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REGISTRATION NO. 333-36186
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 2000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CNB FINANCIAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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WEST VIRGINIA 6712 55-0773918
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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212 S. WASHINGTON STREET, P. O. BOX 130,
BERKELEY SPRINGS, WEST VIRGINIA 25411-0130
(304) 258-1520
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
THOMAS F. ROKISKY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CNB FINANCIAL SERVICES, INC.
212 S. WASHINGTON STREET, P. O. BOX 130
BERKELEY SPRINGS, WEST VIRGINIA 25411-0130
(304) 258-1520
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
CHARLES D. DUNBAR, ESQUIRE
ELIZABETH OSENTON LORD, ESQUIRE
JACKSON & KELLY PLLC
1600 LAIDLEY TOWER
POST OFFICE BOX 553
CHARLESTON, WEST VIRGINIA 25322
(304) 340-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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CITIZENS NATIONAL BANK OF BERKELEY SPRINGS
212 W. WASHINGTON STREET
P. O. BOX 130
BERKELEY SPRINGS, WEST VIRGINIA 25411
(304) 258-1520
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE , 2000
A special meeting of shareholders of Citizens National Bank of Berkeley
Springs ("Citizens National") will be held on Thursday, June , 2000, at the
Country Inn, Berkeley Springs, West Virginia, at 10:00 a.m., local time, for the
following purposes:
1. To vote on the following resolution:
RESOLVED, that the formation of a bank holding company for Citizens
National Bank of Berkeley Springs, pursuant to the terms and conditions
of an Agreement and Plan of Merger between Citizens National Bank of
Berkeley Springs and CNB Financial Services, Inc., and related Plan of
Merger, whereby (a) Citizens National Bank of Berkeley Springs will
become a wholly-owned subsidiary of CNB Financial Services, Inc., and
(b) shareholders of Citizens National Bank of Berkeley Springs will
become shareholders of CNB Financial Services, Inc., is hereby
authorized and approved.
2. To transact such other business as may properly come before the meeting
or any adjournments thereof.
At this meeting, holders of record of common stock of Citizens National at
the close of business on June , 2000, will be entitled to vote. Two-thirds of
the issued and outstanding shares of Citizens National must vote in favor of the
above resolution in order to permit the holding company formation to proceed.
Shareholders and beneficial shareholders are entitled to assert dissenters'
rights under 12 U.S.C. Sections 215a(b), (c) and (d). A copy of those sections
is attached to the following proxy statement/prospectus as Appendix II.
THE BOARD OF DIRECTORS OF CITIZENS NATIONAL BELIEVES THAT THE PROPOSED
HOLDING COMPANY IS IN THE BEST INTERESTS OF CITIZENS NATIONAL AND ITS
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF CITIZENS NATIONAL
VOTE "FOR" THE PROPOSED HOLDING COMPANY.
By Order of the Board of Directors,
Thomas F. Rokisky
President and Chief Executive Officer
June , 2000
Berkeley Springs, West Virginia
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PROXY STATEMENT/PROSPECTUS
JUNE , 2000
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS
PROXY STATEMENT
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CNB FINANCIAL SERVICES, INC.
PROSPECTUS
458,048 SHARES OF COMMON STOCK
------------------------
We are providing this proxy statement/prospectus to you because we are
soliciting your proxy to vote at a special meeting of shareholders. We are
seeking shareholder approval for a merger/corporate reorganization. This
reorganization involves the formation of a bank holding company for Citizens
National Bank of Berkeley Springs. If at least two-thirds of the bank's
shareholders approve the reorganization, you will become a shareholder of CNB
Financial Services, Inc., and this holding company will own all of the
outstanding stock of the bank.
IF SHAREHOLDERS APPROVE THE REORGANIZATION, YOU WILL RECEIVE TWO SHARES OF
HOLDING COMPANY STOCK FOR EACH SHARE OF THE BANK'S COMMON STOCK THAT YOU OWN.
GENERALLY, YOU WILL NOT RECOGNIZE ANY TAXABLE GAIN OR LOSS FOR CITIZENS NATIONAL
SHARES IN EXCHANGE FOR CNB FINANCIAL'S SHARES.
The date, time and place of the special meeting is June , 2000, 10:00
a.m., local time, at the Country Inn, Berkeley Springs, West Virginia.
THE SHARES OF CNB FINANCIAL'S COMMON STOCK ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER BANK OBLIGATIONS, AND NEITHER THE FDIC NOR ANY OTHER
GOVERNMENTAL AGENCY INSURES THESE SHARES.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JUNE , 2000.
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TABLE OF CONTENTS
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SUMMARY..................................................... 1
SELECTED FINANCIAL DATA..................................... 3
FORWARD-LOOKING STATEMENTS.................................. 4
THE SPECIAL MEETING......................................... 5
Matters to be Voted on at the Special Meeting............. 5
Who is Eligible to Vote................................... 5
Quorum; Required Vote..................................... 5
Revocability of Proxies................................... 5
Proxy Solicitation........................................ 5
PROPOSED MERGER AND REORGANIZATION INTO A BANK HOLDING
COMPANY................................................... 6
Description of Proposed Merger and Reorganization......... 6
Reasons for Forming the Holding Company................... 6
Recommendation of Citizens National's Board of
Directors.............................................. 7
Treatment of Stock Certificates........................... 7
Conditions That Must Occur Before the Merger Can Occur.... 8
Federal Tax Consequences of the Merger and Reorganization
into a Bank Holding Company............................ 8
Accounting Treatment...................................... 10
COMPARISON OF CITIZENS NATIONAL'S AND CNB FINANCIAL'S
STOCK..................................................... 10
Issuance of Capital Stock................................. 10
Dividends and Dividend Rights............................. 11
Voting Rights............................................. 11
Preemptive Rights......................................... 11
Liquidation Rights........................................ 12
Assessment of Shares...................................... 12
Indemnification........................................... 12
Fair Price Provision...................................... 12
REGULATORY APPROVALS........................................ 13
RIGHTS OF DISSENTING SHAREHOLDERS........................... 13
MARKET PRICE OF CITIZENS NATIONAL'S CAPITAL STOCK AND
DIVIDENDS................................................. 15
MANAGEMENT.................................................. 16
Directors................................................. 16
Executive Officers........................................ 17
Meetings and Committees of the Board of Directors......... 17
Compensation of Bank Directors............................ 18
Bank Executive Compensation............................... 18
Pension Plan.............................................. 19
401(k) Profit Sharing Plan................................ 19
Deferred Compensation..................................... 19
Compensation for CNB Financial's Executive Officers and
Directors.............................................. 19
Ownership of Certain Beneficial Owners and Management..... 19
Certain Transactions...................................... 21
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DESCRIPTION OF CITIZENS NATIONAL'S BUSINESS................. 21
Business of Citizens National............................. 21
Employees................................................. 21
Competition............................................... 21
Property.................................................. 23
SUPERVISION AND REGULATION.................................. 23
Gramm-Leach-Bliley Act of 1999............................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 24
General................................................... 24
Earnings Summary.......................................... 25
Net Interest Income....................................... 25
Provision for Loan Losses................................. 27
Noninterest Income........................................ 27
Noninterest Expenses...................................... 27
Income Taxes.............................................. 27
Financial Condition....................................... 27
Loan Portfolio............................................ 28
Nonperforming Assets and Allowance for Loan Losses........ 28
Deposits.................................................. 29
Capital Resources......................................... 29
ADDITIONAL INFORMATION ABOUT THE HOLDING COMPANY............ 44
OTHER MATTERS............................................... 44
LEGAL MATTERS............................................... 44
WHERE YOU CAN FIND MORE INFORMATION......................... 44
FINANCIAL STATEMENTS
APPENDIX I -- AGREEMENT AND PLAN OF MERGER
APPENDIX II -- 12 C.F.R. Sections 215a(b), (c) and (d)
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QUESTIONS AND ANSWERS
Q: WHY IS CITIZENS NATIONAL PROPOSING TO REORGANIZE INTO A HOLDING COMPANY
STRUCTURE?
A. We believe that the reorganization will give Citizens National greater
flexibility in the services it provides to its customers and in
responding to changing market conditions and the changing needs of the
community.
Q: WHAT DO I NEED TO DO NOW?
A. Just indicate on your proxy card how you want to vote, and sign, date
and return it to us. If you sign and send in your proxy and do not
indicate how you want to vote, the proxies will vote your shares in
favor of the formation of a holding company. Not returning your proxy,
not voting at the special meeting or abstaining from voting has the
effect of voting against the reorganization.
