computations, nonaccruing loans are included in the amounts of average loans outstanding. | |
(3) | Net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. | |
(4) | Yields/Rates are expressed on an annualized basis. | |
(5) | Interest income on loans excludes fees of $172,671 in 2009 and $154,893 in 2008. | |
(6) | Interest income on loans includes fees of $67,704 in 2009 and $53,050 in 2008 from student loans and lease receivables. |
24
Table of Contents
PROVISION FOR LOAN LOSSES
The amount charged to 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 of management of the probable losses which have been
incurred as of a balance sheet date.
The provision for loan losses is a charge to earnings which is made to maintain the allowance
for loan losses at a sufficient level. The provision for loan losses for the three months ended
September 30, 2009 and September 30, 2008 amounted to $400,000 and $160,000, respectively. The
provision for loan losses for the nine months ended September 30, 2009 and September 30, 2008
amounted to $1.2 million and $385,000, respectively. Although, non performing assets and
foreclosure activity have decreased from the same period in 2008, past due loans have increased
from 2.6% of total loans as of September 30, 2008 to 3.5% of total loans as of September 30, 2009.
Management believes the allowance for loan losses is adequate and is not aware of any information
relating to the loan portfolio which it expects will materially impact future operating results,
liquidity or capital resources. In addition, federal regulators may require an adjustment to the
reserves as a result of their examination of the Bank. See Nonperforming Assets and Allowance for
Loan Losses for further discussion.
NONINTEREST INCOME
Noninterest income for the three months ended September 30, 2009 decreased $45,000 or 7.7% to
$543,000 from $589,000. Noninterest income for the nine months ended September 30, 2009 decreased
$184,000 or 10.0% to $1.7 million from $1.8 million. The decrease in noninterest income for the
three and nine months ended September 30, 2009 is partially a result of decreases in overdraft
account fees and trust fee income offset by an increase in debit card 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 due to average assets under management decreased to $33.9 million
from $39.8 million at September 30, 2008, a 14.7% decrease. This decrease in trust assets is
primarily due to market value decline.
Other factors contributing to the decrease in noninterest income for the nine months ended
September 30, 2009 is an increase in 2009 in the loss on sale of other real estate owned by $76,000
and smaller gains recorded in 2009 on the sale of investment securities. For the third quarter of
2009 and for the nine months ended September 30, 2009 compared to the same periods in 2008, the
gain on sale of loans showed decreases of $3,200 and $18,800, respectively. This decrease in the
gain on sale of loans is due to the tightened spreads on the sold loans due to the competitiveness
of the current market.
Offsetting these decreases is an increase in miscellaneous income which is a direct result of
in February 2009, one of the Banks Board of Directors passed away 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 have been recorded in assets as cash surrender value. The difference of
$58,858 is reflected in other operating income.
NONINTEREST EXPENSES
Noninterest expenses for the three months ended September 30, 2009, decreased $110,000 or
5.5%. Noninterest expenses for the nine months ended September 30, 2009, increased $72,000 or
1.2%. The most significant factor leading to the increase in noninterest expenses for the three
and nine month periods ending September 30, 2009 is the increased FDIC quarterly assessments and
the one time special assessment. The one time special assessment was payable on September 30, 2009
and totaled $130,188. The special assessment was expensed in the first half of 2009.
Salaries decreased for the three and nine months ending September 30, 2009 due to, in the
first quarter of 2009, a concerted effort on the part of Bank management to control expenses by
eliminating extra hours worked and to utilize employees time more efficiently offset by normal
merit increases. Employee benefits decreased during this same time period due 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.
The decreases in other occupancy expense for the three and nine months ended September 30,
2009 is 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. The decrease
of $36,000 in furniture and equipment expense for the three months ended September 30, 2009 and the
decrease of $124,000 for the nine months ended September 30, 2009, are due to decreases in
furniture and equipment maintenance expense along with decreased depreciation expense due to some
computer hardware becoming fully depreciated during this time period. The decreased maintenance
expense is due to the number and amount of maintenance
contracts declined due to the outsourcing of the Banks technology. These expenses have
shifted to data processing fees and are included in other operating expenses on the statement of
income..
25
Table of Contents
The decrease of $4,000 in other operating expenses for the three months ended September 30,
2009 and the increase of $353,000 for the nine months ended September 30, 2009, are due to
increases in the Banks FDIC assessment fee, data processing expenses, legal fees and
75th anniversary expenses offset by decreases in marketing expense, telephone expense,
debit card expense and audit and accounting expense. 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 was payable on
September 30, 2009 but the total estimated special assessment of $130,188 was reflected in
noninterest expenses as of June 30, 2009. Data processing expense increased due to the expenses
related to the monthly outsourcing charges of the Banks data processing system. Legal fees
increased due to the additional number of foreclosures and legal suits the Bank is involved
pertaining to our loan portfolio. 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 in the park celebration for customers and local businesses. During 2009, the
Bank has been in a cost cutting mode and has attempted to reduce non essential expenses to a
minimum. During the third quarter 2009, adjustments were made to reduce certain non interest
expense accounts to realign them to actual expenses incurred or to be incurred by the Bank in 2009.
These expenses related to the SOX 404 auditor attestation requirements being delayed until 2010.
This delay was announced by the SEC late in the third quarter 2009.
INCOME TAXES
The Banks provision for income taxes decreased $179,000 or 48.0% to $194,000 for the three
months ended September 30, 2009 and decreased $473,000 or 41.6% to $664,000 for the nine months
ended September 30, 2009. The effective tax rates for the third quarter of 2009 and 2008 were
24.0% and 33.1%, respectively. The effective tax rates for the nine months ending September 30,
2009 and 2008 were 27.4% and 33.1%, respectively. The effective tax rate for the quarter and nine
months ending September 30, 2009 is lower due to the recording of $59,000 of non-taxable life
insurance proceeds and the increase in tax-exempt earnings on municipal bonds. 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.
FINANCIAL CONDITION
The Banks total assets as of September 30, 2009 increased $9.5 million or 3.4% to $291.7
million from December 31, 2008 due primarily to a $3.7 million increase in certificates of
deposits, a $10.0 million increase in federal funds sold and a $3.2 million increase in investment
securities offset by a $979,000 decrease in cash and due from banks and a $5.8 million decrease in
loans The Banks total liabilities increased $6.9 million or 2.7% to $266.0 million from December
31, 2008 due to a $22.6 million increase in deposits offset by a $15.4 million decrease in
borrowings. Shareholders equity increased $2.5 million to $25.7 million at September 30, 2009,
due to net income of $1.8 million and a $1.1 million increase in accumulated other comprehensive
income offset by stock repurchases of $172,000 and cash dividends paid of $236,000. The $1.1
million increase in accumulated other comprehensive income is a direct result of the increase in
market value of available for sale securities. The components of accumulated other comprehensive
income at September 30, 2009 and December 31, 2008, 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 unrealized gains and losses are primarily a function of available market
interest rates relative to the yield being generated on the available for sale portfolio. No
earnings impact results unless the securities are actually sold.
During the third quarter 2007, the Bank instituted a stock repurchase program to repurchase
issued shares of common stock of CNB Financial Services, Inc. Through this program as of September
30, 2009, the Bank has repurchased 12,600 shares of CNB Financial Services, Inc. common stock
reducing shareholders equity by $742,808.
LOAN PORTFOLIO
At September 30, 2009, total loans decreased $5.8 million or 2.9% to $194.9 million from
$200.8 million at December 31, 2008. During the first quarter of 2009, real estate loan
outstandings decreased by $3.0 million due to the Bank experiencing increased payoffs from
customers refinancing their real estate loans through other financial institutions due to the fact
that the Banks fixed rates were higher than the competition. Another factor impacting the
decrease was CNB originated and sold $7.1 million of loans to secondary market investors. CNB began
selling all fixed rate mortgage loans to secondary market investors in January 2007. During the
first quarter of 2009, the Bank adjusted the yield spread premium the Bank was earning on these
secondary market loans to become more competitive which has resulted in $6.9 million in fixed rate
mortgage loans being sold to secondary market investors during the second and third quarters
compared to $223,000 in loans sold in the first quarter 2009. During the third quarter 2009, the
Bank was notified that the Federal authorities had closed the office of one of the Banks main
secondary market investors. The Bank did not have any loss from this closure but had to book in
the Banks loan portfolio $820,000 of loans originated for sale. The Bank will seek an
alternative secondary market outlet to sell future fixed rate mortgages. An additional factor
impacting the decrease in real estate loans were the foreclosures of five loans during the first
nine months of 2009.