If you hold Citizens National's common stock, you can choose to attend
the special meeting and vote your shares in person instead of returning
your completed proxy card. If you do return a proxy card, you may change
your vote at any time up to the time of the vote by following the
directions on page .
Q: WHAT WILL CITIZENS NATIONAL'S STOCKHOLDERS RECEIVE?
A. Each non-dissenting shareholder will receive two shares of common stock
of CNB Financial for each share of Citizens National's common stock.
Q: WHEN DO YOU EXPECT THE REORGANIZATION TO TAKE PLACE?
A. We are working toward completing the reorganization as quickly as
possible. In addition to the approval of Citizens National's
stockholders, we must obtain a number of regulatory approvals. We expect
the reorganization to take place as soon as practicable after the
special meeting and after we receive all regulatory approvals.
Q: WHAT ARE THE INCOME TAX CONSEQUENCES OF THE MERGER TO ME?
A. As a result of the reorganization, you will not recognize any gain or
loss when you exchange your bank common stock for holding company common
stock.
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SUMMARY
The following is a brief summary of information located elsewhere in this
proxy statement/ prospectus. BEFORE YOU VOTE, PLEASE CAREFULLY CONSIDER ALL OF
THE INFORMATION CONTAINED IN THIS DOCUMENT.
SHAREHOLDERS WILL RECEIVE TWO SHARES OF CNB FINANCIAL'S COMMON STOCK FOR EACH
SHARE OF CITIZENS NATIONAL'S COMMON STOCK THEY OWN. (PAGE )
If Citizens National's shareholders approve the reorganization/merger and
the parties satisfy all of the other conditions in the agreement and plan of
merger, each share of Citizens National's common stock that is outstanding
immediately prior to the merger will automatically become two shares of CNB
Financial's common stock on the effective date of the merger.
THIS TRANSACTION WILL BE GENERALLY TAX FREE TO SHAREHOLDERS. (PAGE )
Subject to the limitations and assumptions described in "Federal Tax
Consequences of the Merger and Reorganization Into a Bank Holding Company," the
shareholders of Citizens National will not recognize any gain or loss as a
result of exchanging Citizens National's common stock for CNB Financial's common
stock.
CNB FINANCIAL'S GOVERNING DOCUMENTS CONTAIN A "FAIR PRICE" PROVISION WHICH IS
DESIGNED TO MAKE UNSOLICITED TAKEOVER ATTEMPTS MORE DIFFICULT. (PAGE )
CNB Financial's articles and bylaws contain a fair price provision.
Citizens National's corporate governance documents do not contain this type of
provision. Anti-takeover provisions such as a fair price provision are designed
to make unsolicited takeover attempts more difficult to accomplish.
CITIZENS NATIONAL'S SHAREHOLDERS HAVE DISSENTERS' RIGHTS. (PAGE )
If the merger occurs, any Citizens National stockholder may receive payment
of the value of his or her shares from Citizens Financial if the shareholder
follows the procedures set forth in 12 C.F.R. Sections 215a(b), (c) and (d).
CNB FINANCIAL'S COMMON STOCK IS NOT CURRENTLY LISTED ON AN EXCHANGE OR OTHER
TRADING FACILITY. (PAGE )
Citizens National's common stock currently is traded in privately
negotiated transactions. After the reorganization takes place and upon meeting
listing qualifications, we may in the future seek listing for trading on the
Nasdaq Stock Market's National Market Tier. We cannot predict when, if ever, we
would become eligible for listing.
CITIZENS NATIONAL AND CNB FINANCIAL ARE THE PARTIES TO THE MERGER. (PAGE )
Citizens National. Citizens National has operated as a national banking
association in Berkeley Springs, West Virginia, since June 20, 1934. The bank
provides a wide range of financial services for retail and institutional
customers. Citizens National operates as a full-service bank regulated by the
Office of the Comptroller of the Currency and the Board of Governors of the
Federal Reserve. The FDIC insures the bank's deposits, and therefore, the FDIC
also regulates the bank.
CNB Financial. CNB Financial is a West Virginia corporation formed in March
2000. Its principal executive offices are located at 212 S. Washington Street,
P. O. Box 130, Berkeley Springs, West Virginia, and its telephone number is
(304) 258-1520.
THE MERGER. (PAGE )
After the merger, each shareholder of Citizens National will become a
shareholder of CNB Financial. Citizens National will be a wholly owned
subsidiary of CNB Financial.
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RECAPITALIZATION STRUCTURE AFTER THE MERGER. (PAGE )
Immediately after the reorganization takes place (1) the holding company
will have outstanding twice the number of shares of common stock that Citizens
National had issued and outstanding immediately prior to the merger, (2) the
persons who held the Citizens National's common stock will be the same persons
who hold CNB Financial's common stock, and (3) the holding company will own all
of the shares of Citizens National.
TWO-THIRDS OF CITIZENS NATIONAL'S SHAREHOLDERS MUST APPROVE THE MERGER. (PAGE
)
Under federal law, at least two-thirds of our outstanding common stock must
approve the merger.
If you held Citizens National's common stock at the close of business on
May 5, 2000, you are entitled to vote at the special meeting. Each share of
common stock is entitled to one vote.
After careful consideration, Citizens National's board of directors
believes that the merger is in the best interests of Citizens National and its
stockholders and has approved the agreement and plan of merger and related plan
of merger. Citizens National's board of directors recommends that you vote FOR
approval of the agreement and plan of merger and related plan of merger.
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SELECTED FINANCIAL DATA
We are providing the following information to you to help you analyze
Citizens National's operations. We derived this information from audited
financial statements for 1995 through 1999 and unaudited financial statements
for the first quarters ended March 31, 2000 and 1999. We have adjusted the per
share data to reflect a 100% stock dividend declared on March 1, 1998. This
information is only a summary, and you should read it in conjunction with
Citizens National's historical financial statements and related notes contained
in this document. We have not provided any financial information for CNB
Financial because it was recently formed, and there are no operations to date.
CITIZENS NATIONAL -- HISTORICAL FINANCIAL INFORMATION
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AS OF / FOR THE
QUARTERS ENDED
MARCH 31, AS OF / FOR THE YEARS ENDED DECEMBER 31,
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2000 1999 1999 1998 1997 1996 1995
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Net interest income..... $ 1,393 $ 1,263 $ 5,348 $ 5,072 $ 4,831 $ 4,580 $ 4,342
Net income.............. 399 313 1,220 1,301 1,317 1,215 1,071
Cash dividends paid per
share................. -- -- 2.00 2.00 1.87 1.75 1.60
Book value per share.... 54.90 55.08 53.48 54.66 50.84 46.29 43.02
Total assets............ 140,430 138,648 138,648 129,600 115,402 108,943 101,901
Loans, net of unearned
income................ 100,266 86,833 98,272 86,377 81,084 72,268 71,156
Provision for loan
losses................ 30 42 118 196 174 134 146
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FORWARD-LOOKING STATEMENTS
When used in this proxy statement/prospectus, in Citizens National's or CNB
Financial's press releases or other public or shareholder communications, and in
oral statements made with the approval of the authorized executive officer, the
words or phrases "are expected to," "estimate," "is anticipated," "project,"
"will continue," "will likely result," "plans to" or similar expressions are
intended to identify "forward-looking statements." These types of statements are
subject to risks and uncertainties, including changes in economic conditions in
Citizens National's market area, changes in policies by regulatory agencies,
fluctuation in interest rates, demand for loans in Citizens National's market
area, and competition, that could cause actual results to differ materially from
what Citizens National or CNB Financial have presently anticipated or projected.
Citizens National and CNB Financial wish to caution readers not to place undue
reliance on any forward-looking statements, which speak only as of the date
made. Citizens National and CNB Financial wish to advise readers that factors
addressed within the proxy statement/prospectus could affect Citizens National's
financial performance and could cause Citizens National's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
Where any forward-looking statement includes a statement of the assumptions
or bases underlying the forward-looking statement, Citizens National and CNB
Financial caution that assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material. We cannot assure you that any statement of expectation or
belief in any forward-looking statement will result, or be achieved or
accomplished.
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THE SPECIAL MEETING
MATTERS TO BE VOTED ON AT THE SPECIAL MEETING
At the special meeting, you will be asked to vote on an agreement and plan
of merger, dated as of April 5, 2000, and related plan of merger. CNB Financial
Services, Inc., is the new West Virginia corporation we organized to become the
holding company for Citizens National. If shareholders approve the agreement and
plan of merger, each outstanding share of common stock of Citizens National will
be converted into two shares of common stock of CNB Financial, and Citizens
National will become a wholly owned subsidiary of CNB Financial.
WHO IS ELIGIBLE TO VOTE
If you held Citizens National common stock at the close of business on June
, 2000, you may vote at the special meeting. On April 24, 2000, there were
229,024 shares of Citizens National common stock outstanding, held by 567
shareholders of record. Each share of common stock is entitled to one vote on
each matter properly presented at the special meeting.
QUORUM; REQUIRED VOTE
Under our articles of incorporation and bylaws, at least two-thirds of our
outstanding common stock must approve the merger. The presence, in person or by
proxy, of at least a majority of the total number of shares of common stock
entitled to vote is necessary to constitute a quorum at the special meeting.
Shares that are subject to abstentions and broker non-votes are counted as
present for purposes of determining the presence of a quorum. If there are not
sufficient votes for a quorum, the special meeting may be adjourned or postponed
to permit further solicitation of proxies.
REVOCABILITY OF PROXIES
The proxies we are soliciting under this proxy statement/prospectus, if
properly signed and returned to Citizens National and not revoked prior to their
use, will be voted in accordance with the instructions contained in the proxies.
EXECUTED PROXIES WITH NO INSTRUCTIONS INDICATED ON THE PROXY CARD WILL BE VOTED
FOR THE MERGER. Any stockholder who submits a proxy card has the power to revoke
it at any time before it is exercised by (1) filing a written notice of
revocation with Mr. Thomas F. Rokisky, Citizens National Bank of Berkeley
Springs, 212 S. Washington Street, P. O. Box 130, Berkeley Springs, West
Virginia 25411, (2) submitting a duly executed proxy card bearing a later date,
or (3) appearing at the special meeting and giving notice of his or her
intention to vote in person.
PROXY SOLICITATION
In addition to soliciting proxies by mail, Citizens National's directors,
officers and employees may solicit proxies personally or by telephone without
receiving additional compensation for these activities. Citizens National will
also make arrangements with brokerage firms and other custodians, nominees and
fiduciaries to send proxy materials to their principals and will reimburse those
parties for their expenses in doing so.
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PROPOSED MERGER AND REORGANIZATION INTO A BANK HOLDING COMPANY
We have attached a copy of the agreement and plan of merger to this proxy
statement/ prospectus as Appendix I. We urge you to read the entire agreement
and plan of merger because it is the document that governs the reorganization of
the bank into a one-bank holding company.
DESCRIPTION OF PROPOSED MERGER AND REORGANIZATION
If Citizens National's stockholders approve the merger and all of the other
conditions in the agreement and plan of merger are satisfied, on the effective
date of the merger each share of Citizens National's common stock that is
outstanding immediately prior to the merger (other than dissenting shares) will
automatically by operation of law be exchanged for two shares of the holding
company's common stock.
After the merger, the former holders of Citizens National's outstanding
common stock who do not exercise dissenters' rights will be the holders of all
of the outstanding shares of the holding company's common stock. At that point,
the holding company will own all of Citizens National's outstanding capital
stock. Because CNB Financial will hold all of the issued and outstanding capital
stock of Citizens National after the reorganization takes place, Citizens
National will be described as a "wholly owned" subsidiary of the holding company
following the merger.
After this reorganization, Citizens National will continue its existing
business and operations as a wholly owned subsidiary of the holding company. At
that time, the consolidated capitalization, assets, liabilities, income and
financial statements of the holding company immediately following the
reorganization will be substantially the same as those of Citizens National
immediately prior to when the reorganization takes place. The articles of
incorporation and the bylaws of Citizens National will continue in effect, and
the transaction will not affect them in any material way. Citizens National will
continue to use the name "Citizens National Bank of Berkeley Springs," and
Citizens National's corporate existence will continue unimpaired.
Citizens National's board of directors and the holding company believe that
the merger and reorganization into a holding company structure is in the best
interests of Citizens National's stockholders for the reasons we describe below.
The Citizens National and CNB Financial boards of directors have approved the
merger. If Citizens National's stockholders approve the agreement and plan of
merger and the other conditions described below under "Conditions That Must
Occur Before the Merger Can Occur" are satisfied, the merger will become
effective upon the filing of the plan of merger with the West Virginia Secretary
of State.
REASONS FOR FORMING THE HOLDING COMPANY
The reasons for forming CNB Financial are to permit greater flexibility to
Citizens National in meeting the financial needs of its customers and to provide
a vehicle for growth and potential geographic diversification. In addition,
holding companies may redeem their shares, and banks may accept holding company
shares as collateral for loans (within certain limits). National banks do not
have these powers.
Bank holding companies may also establish or acquire companies engaged in
activities closely related to banking with operations and offices located in
West Virginia and outside
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the state as well. While the holding company is not presently engaged in
negotiations and there are no current arrangements or agreements for the
acquisition of other banks or companies engaged in activities closely related to
banking, and while we cannot assure you that we will make any acquisitions,
Citizens National's board of directors believes that the possibility of making
acquisitions which would be permissible if the reorganization takes place
represents a potentially attractive growth possibility.
Citizens National's board of directors is also forming the holding company
to be in a position to take advantage of the provisions of the
Gramm-Leach-Bliley Act of 1999. This Act was passed by the United States
Congress on November 4, 1999, and signed by President Clinton on November 12,
1999. This Act repealed many of the restrictions on the activities that
financial institutions conduct. Under the Act, a bank holding company can
qualify as a "financial holding company" and engage in business activities which
were previously prohibited. The activities permitted to financial holding
companies under the Act are slightly broader than those permitted to banks.
Citizens National's board of directors also believes that the holding
company may provide additional funding sources for Citizens National, as well as
better access to the capital markets. Additionally, Citizens National's board
believes a bank holding company will be in a better position to respond to the
competitive environment in which it is operating, characterized in larger part
by the activities of bank holding companies in West Virginia as well as
nationally. In general, the board of directors of Citizens National believes
that operating as a bank holding company will serve the interests of the banking
public and the stockholders of Citizens National by improving the capability for
service in a highly competitive environment.
RECOMMENDATION OF CITIZENS NATIONAL'S BOARD OF DIRECTORS
After careful consideration, Citizens National's board of directors has
determined that the merger and reorganization is advisable and in the best
interests of Citizens National and its stockholders. Accordingly, the board has
approved the agreement and plan of merger and the related plan of merger and the
contemplated reorganization. CITIZENS NATIONAL'S BOARD OF DIRECTORS RECOMMENDS
THAT YOU VOTE FOR APPROVAL OF THE AGREEMENT AND PLAN OF MERGER AND THE RELATED
PLAN OF MERGER.
TREATMENT OF STOCK CERTIFICATES
After the merger, Citizens National's shareholders who do not exercise
dissenters' rights will be entitled to exchange their Citizens National stock
certificates or the right to receive certificates for new certificates
evidencing two shares of holding company common stock for each share of Citizens
National common stock. Until exchanged, Citizens National stock certificates
will, for all purposes, represent two shares of holding company stock for each
Citizens National share previously represented. The holders of Citizens National
certificates who do not exercise dissenters' rights will have all of the rights
of holders of the holding company's shares.
As soon as practicable after the merger takes place, we will send
instructions concerning stock certificates to all holders of record as of the
effective date of the merger.
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CONDITIONS THAT MUST OCCUR BEFORE THE MERGER CAN OCCUR
The following summarizes some of the conditions that must occur before the
merger can take place:
- two-thirds of the issued and outstanding shares of Citizens National
common stock must approve the agreement and plan of merger and related
plan of merger;
- all regulatory approvals (or waiver or exemption from any required
regulatory approval) and satisfaction of all other requirements required
by law which are necessary to complete the merger, must be obtained, and
all statutory waiting periods must expire, without the imposition of any
condition or requirements that would materially and adversely affect the
operations or business prospects of the holding company or Citizens
National;
- Citizens National must receive an opinion letter from Jackson & Kelly
PLLC, counsel to Citizens National, regarding federal income tax
consequences of the merger; and
- Unless CNB Financial waives this condition, holders of more than 5% of
Citizens National's common stock may not dissent from the merger.
FEDERAL TAX CONSEQUENCES OF THE MERGER AND REORGANIZATION INTO A BANK HOLDING
COMPANY
The merger agreement expressly conditions the merger upon Citizens National
receiving an opinion of counsel from Jackson & Kelly PLLC with respect to United
States federal income taxation.
We qualify the following summary of federal income tax consequences in its
entirety by referring you to the full text of Jackson & Kelly PLLC's opinion,
including that firm's assumptions. We have filed Jackson & Kelly PLLC's opinion
as Exhibit 8 to the registration statement of which this proxy
statement/prospectus is a part.
This summary applies only to Citizens National's shareholders, if any, who
hold their common stock as a capital asset. This discussion does not address all
aspects of taxation that may be relevant to particular shareholders in light of
their personal investment or tax circumstances, or to certain types of
shareholders subject to special treatment under the federal income tax laws.