26
Table of Contents
The increase in the Banks commercial real estate portfolio for the nine months ended
September 30, 2009 is due 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. These
increases were offset by a slowing in the commercial real estate activity in the third quarter
2009. Various internal sundry reasons along with the uncertainty of the current financial position
of prospective bank customers caused a lag in officer calls during the third quarter 2009. There
is a potential for over $1.0 million in new loan activity for the commercial real estate portfolio
for the fourth quarter of 2009. With the possible 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, the
projections for commercial real estate activity for 2010 are positive for the Eastern Panhandle of
West Virginia.
The consumer loan portfolio increase is attributable to funding of the second or third
disbursements on student loans along with mobile home financing and vehicle secured personal loans.
In the fourth quarter 2008, the Bank suspended funding new student loans but was obligated to fund
second or third draws on student loans the Bank funded originally. Although, the second and third
disbursements on student loans were disbursed in the first half of 2009, the consumer loan
portfolio continues to show moderate growth through the third quarter of 2009.
Although, the Bank experienced an increase in the volume of commercial loan activity early in
the second quarter, the commercial loan activity decreased in the third quarter. The increase in
volume was short-lived as the developers did not see the influx of business they anticipated as the
perception of an improvement in the economy did not come to fruition. Lending officers continue to
be proactive in their marketing effort in the Banks lending area.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of nonaccrual loans, loans which are past due 90 days or more and
still accruing interest, impaired loans and foreclosed real estate. The following table summarized
the Banks nonperforming assets as of the periods shown:
September 30, | December 31, | |||||||||||
2009 | 2008 | 2008 | ||||||||||
Impaired loans, not on nonaccrual |
654,404 | 692,871 | 130,905 | |||||||||
Nonaccrual loans, impaired (1) |
582,481 | 1,243,103 | 1,096,163 | |||||||||
Nonaccrual loans, not impaired |
258,019 | 779,254 | 402,520 | |||||||||
Loans past due 90 days or more still accruing interest |
| | | |||||||||
Total non-performing loans |
$ | 1,494,904 | $ | 2,715,228 | $ | 1,629,588 | ||||||
Foreclosed real estate (other real estate owned) |
$ | 284,329 | $ | 523,134 | $ | 253,300 | ||||||
Total nonperforming assets |
$ | 1,779,233 | $ | 3,238,362 | $ | 1,882,888 | ||||||
Nonperforming loans/Total loans |
0.77 | % | 1.36 | % | 0.81 | % | ||||||
Nonperforming assets/Total assets |
0.61 | % | 1.14 | % | 0.67 | % | ||||||
Allowance for loan losses/Total loans |
1.73 | % | 1.15 | % | 1.37 | % |
(1) | Some of these loans have government agency guarantees reducing the banks exposure by $38,435 at September 30, 2009, $66,431 at September 30, 2008 and $57,611 at December 31, 2008. |
As of September 30, 2009, there are fourteen loans considered to be impaired with a balance of
$1.2 million (net of government agency guarantees) and a specific allowance of $275,000. As of
September 30, 2009, management is aware of thirty three borrowers who have exhibited weaknesses.
Their loans have aggregate uninsured balances of $4.8 million. A specific allowance of $709,000
related to these loans has been established as part of the allowance for loan losses. The loans
are collateralized and management anticipates any additional potential loss would be minimal. The
Bank continues to experience additional foreclosures in its mortgage loan portfolio. Although the
Banks mortgage loan portfolio is well secured, if the Bank needs to go to foreclosure on a
property, the value of the property may possibly be less than the current appraised value
considering the current real estate market. In turn, the Bank may begin to see future write downs
on foreclosed properties.
27
Table of Contents
The allowance for loan losses is the best estimate by management of the probable losses which
have been incurred as of a balance sheet date. Management makes this determination quarterly by
its analysis of overall loan quality, changes in the mix and size of the loan portfolio, previous
loss experience, general economic conditions, information about specific borrowers and other
factors. The Banks methodology for determining the allowance for loan losses established both an
allocated and an unallocated component. The allocated portion of the allowance represents the
results of analyses of individual loans that the Bank monitors for potential credit problems and
pools of loans within the portfolio. Management bases the allocated portion of the allowance for
loans principally on current loan risk ratings, historical loan loss rates adjusted to reflect
current conditions, as well as analyses of other factors that may have affected the collectibility
of loans in the portfolio. The Bank analyzes all commercial loans it is monitoring as potential
credit problems to determine whether those loans are impaired, with impairment measured by
reference to the borrowers collateral values and cash flows.