This opinion does not address tax issues relating to insurance companies,
financial institutions, broker-dealers, foreign corporations, persons who
receive stock through the exercise of stock options or otherwise as compensation
for services rendered and persons who are not citizens or residents of the
United States. It also does not discuss any state, local or foreign tax
considerations. Accordingly, we urge you to consult your own tax advisor as to
the specific tax consequences of the merger, including the applicable federal,
state, local and foreign tax consequences of the merger.
We have not requested any ruling from the Internal Revenue Service as to
the federal income tax consequences of the merger. Jackson & Kelly PLLC's
opinion is not binding on the IRS or any court, and neither the IRS nor any
court is precluded from taking a different position. The Internal Revenue Code
governs some of the federal income tax consequences of the merger as to which
there are no final regulations and little or no judicial or administrative
guidance. Jackson & Kelly PLLC bases its opinion upon the federal income tax
laws in effect on the date of the opinion and as those laws are currently
interpreted. Future legislation, regulations, administrative rulings or court
decisions could adversely affect the accuracy of the statements.
8
<PAGE> 15
We condition the federal income tax consequences below upon, and Jackson &
Kelly PLLC bases its opinion upon, the accuracy of assumptions and
representations of fact that the parties to the merger agreement provided to
Jackson & Kelly PLLC. Jackson & Kelly PLLC has not independently verified these
assumptions and representations. These assumptions and representations include,
but are not limited to, the following:
- that following the merger, CNB Financial will continue the historic
business of Citizens National or use a significant portion of Citizens
National's historic business assets in a business;
- that a bona fide corporate business purpose exists for the merger; and
- that in the merger shares of stock of Citizens National representing
control of Citizens National will be exchanged solely for CNB Financial's
common stock. For this purpose, control means 80% of the total combined
voting power of all classes of stock entitled to vote and of at least 80%
of the total number of shares of each other class of stock of Citizens
National.
As of the date of this proxy statement/prospectus, CNB Financial and
Citizens National believe that all of these assumptions are now, and will be at,
as of and after the time the merger becomes effective, accurate. If either CNB
Financial or Citizens National learns before that time that the assumptions are
false and that its counsel therefore believes that the merger is unlikely to be
treated as a tax-free reorganization, then additional shareholder approval will
be obtained before consummation of the merger.
Subject to the limitations and assumptions described above, we anticipate
that Jackson & Kelly PLLC will render an opinion that the merger will have the
following federal income tax consequences:
- The merger will constitute a reorganization within the meaning of
Sections 368(a)(1)(A) and (a)(2)(E) of the Internal Revenue Code of 1986;
- None of the parties to the merger agreement will recognize any gain or
loss as a result of the merger;
- Shareholders of Citizens National will not recognize any gain or loss as
a result of their exchange of Citizens National's common stock for CNB
Financial's common stock except to the extent any shareholder receives
cash as a dissenting shareholder;
- The holding period for Citizens National's shareholders of the CNB
Financial's common stock they receive in the merger will include the
period during which the Citizens National's stock was held, provided this
stock was a capital asset in the hands of the holder on the date of
exchange;
- The federal income tax basis for Citizens National's shareholders of the
CNB Financial's common stock they receive in the merger will be the same
as the basis of the Citizens National's common stock shareholders
exchange therefor; and
- CNB Financial's payment of cash to Citizens National's shareholders in
exchange for Citizens National common stock relating to the exercise of
dissenter's rights will be treated as having been received as a
distribution in redemption of a dissenting stockholder's Citizens
National's common stock, subject to the provisions and limitations of
Section 302 of the Internal Revenue Code. Where as a result of such
distribution a stockholder owns no Citizens National's common stock
either directly or through the application of Section 318(a) of the Code,
the redemption will be a complete termination of interest within the
meaning of Section 302(b)(3) of the Code and the cash will be treated as
a distribution in full payment in exchange for his or
9
<PAGE> 16
her Citizens National's common stock, as provided in Section 302(a) of
the Code. Under Section 1001 of the Code, gain or (subject to the
limitations of Section 267 of the Code) loss will be realized and
recognized to such stockholders in an amount equal to the difference
between the amount of such cash and the adjusted basis of the Citizens
National's common stock surrendered, as determined under Section 1011 of
the Code. If the Citizens National's stockholder has held his or her
stock for more than one year, the gain should be treated as long-term
capital gain, provided that the shares were held as a capital asset on
the date of the exchange.
The tax consequences of the merger may vary depending upon your particular
circumstances. We urge you to consult your own tax advisor to determine the
particular tax consequences of the merger to you, including the applicability
and effect of any state, local or foreign income, property, transfer and other
tax laws.
ACCOUNTING TREATMENT
The merger and reorganization into a bank holding company will be accounted
for as a change in corporate form with the historical basis of Citizens
National's assets, liabilities and stockholders' equity unchanged under the bank
holding company.
COMPARISON OF CITIZENS NATIONAL'S AND CNB FINANCIAL'S STOCK
The respective articles of incorporation and bylaws of Citizens National
and CNB Financial govern the bank's and the holding company's shareholders. In
many respects, the rights of CNB Financial's shareholders will be similar to
those of Citizens National's shareholders. For example:
- Holders of common stock of each corporation are entitled to one vote for
each share of common stock and to receive pro rata any assets distributed
to shareholders upon liquidation.
- Shareholders of neither corporation have preemptive rights.
- The shareholders of both corporations have the right to dissent from
certain corporate transactions and to elect dissenters' rights.
- The board of directors of each corporation may fill a vacancy of the
board occurring during the course of the year, including a vacancy
created by an increase in the number of directors.
Below we discuss the various attributes of owning CNB Financial's common
stock and Citizens National's common stock.
ISSUANCE OF CAPITAL STOCK
Under Citizens National's articles of incorporation, Citizens National's
authorized capital stock is 600,000 shares of common stock, par value $10.00 per
share, of which 229,024 shares are issued and outstanding as of April 24, 2000.
Under the holding company's articles of incorporation, the authorized capital
stock of the holding company is 5,000,000 shares of common stock, par value
$1.00 per share.
Under the agreement and plan of merger, CNB Financial will issue
approximately 458,048 shares of its common stock in exchange for all of the
outstanding shares of Citizens National's common stock. The balance of CNB
Financial's authorized capital stock will be
10
<PAGE> 17
available for issuance when and as the board of directors of CNB Financial
determines. CNB Financial could issue that common stock to raise additional
capital in connection with the acquisition of other businesses or for other
appropriate purposes. The board of directors of CNB Financial will have the
authority to issue common stock to the extent of the present number of
authorized and unissued shares, without obtaining shareholder approval. If
additional holding company common stock is issued, the existing holders of the
holding company's common stock would own a proportionately smaller portion of
the total number of issued and outstanding common stock, unless they acquire a
pro-rata portion of the new issue.
DIVIDENDS AND DIVIDEND RIGHTS
Citizens National's stockholders are entitled to receive dividends when and
as declared by its board of directors, subject to various regulatory
restrictions. In certain instances, a national bank must obtain approval of the
Comptroller of the Currency before paying dividends. Federal law prohibits
national banks from paying dividends greater than the bank's undivided profits
after deducting statutory bad debt in excess of the bank's allowance for loan
losses.
CNB Financial's future cash dividends will depend on its consolidated
earnings, general economic conditions, financial condition of its subsidiaries
and other factors generally affecting dividend policy. CNB Financial's
stockholders are entitled to receive dividends when and as declared by its board
of directors subject to the restrictions under federal law and the regulations
of the Office of the Comptroller of the Currency. Generally, the Office of the
Comptroller of the Currency must approve any dividends in excess of the sum of
current year's income and net profits retained for the prior two years.
Following the merger's completion, funds for the payment of cash dividends and
expenses of CNB Financial will come from cash dividends from Citizens National.
VOTING RIGHTS
All voting rights with respect to Citizens National are vested in the
holders of the bank's common stock. All voting rights with respect to CNB
Financial will be vested in the holders of CNB Financial's common stock.
In the election of directors, the shareholders of CNB Financial and
Citizens National have the right to vote the number of shares owned by them for
as many persons as there are directors to be elected, or to cumulate such shares
and give one candidate as many votes as the number of directors to be elected
multiplied by the number of shares they own, or to distribute them on the same
principle among as many candidates as they may decide. For all other purposes,
each share is entitled to one vote.
PREEMPTIVE RIGHTS
Holders of Citizens National's common stock do not have preemptive rights
to subscribe to a pro-rata share of any future offers of shares by the bank. The
holders of common stock of CNB Financial will have no preemptive rights to
subscribe to any additional securities which CNB Financial may issue. If CNB
Financial should decide to issue any or all of these shares, the effect would be
to dilute the percentage ownership of the shareholders who do not purchase a
pro-rata portion of the shares issued.
11
<PAGE> 18
LIQUIDATION RIGHTS
The holders of Citizens National's common stock are entitled to share
equally in the net assets of the bank in the event of liquidation or
dissolution. After the merger's completion, holders of Citizens National's
common stock converted to CNB Financial's common stock will be entitled to share
equally in the net assets of the holding company in the event of liquidation or
dissolution, subject to the preferential rights, if any, of the holders of any
outstanding senior securities. At this time, there are no senior securities of
the holding company issued or outstanding, and the holding company currently has
no plan to issue senior securities.
ASSESSMENT OF SHARES
The shares of CNB Financial's common stock are fully paid and
non-assessable. Federal regulations provide that the outstanding shares of
Citizens National held by the officers and directors of the bank may be assessed
if its common stock becomes impaired by losses or otherwise.
INDEMNIFICATION
Directors and officers of CNB Financial or persons serving at the request
of CNB Financial as directors, officers, employees or agents of another
corporation or organization (including any of its subsidiaries) are entitled to
indemnification as provided in its articles of incorporation.
In general, indemnification is provided for reasonable costs and expenses,
fees and reasonable payments in settlement, except in matters in which the
person is adjudged to be liable for gross negligence, willful misconduct, or
criminal acts.
The bank's articles of incorporation contains similar provisions.
Although we believe the foregoing describes the material similarities and
differences between the rights of CNB Financial's and Citizens National's
shareholders, it is not exhaustive, and we encourage you to refer to the West
Virginia Corporation Act and the articles and bylaws of both CNB Financial and
Citizens National.
FAIR PRICE PROVISION
Citizens National's articles of incorporation and bylaws do not contain a
fair price provision. However, CNB Financial's articles of incorporation contain
this provision.
The fair price provision requires the approval of at least 80% of CNB
Financial's shares entitled to vote to approve transactions with an interested
shareholder except in cases where either (1) price criteria and procedural
requirements are satisfied, or (2) a majority of CNB Financial's board of
directors recommends the transaction to the shareholders. If the minimum price
criteria and procedural requirements are met or the requisite approval of CNB
Financial's board of directors are given, the normal requirements of West
Virginia law would apply.
An "interested shareholder" is any person, other than CNB Financial or any
of its subsidiaries, who is, or who was within the two-year period immediately
before the announcement of a proposed business combination, the beneficial owner
of more than 10% of CNB Financial's voting power. It also includes any person
who is an assignee of, or has
12
<PAGE> 19
succeeded to, any shares of voting stock in a transaction not involving a public
offering which were at any time within the prior two-year period beneficially
owned by interested shareholders. A "disinterested director" is any member of
the board of directors of CNB Financial who is not affiliated with an interested
shareholder and who was a director of CNB Financial prior to the time the
interested shareholder became an interested shareholder. It also includes any
successor to a disinterested director who is not affiliated with an interested
shareholder and who was recommended by a majority of the disinterested directors
then on the board.
ADVANTAGES OF CNB FINANCIAL'S FAIR PRICE PROVISION. The fair price
provision may constitute a defensive measure because it may discourage or deter
a third party from attempting to acquire control of CNB Financial. The purpose
of this provision is to discourage and to insulate the corporation against
hostile takeover efforts which CNB Financial's board of directors might
determine are not in the best interests of CNB Financial or its shareholders. We
believe that the fair price provision is a reasonable precaution to ensure that
a party seeking control will discuss its proposal with management.
DISADVANTAGES OF CNB FINANCIAL'S FAIR PRICE PROVISION. The fair price
provision may be beneficial to management in a hostile takeover attempt, making
it more difficult to effect changes, and at the same time, adversely affecting
shareholders who might wish to participate in a takeover attempt.
REGULATORY APPROVALS
For the merger to occur, the holding company and Citizens National must
have received approvals from the Office of the Comptroller of the Currency and
the Federal Reserve Board.
RIGHTS OF DISSENTING SHAREHOLDERS
Citizens National's shareholders will be voting on the agreement and plan
of merger. If you object to the reorganization and comply with 12 C.F.R.
Sections 215a(b), (c) and (d), you are entitled to payment of the fair value of
your shares. The following is a brief summary of the steps you must take to
perfect dissenters' rights. The summary may not contain all information that is
important to investors, even though it contains all material terms and
conditions. We have reproduced for you the provisions of 12 C.F.R. Sections
215a(b), (c) and (d) as Appendix II to this proxy statement/prospectus.
YOU MUST VOTE AGAINST THE MERGER OR GIVE WRITTEN NOTICE OF YOUR DISSENT. If
the Comptroller of the Currency approves the merger and if the merger is
approved by two-thirds of the number of shares outstanding, you may receive the
fair value of your shares if you vote against the merger or give written notice
at or prior to the special meeting to Thomas F. Rokisky that you dissent from
the plan of merger. You will be entitled to receive the value of your shares
when the Comptroller of the Currency approves the merger and plan of merger upon
written request made to CNB Financial at any time before 30 days after the date
of consummation of the merger. Your stock certificates must accompany this
written request.
THE VALUE OF YOUR SHARES WILL BE DETERMINED AS OF THE EFFECTIVE DATE OF THE
MERGER. An appraisal committee consisting of three persons composed of one
selected by the vote of the holders of a majority of the bank's common stock,
one selected by the directors of the
13
<PAGE> 20
bank and one selected by each of the foregoing shall make up the committee. The
valuation agreed upon by any of the two of the three appraisers shall govern.
If the value so fixed is not satisfactory to any dissenting shareholder who
has requested payment, that shareholder may, within five days after being
notified of the appraised value of the shares, appeal to the Comptroller of the
Currency. In this event, the Comptroller of the Currency shall see to it that a
reappraisal be made and this appraisal will be the final and binding value of
the shares.
If within 90 days from the date of consummating the merger one or more of
the appraisers is not selected or the appraisers fail to determine the value of
the shares, the Comptroller of the Currency will upon written request of any
interested party cause an appraiser to make a final and binding appraisal. CNB
Financial will pay the expenses of the Comptroller in making the reappraisal or
the appraisal. CNB Financial will promptly pay to the dissenting shareholder the
value of the shares.
The shares of stock of CNB Financial which it would have delivered to a
dissenting shareholder had they not requested payment shall be sold by CNB
Financial at an advertised public auction, and CNB Financial will have the right
to purchase any of those shares at the public auction if it is the highest
bidder for the purpose of reselling the shares within 30 days to anyone and at a
price not less than the par value of the shares. If the shares are sold at
public auction at a price greater than the amount paid to a dissenting
shareholder, the excess of the sale price will be paid to the dissenting
shareholder.
14
<PAGE> 21
MARKET PRICE OF CITIZENS NATIONAL'S CAPITAL STOCK AND DIVIDENDS
The price of Citizens National's common stock ranged from $100.00 to
$150.00 in 1999, and from $75.00 to $90.00 in 1998. We have adjusted these
amounts to reflect a two-for-one stock split effective in the form of a 100%
stock dividend on March 1, 1998. The bank's stock is not traded on an
established exchange and there are no market makers. We use the prices listed
below upon information available to us through discussions with the bank's
shareholders. Prices reflect amounts purchasers of the stock made and may
include commissions or fees. We have not attempted to determine the prices for
every sale made during these periods. The bank's ability to pay dividends is
subject to limitations of national banking laws. As of April 24, 2000, Citizens
National's common stock was held of record by 567 persons.
After the reorganization takes place, we anticipate that the holding
company will obtain the funds needed for payment of its dividends and expenses
from Citizens National, chiefly in the form of dividends. The following table
sets forth dividends declared per share of Citizens National's common stock for
the periods indicated. The ability of Citizens National and CNB Financial to pay
dividends is and will be, respectively, subject to the restrictions we described
in "Supervision and Regulation." We have adjusted the per share data to reflect
a 100% stock dividend declared on March 1, 1998.