The unallocated portion of the allowance for loan losses represents the results of analyses
that measure probable losses inherent in the portfolio that are not adequately captured in the
allocated allowance analyses. These analyses include consideration of unidentified losses inherent
in the portfolio resulting from changing underwriting criteria, changes in the types and mix of
loans originated, industry concentrations and evaluations, allowance levels relative to selected
overall credit criteria and other economic indicators used to estimate probable incurred losses.
During the first quarter, the Bank considered the general economic conditions in its market area
and the significant slowdown in the residential housing market. At September 30, 2009, the Bank
had outstanding loans for the development of residential property including loans for spec homes
and subdivisions totaling $12.9 million with an additional undisbursed commitment of $2.7 million.
At September 30, 2009 and December 31, 2008, the allowance for loan losses totaled $3.4 million and
$2.8 million, respectively. The allowance for loan losses as a percentage of loans was 1.7% as of
September 30, 2009 and 1.4% as of December 31, 2008.
An analysis of the allowance for loan losses is summarized below:
In thousands | September 30, | December 31, | ||||||||||||||
2009 | 2008 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
Loans in Each | Loans in Each | |||||||||||||||
Category to | Category to | |||||||||||||||
Amount | Total Loans | Amount | Total Loans | |||||||||||||
Commercial, financial
and agriculture |
$ | 1,258 | 25 | % | $ | 1,178 | 22 | % | ||||||||
Real estate
residential mortgage |
1,281 | 65 | 543 | 69 | ||||||||||||
Installment and other |
454 | 9 | 415 | 8 | ||||||||||||
Impaired loans |
275 | 1 | 383 | 1 | ||||||||||||
Unallocated |
101 | N/A | 232 | N/A | ||||||||||||
Total |
$ | 3,369 | 100 | % | $ | 2,751 | 100 | % | ||||||||
DEPOSITS
The Banks deposits increased $22.6 million during the nine months ended September 30, 2009.
This increase was reflected in all deposit categories. The bank has experienced increased customer
activity in the deposit area over the past nine months especially in the non interest bearing
checking and savings account areas. Although, the rates on interest bearing demand accounts are
low they remain competitive and customers continue to open these accounts also. The Bank
experienced a decrease in the Ultimate Invest checking account during the first quarter of 2009.
This decrease was directly related 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 from the proactive approach of management in establishing
new customer relationships. 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. The Banks 36-month Ultimate Certificates of Deposit and 28-month non
renewable certificate of deposit continue to be the certificates of choice for customers. The
Banks 36-month Ultimate Certificate of Deposit allows the customer to withdraw all or a portion of
the certificate of deposit on the first or second year anniversary date without penalty and
deposits may be made to this CD at any time. The 28-month non renewable certificate of deposit
began in July 2008 and is still available to customers and carries an attractive rate. In May
2009, the Bank was successful in its bid for another $5.0 million in certificate of deposit funds
from the State of WV Treasurers office. This certificate of deposit carries an interest rate of
.508% and matures in November 2009. In August 2009, the Bank was 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.
28
Table of Contents
CAPITAL RESOURCES
Shareholders equity increased $2.5 million or 10.8% during the first nine months of 2009 due
to $1.8 million in net income and a $1.1 million increase in accumulated other comprehensive income
offset by stock repurchases of $172,000 and cash dividends paid of $236,000.
During the third quarter 2007, the Bank instituted a stock repurchase program to repurchase
issued shares of common stock of CNB Financial Services, Inc. Through this program as of September
30, 2009, the Bank has repurchased 12,600 shares of CNB Financial Services, Inc. common stock
reducing shareholders equity by $742,808.
The Bank is subject to various regulatory capital requirements administered by the banking
regulatory agencies. Under each measure, the Bank was substantially in excess of the minimum
regulatory requirements, and, by definition was well capitalized at September 30, 2009. The
following table summarizes, as of September 30, 2009, the Banks capital ratios.