<TABLE>
<CAPTION>
QUARTER DIVIDEND
HIGH LOW END PER SHARE
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
First Quarter.................... $ 75.00 $ 75.00 $ 75.00 $0.00
Second Quarter................... $ 75.00 $ 75.00 $ 75.00 $0.70
Third Quarter.................... $ 85.00 $ 75.00 $ 75.00 $0.00
Fourth Quarter................... $ 90.00 $ 75.00 $ 90.00 $1.30
Year Ended December 31, 1999:
First Quarter.................... $100.00 $100.00 $100.00 $0.00
Second Quarter................... $100.00 $100.00 $100.00 $0.70
Third Quarter.................... $150.00 $131.58 $150.00 $0.00
Fourth Quarter................... $150.00 $150.00 $150.00 $1.30
Quarter Ended March 31, 2000....... $150.00 $150.00 $150.00 $0.00
</TABLE>
15
<PAGE> 22
MANAGEMENT
After the merger takes place, the initial directors of the holding company
will be the same as those currently serving as Citizens National's directors. We
will deem approval of the agreement and plan of merger by Citizens National's
shareholders to be a confirmation by the holding company's stockholders of those
persons as the directors of the holding company without further action and
without changes in classes or terms.
DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR PRINCIPAL OCCUPATION
NAME AGE POSITION SINCE (PAST FIVE YEARS)
- ---- --- --------------------- -------- ---------------------------
<S> <C> <C> <C> <C>
J. Robert Ayers 70 Director 1974 President, Citizens
National Bank (Retired)
John E. Barker 71 Director 1972 Owner, Barker's Auto Sales
Jay E. Dick 47 Director 1983 Manager, Hunters' Hardware,
Inc.
Herbert L. Eppinger 67 Director 1979 Retired Agricultural
Stabilization and
Conservation Service, USDA
Robert L. Hawvermale 70 Director 1967 Retired Professional
Engineer, Pennsylvania
Glass Sand Corporation
J. Philip Kesecker 70 Director 1965 Owner, Kesecker Realty
Raymond H. Lawyer 65 Director 1979 President, Citizens
National Bank (Retired)
Jerry McGraw 53 Director 1988 Smith Nadenbousch Insurance
Martha H. Quarantillo 40 Director 1999 Pharmacist, Reed's
Pharmacy; formerly
Pharmacist, War Memorial
Hospital; Self-Employed
Pharmacist
Thomas K. Rokisky 53 Director 1993 President and Chief
Executive Officer, Citizens
National Bank of Berkeley
Springs
Charles S. Trump, IV 39 Director 1986 General Partner, Trump and
Trump, Attorneys at Law
Arlie R. Yost 52 Director 1988 Licensed Residential
Appraiser, Kesecker
Appraisal Services
</TABLE>
16
<PAGE> 23
EXECUTIVE OFFICERS
The following table sets forth selected information, as of March 1, 2000,
about the principal officers of the bank.
<TABLE>
<CAPTION>
OFFICE BANK
HELD EMPLOYEE PRINCIPAL OCCUPATION
NAME AGE POSITION SINCE SINCE (PAST FIVE YEARS)
- ---- --- --------------------- ------ -------- --------------------
<S> <C> <C> <C> <C> <C>
J. Philip Kesecker 70 Chairman of the Board 1987 (1) Kesecker Realty
Thomas F. Rokisky 53 President, Chief 1996 1990 President and Chief
Executive Officer Executive Officer,
Citizens National
Bank of Berkeley
Springs
Arnold K. Stotler 40 Senior Vice 1996 1978 Banker
President- Lending
Thomas A. Cummings 53 Vice President 1998 1998 Banker
David G. Komornik 41 Vice President/Trust 1996 1995 Banker
Officer
Rebecca S. Brock 39 Vice President- 1996 1983 Banker
Finance/Cashier
Patricia L. Poland 59 Vice President- 1996 1978 Banker
Lending
Karen O. Unger 48 Vice President- Data 1996 1974 Banker
Processing
</TABLE>
- ---------------
(1) Mr. Kesecker is not an employee of the Bank.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Citizens National's board of directors has a standing audit committee and
personnel committee, but does not have a standing nominating committee.
The functions of the audit committee include meeting with the independent
public accountants to review the scope of audit services, significant accounting
changes, audit conclusions regarding significant accounting estimates,
assessments as to the adequacy of internal controls and the resolution of any
reportable conditions or weaknesses, and compliance with laws and regulations;
overseeing the internal audit function; reviewing regulatory examination reports
and management's responses to those reports; and reviewing period reports from
the loan review function. Members of the audit committee during 1999 were
Charles S. Trump, IV, Chairman, Messrs. Yost, Barker, McGraw and Dick. Mr.
Kesecker serves as an ex-officio member of this committee. The audit committee
met four times during the year.
The functions of the personnel committee include reviewing benefit and
salary administration programs and increases in salaries for officers and
employees. Members of the personnel committee during 1999 were Jay E. Dick,
Chairman, Messrs. Andrews, Hawvermale, Eppinger, Trump and Ayers. Mr. Kesecker
serves as an ex-officio member of this committee. The personnel committee met
one time during the year.
17
<PAGE> 24
There were 26 meetings of the bank's board of directors and 31 meetings of
committees of the board of directors of Citizens National during 1999. No
director attended fewer than 75 percent of the aggregate number of meetings of
the board of directors and of the various committees on which they served.
COMPENSATION OF BANK DIRECTORS
Bank directors receive $125 for each board meeting they attend, $150 for
each discount committee meeting and $75 for other committee meetings. In
addition, each director receives a fee of $4,150 per year. The chairman of the
board receives $3,500 per year and the vice chairman receives $1,000 per year.
Other than the supplemental insurance plan described below, there are no other
special arrangements with any of the directors. In 1999, the board of directors
of the bank received $137,002, in the aggregate, for all board of directors'
meetings attended and all fees paid.
The bank maintains a supplemental insurance plan for directors pursuant to
which a director may elect to defer receipt of a portion of fees for board
meetings for at least four years or until he reaches age 65, whichever is later.
An amount equal to fees waived in addition to interest at an annual rate of 10%
per year will be paid to each participating director or his designated
beneficiary during a period of 10 years after the director reaches age 65. Fees
and interest the bank pays will be recovered through insurance policies on the
lives of participating directors. The bank uses funds from the deferred fees of
a participating director to pay the premium costs for the insurance policies.
The cost of the insurance premiums in 1999 was $49,944.
BANK EXECUTIVE COMPENSATION
The following table sets forth the compensation of the bank's chief
executive officer for the years 1999 and 1998. No executive officers received
total annual compensation exceeding $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- ---- ------- ----- ------------
<S> <C> <C> <C> <C>
Thomas F. Rokisky, 1999 $89,095 $-0- $11,403(1)(2)
President and 1998 $84,829 $-0- $10,609(1)(2)
Chief Executive Officer
</TABLE>
- ---------------
(1) The bank's group life and health insurance program, which the bank pays, is
available to all full-time employees. In accordance with IRS Code Section
79, the bank adds the cost of group term life insurance coverage for an
individual in excess of $50,000 to the individual's earnings and includes it
in salary. This figure also includes board fees earned and the bank's
contributions to the individual's 401(k) retirement savings program to which
the individual has a vested interest.
(2) We do not and cannot calculate the allocation to specific participants of
the bank's contributions to the defined benefit pension plan. The bank made
contributions of $120,095 and $62,353 in 1999 and 1998, respectively.
The bank does not maintain any form of stock option, stock appreciation
rights, or other long-term compensation plans.
18
<PAGE> 25
PENSION PLAN
The bank maintains a non-contributory defined benefit pension plan with
employer contributions being based on a pension formula, which targets a
specified monthly benefit for each plan participant at retirement. This defined
benefit becomes the basis for a contribution to the plan for each eligible
participant. The normal retirement date for employees is the later of the
participant's 65th birthday, or the fifth anniversary of the participant joining
the plan. An employee must be at least 21 years of age and have one full year of
service to become a plan participant. Full vesting in accumulated plan benefits
occurs at the end of five years of service. There is no partial vesting. For the
1999 plan year, the employer contribution for all plan participants was
$120,095.
401(k) PROFIT SHARING PLAN
The bank maintains a 401(k) profit sharing plan that generally covers all
employees who have completed one year of service. The bank bases contributions
to the plan on bank performance as a percentage of assets and computes as a
percentage of the participant's total deferrals into the plan. The bank makes
the payment of benefits to participants at death, disability, termination or
retirement. Contributions to the plan for all employees charged to operations
during 1999 amounted to $19,800.
DEFERRED COMPENSATION
The bank maintains a deferred compensation plan for directors. This plan
provides payments after retirement, which the bank will pay from general funds.
The bank purchases and is the beneficiary of insurance on the lives of
participants and the bank uses the proceeds to help recover the net after-tax
cost of the benefits and insurance premiums it pays. At December 31, 1999, these
policies had a net accumulated cash value of $670,734.
COMPENSATION FOR CNB FINANCIAL'S EXECUTIVE OFFICERS AND DIRECTORS
CNB Financial does not currently compensate its directors for regular or
special board meetings attended, but it intends to compensate directors in the
future. Thomas F. Rokisky will serve as president and chief executive officer of
the holding company and will continue to serve as president and chief executive
officer of Citizens National.
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth information as of April 24, 2000, relating to the
beneficial ownership of the common stock by (i) each person or group known by
Citizens National to own beneficially more than 5% of Citizens National's
outstanding common stock; (ii) each of the bank's directors; and (iii) all
directors and executive officers of the bank as a group. Unless otherwise noted
below, the persons named in the table have sole investment powers with respect
to each of the shares reported as beneficially owned by such person. On the
merger, the percentage ownership will be the same as that listed below. Unless
the table
19
<PAGE> 26
notes otherwise, the address of all individuals is 212 S. Washington Street,
Berkeley Springs, West Virginia 25411.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS SHARES CLASS
- ---------------- --------- ----------
<S> <C> <C>
J. Robert Ayers(1)...................................... 920 *
John E. Barker(2)....................................... 8,632 3.77
Jay E. Dick(3).......................................... 7,787 3.40
Herbert L. Eppinger(4).................................. 1,395 *
Robert L. Hawvermale(5)................................. 1,865 *
J. Philip Kesecker(6)................................... 7,208 3.15
Raymond H. Lawyer(7).................................... 688 *
Jerald McGraw(8)........................................ 777 *
Martha H. Quarantillo................................... 100 *
Thomas F. Rokisky(9).................................... 584 *
Charles S. Trump, IV(10)................................ 5,630 2.46
Arlie R. Yost(11)....................................... 855 *
All directors and executive officers as a group (18
persons).............................................. 37,161 16.25
D. Louise Stotler and Deborah Dhayer
RR 6 Box 12460, Berkeley Springs, WV 25411............ 23,744 10.37
Mary Lou Trump
RR 7 Box 12840, Berkeley Springs, WV 25411............ 26,735 11.67
</TABLE>
- ---------------
* Indicates holdings of less than 1%.
(1) Includes 460 shares his spouse holds.
(2) Includes 2,152 shares he holds jointly with his spouse.
(3) Includes 5,446 shares his spouse holds.
(4) Includes 1,195 shares he holds jointly with his spouse.
(5) Includes 600 shares his spouse holds, 50 shares he holds jointly with his
spouse, and 15 shares he holds jointly with his son.
(6) Includes 792 shares his spouse holds, 1,687 shares he holds jointly with
his spouse, and 132 shares he holds jointly with his daughter.
(7) Includes 424 shares he holds jointly with his spouse.
(8) Includes 100 shares his spouse holds and 442 shares he holds jointly with
his spouse.
(9) Includes 584 shares he holds in an Individual Retirement Account.
(10) Includes 25 shares his spouse holds, 396 shares he holds jointly with his
spouse, and 100 shares he holds as custodian for his children.
(11) Includes 635 shares he holds jointly with his spouse.
20
<PAGE> 27
CERTAIN TRANSACTIONS
The bank has had and intends to continue to have banking and financial
transactions in the ordinary course of business with directors and executive
officers of the bank, CNB Financial and their associates. Total loans
outstanding from the bank at December 31, 1999, to the bank's officers and
directors as a group and members of their immediate families and companies in
which they had an ownership interest of 10% or more was $1,463,356 or
approximately 12.0% of total equity capital. These loans do not involve more
than the normal risk of collectibility or present other unfavorable features.
DESCRIPTION OF CITIZENS NATIONAL'S BUSINESS
Citizens National began banking operations in Berkeley Springs, Morgan
County, West Virginia, in 1934.
BUSINESS OF CITIZENS NATIONAL
Citizens National is a full-service commercial bank. It accepts time,
demand and savings deposits, including NOW accounts, regular savings accounts,
money market accounts, fixed-rate certificates of deposit and club accounts. In
addition, the bank provides safe deposit box rentals, wire transfer services and
24-hour ATM services through a regional network known as "Honor." Honor is a
participant in the nationwide Cirrus network.
The bank offers a full spectrum of lending services to its customers,
including commercial loans and lines of credit, residential real estate loans,
consumer installment loans and other personal loans. Commercial loans are
generally secured by various collateral, including commercial real estate,
accounts receivable and business machinery and equipment. Residential real
estate loans consist primarily of mortgages on the borrower's personal
residence, and are typically secured by a first lien on the subject property.
Consumer and personal loans are generally secured, often by first liens on
automobiles, consumer goods or depository accounts. The bank makes a special
effort to keep loan products as flexible as possible within the guidelines of
prudent banking practices in terms of interest rate risk and credit risk. The
bank's lending personnel adhere to established lending limits and authorities
based on each individual's lending expertise and experience.
When considering loan requests, the bank takes into consideration the cash
flow and financial condition of the borrower, the value of the underlying
collateral, if any, and the borrower's character and integrity. Bank personnel
evaluate these factors in a number of ways, including analyzing of financial
statements, conducting credit reviews and visiting the borrower's place of
business.
EMPLOYEES
As of June , 2000, Citizens National and its subsidiary employed
full-time equivalent employees.
COMPETITION
The banking business is highly competitive. Citizens National faces a high
degree of competition for all of its services from local banks. Within its
market area of Morgan County, the eastern section of Berkeley County in West
Virginia and Washington County in
21
<PAGE> 28
Maryland, there exists 11 competing commercial banks with 25 offices. Total
deposits of those commercial banks as of June 30, 1999, exceeded $639 million.
The three largest competitors are One Valley Bank-East, N.A., F & M Bank, West
Virginia, and The Huntington National Bank.
Nonbank competition has also increased in recent years locally by the
establishment of finance companies and the expansion of insurance operations and
credit unions as well as from mutual funds located throughout the country.
West Virginia banks are allowed unlimited branch banking throughout the
state. The Interstate Banking and Branch Efficiency Act of 1994 also authorizes
interstate branching by acquisition and consolidation nationwide. This law
provides opportunities for the bank, but it also serves to intensify future
competition.
The principal competitive factors in the markets for deposits and loans are
interest rates, either paid on deposits or charged on loans.
The principal economic risk associated with the bank's lending activities
is the creditworthiness of the bank's prospective borrowers. With any loan
category, the level of risk increases or decreases depending on economic
conditions prevailing from time to time. The bank makes a substantial portion of
its loans to working individuals, small business and professional persons.
During 1999, the bank's loan portfolio consisted of the following:
<TABLE>
<CAPTION>
TYPE OF LOAN PERCENTAGE OF PORTFOLIO
- ------------ -----------------------
<S> <C>
Residential Real Estate Loans.............. 63
Commercial Loans........................... 15
Undeveloped Real Estate Loans.............. -0-
Construction Loans......................... 1
Consumer Loans............................. 21
</TABLE>
The bank's lending activities are subject to a variety of lending limits
that federal law imposes. While differing limits apply in certain circumstances
based on the type of loan or the nature of the borrower (including the
borrower's relationship to the bank), in general, the bank is subject to a
loan-to-one borrower limit of an amount equal to (1) 15% of the bank's
unimpaired capital and surplus in the case of loans which are not fully secured
by readily marketable collateral, or (2) 25% of the unimpaired capital and
surplus if the excess over 15% is fully secured by readily marketable
collateral.
The bank may not make any extensions of credit to any director, executive
officer or principal shareholder of the bank, or to any related interest of such
a person, unless the board of directors approves the extension of credit.
Additionally, the bank cannot make loans to an affiliate of the bank on terms
and conditions more favorable than would be available to a person not affiliated
with the bank.
The bank also owns an insurance agency, CNB Insurance Services, Inc. CNB
Insurance is a property and casualty insurance agency selling primarily personal
lines of insurance in Morgan and Berkeley Counties.
The FDIC insures all deposit accounts up to $100,000 per depositor, subject
to aggregation rules.
22
<PAGE> 29
PROPERTY
The principal executive office and main banking office is located at 212 S.
Washington Street, Berkeley Springs, West Virginia. In addition, the bank has
owned and operated a full-service branch bank located at 2450 Valley Road,
Berkeley Springs, West Virginia, since 1991. In October 1998, the bank opened an
additional full-service branch located at 2646 Hedgesville Road, Martinsburg,
West Virginia. Each location provides ATM services in addition to traditional
lobby and drive-in services. During 1998, the bank purchased two cash machines
and placed them at Cacapon State Park Lodge and the Woods Resort. In November of
1998, the bank acquired CNB Insurance Services, Inc., which is operated out of
the main office in Berkeley Springs. The main office and branches are owned free
and clear of any indebtedness. The net book value of the bank's premises and
equipment as of December 31, 1999, is $3.4 million.