Components | Actual | Required | ||||||||||
of Capital | Ratio | Ratio | ||||||||||
Tier 1 Capital |
$ | 25,923 | 9.1 | % | 4.0 | % | ||||||
Total Risk Based Capital |
$ | 28,123 | 16.1 | % | 8.0 | % |
29
Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to economic loss that arises from changes in the values of certain
financial instruments. The types of market risk exposures generally faced by banking entities
include interest rate risk, bond market price risk, real estate market risk, foreign currency risk
and commodity price risk. Due to the nature of its operations, only bond market price risk,
interest rate risk and real estate market risk are significant to the Bank.
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 which totaled $79.4 million, or 27.2% of total assets at September
30, 2009. In addition, liquidity may be generated through loan repayments, FHLB borrowings and over
$6.5 million of available borrowing arrangements with correspondent banks. At September 30, 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 $3.0 million of cash from operations in the first nine
months of 2009, which compares to $3.7 million during the same time period in 2008. Additional
cash of $10.7 million was used in net investing activities through September 30, 2009, which
compares to $2.7 million additional cash provided by net investing activities for the first nine
months of 2008. Net cash provided by financing activities totaled $6.8 million during the first
nine months of 2009, which compares to net cash used in financing activities of $6.8 million during
the same time period in 2008. 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, Senior Lending
Officer, Chief Financial Officer and the Chief Operations Officer monitor day to day deposit flows,
lending requirements and the competitive environment. Rate changes occur within policy guidelines
if necessary to minimize adverse effects. Also, the Banks policy is intended to ensure the Bank
measures a range of rate scenarios and patterns of rate movements that are reasonably possible.
The Bank measures the impact that 200 basis point changes in rates would have on earnings over the
next twelve months.
In analyzing interest rate sensitivity for policy measurement, the Bank compares its
forecasted earnings in both a high rate and low rate scenario to a base-line scenario. The
Banks base-line scenario is its estimated most likely path for future short-term interest rates
over the next 12 months. The high rate and low rate scenarios assumes 100 and 200 basis point
increases or decreases in the prime rate from the beginning point of the base-line scenario over
the most current 12-month period. The Banks 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 Banks base-line scenario holds the prime rate constant at 3.25 percent through September
2010. Based on the October 2009 outlook, if interest rates increased or decreased by 200 basis
points, the model indicates that net interest income during the policy measurement period would be
affected by less than 10 percent, in both an increasing and decreasing interest rate scenario.
CONTRACTUAL OBLIGATIONS
There were no other material changes outside the normal course of business to the quantitative
and qualitative disclosures about contractual obligations previously reported on Form 10-K for the
year ended December 31, 2008. See Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations Contractual Obligations in the Form 10-K for December 31,
2008 for a detailed discussion.
30
Table of Contents
ITEM 4. CONTROLS AND PROCEDURES
The Companys chief executive officer and chief financial officer, based on their evaluation
as of the end of the reporting period of this quarterly report of the Companys disclosure controls
and procedures (as defined in Rule 13 (a) 14 (c) of the Securities Exchange Act of 1934), have
concluded that the Companys disclosure controls and procedures are adequate and effective for
purposes of Rule 13 (a) 14 (c) and timely, alerting them to material information relating to the
Company required to be included in the Companys filings with the Securities and Exchange
Commission under the Securities Exchange Act of 1934.
There have been no changes in the Companys internal controls over financial reporting in the
fiscal quarter ended September 30, 2009, that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
31
Table of Contents
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which CNB or its subsidiary is a party, or to
which any of their property is subject. However, CNB is involved in various legal
proceedings occurring in the ordinary course of business.
Item 1a. Risk Factors
There have been no material changes to CNBs risk factors since these factors were
previously disclosed in CNBs annual report on Form 10-K for the period ended December 31,
2008.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
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 |
||||||||||||||||
June 30, 2009 |
12,200 | 33,604 | ||||||||||||||
July 1, 2009 |
||||||||||||||||
July 31, 2009 |
| $ | | | 33,604 | |||||||||||
August 1, 2009 |
||||||||||||||||
August 31, 2009 |
| $ | | | 33,604 | |||||||||||
September 1, 2009 |
||||||||||||||||
September 30, 2009 |
400 | $ | 46.70 | 400 | 33,204 | |||||||||||
Total |
400 | 12,600 | ||||||||||||||
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.
Item 6. Exhibits
31.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32
Table of Contents
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CNB Financial Services, Inc. (Registrant) |
||||
Date November 13, 2009 | /s/ Thomas F. Rokisky, President/CEO | |||
Date November 13, 2009 | /s/ Rebecca S. Stotler, Vice President/CFO | |||
33