SUPERVISION AND REGULATION
Citizens National, as a national banking association, is subject to
supervision, examination and regulation by the Office of the Comptroller of the
Currency. It is also a member of the Federal Reserve System, and as such is
subject to applicable provisions of the Federal Reserve Act and regulations
issued thereunder.
The Federal Deposit Insurance Corporation insures the bank's deposits to
the extent the law allows. Accordingly, the FDIC also regulates the bank.
The Community Reinvestment Act of 1977 ("CRA") requires the Comptroller of
the Currency to assess the record of the financial institutions and regulates it
to determine if those institutions meet the community's credit needs (including
low-to-moderate income neighborhoods) and to take this record into account when
it evaluates any application made by any institution for, among other things,
approval of a branch or other deposit facility, office relocation, or the merger
with or acquisition of assets of another bank. In its most recent examination,
the bank received a satisfactory CRA rating.
The bank is subject to various capital requirements under federal banking
regulations including the Federal Deposit Insurance Corporation Improvement Act
of 1991. Quantitative measures established by those regulations ensure the bank
maintains minimum capital levels. Note 17 to the Consolidated Financial
Statements summarizes those measures. Note 17 also contains the bank's
regulatory capital ratios at December 31, 1999, and December 31, 1998. Those
ratios show that the bank satisfied the requirements necessary to be categorized
as well capitalized. This is the highest category established under the
regulations. As a well capitalized institution, Citizens National may engage in
a wider range of banking activities.
Another requirement of the Federal Deposit Insurance Corporation
Improvement Act of 1991 is that federal banking agencies must prescribe
regulations relating to various operational areas of banks and bank holding
companies. These include standards for internal audit systems, loan
documentation, information systems, internal controls, credit underwriting,
interest rate exposure, asset growth, compensation, and such other standards as
the agency deems appropriate.
GRAMM-LEACH-BLILEY ACT OF 1999
On November 4, 1999, Congress adopted the Gramm-Leach-Bliley Act of 1999.
This Act, also known as the Financial Modernization Law, repealed a number of
federal
23
<PAGE> 30
limitations on the powers of banks and bank holding companies originally adopted
in the 1930's. Under the Act, banks, insurance companies, securities firms and
other service providers may now affiliate. In addition to broadening the powers
of banks, the Act created a new form of entity, called a financial holding
company, which may engage in any activity that is financial in nature or
incidental or complementary to financial activities. CNB Financial intends to
become a financial holding company.
The Federal Reserve Board provides the principal regulatory supervision of
financial services permitted under the Act. However, the Securities and Exchange
Commission and state insurance and securities regulators also assume substantial
supervisory powers and responsibilities.
The Act addresses a variety of other matters, including customer privacy
issues. The obtaining of certain types of information by false or fraudulent
pretenses is a crime. Banks and other financial institutions must notify their
customers about their policies on sharing information with certain third parties
In some instances, customers may refuse to permit their information to be
shared. The Act also requires disclosures of certain ATM fees and contains
certain amendments to the federal Community Reinvestment Act. The Act became
effective 120 days after its passage.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
GENERAL
Citizens National is a national banking association which provides banking
services to individuals and businesses. The bank's primary regulators are the
Office of the Comptroller of the Currency (OCC) and the Federal Deposit
Insurance Corporation (FDIC). On November 15, 1998, Citizens National formed CNB
Insurance Services, Inc, a wholly owned subsidiary. CNB Insurance Services, Inc
is a property and casualty insurance agency selling primarily personal lines of
insurance.
In March 2000, the bank's Board of Directors approved the formation of CNB
Financial, a financial services holding company. A special meeting of the bank's
shareholders will be held in June 2000 for the shareholders to vote on an
Agreement and Plan of Merger between the Bank and CNB Financial, whereby the
bank will become a wholly-owned subsidiary of CNB Financial and the shareholders
of the bank will become shareholders of CNB Financial. If the reorganization is
approved, each bank shareholder will receive two shares of CNB Financial's stock
for each share of the bank's common stock.
The following discussion and analysis presents the significant changes in
financial condition and results of operations of Citizens National, for the
three months ended March 31, 2000 and 1999. This discussion may include
forward-looking statements based upon management's expectations; actual results
may differ. Amounts and percentages used in this discussion have been rounded.
All average balances are based on monthly averages.
24
<PAGE> 31
EARNINGS SUMMARY
Net income for the three months ended March 31, 2000 was $399,000, or $1.74
per share compared to $313,000 or $1.37 per share for the same period in 1999.
Annualized return on average assets and average equity were 1.16% and 12.80%
respectively, for the three months ended March 31, 2000 compared with .96% and
9.88%, respectively, for the three months ended March 31, 1999. The factors
influencing the bank's results of operations are addressed in the following
sections of this report.
NET INTEREST INCOME
Net interest income represents the primary component of the bank's
earnings. It is the difference between interest and fee income related to
earning assets and interest expense incurred to carry interest-bearing
liabilities. Net interest income is impacted by changes in the volume and mix of
interest earning assets and interest bearing liabilities, as well as by changing
interest rates. In order to manage these changes, their impact on net interest
income and the risk associated with them, the bank utilizes an ongoing
asset/liability management program. This program includes analysis of the
difference between rate sensitive assets and rate sensitive liabilities,
earnings sensitivity to rate changes, and source and use of funds. A discussion
of net interest income and the factors impacting it is presented below.
Net interest income for the three months ended March 31, 2000 increased by
$130,000 or 10.3% over the same period in 1999. Interest income for the three
months ended March 31, 2000 increased by $252,000 or 10.6% compared to the same
period in 1999, while interest expense increased by $122,000 or 11.0% during the
three months ended March 31, 2000 as compared to the same period in the prior
year.
Increased net interest income for the three month period is attributable to
a higher level of net interest earning assets and an increase in the net
interest margin. Total interest income increased for the three month period in
2000 compared to the same periods in 1999 as a result of an increase in the
average balance of loans and the average rates earned thereon, which more than
offset the decrease in the average balance of federal funds sold and investment
securities. Total interest expense increased for the three month period in 2000
compared to the same periods in 1999 as a result of an increase in the average
balance of time deposits and NOW accounts and an increase in the average rates
earned thereon.
The net interest margin is impacted by the change in the spread between
yields on earning assets and rates paid on interest bearing liabilities. Net
interest margin increased slightly in 2000 from 1999. See Table 1 - Distribution
of Assets, Liabilities, and Shareholders' Equity; Interest Rates and Interest
Differential.
25
<PAGE> 32
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold................... $ 27 $ 4 5.53% $ 2,932 $ 32 4.37%
Securities:
Taxable............................ 31,073 501 6.45 29,446 461 6.26
Tax-exempt (1)..................... 1,497 23 9.31 4,070 52 7.74
Loans (net of unearned interest)
(2)................................ 99,411 2,015 8.11 86,515 1,755 8.11
-------- ------ ---- -------- ------ ----
Total interest earning assets
(1)........................... $132,008 $2,543 7.71% $122,963 $2,300 7.48%
-------- ------ ---- -------- ------ ----
Nonearning assets:
Cash and due from banks............ $ 2,806 $ 3,638
Bank premises and equipment, net... 3,311 3,468
Other assets....................... 2,248 2,180
Allowance for loan losses.......... (1,165) (1,129)
-------- --------
Total assets..................... $139,208 $131,120
======== ========
Interest bearing liabilities:
Savings deposits................... $ 16,719 $ 83 1.99% $ 17,320 $ 105 2.42%
Time deposits...................... 71,030 1,000 5.63 63,270 872 5.51
NOW accounts....................... 17,276 125 2.89 16,761 101 2.41
Money market accounts.............. 4,867 27 2.22 5,691 38 2.67
Borrowings......................... 136 3 6.31 -- -- --
-------- ------ ---- -------- ------ ----
Total interest bearing
liabilities................... $110,028 $1,238 4.50% $103,042 $1,116 4.33%
-------- ------ ---- -------- ------ ----
Noninterest bearing liabilities:
Demand deposits.................... $ 15,615 $ 13,822
Other liabilities.................. 1,105 1,574
Shareholders' equity............... 12,460 12,682
-------- --------
Total liabilities and
shareholders' equity.......... $139,208 $131,120
======== ------ ======== ------
Net interest income (1).............. $1,305 $1,184
====== ======
Net interest spread (3).............. 3.21% 3.15%
==== ====
Net interest income to average
earning assets (1)................. 3.75% 3.61%
==== ====
</TABLE>
- ---------------
(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 ratios (expressed as a
percentage) of taxable equivalent interest income to earning assets and of
interest expense to interest-bearing liabilities.
26
<PAGE> 33
PROVISION FOR LOAN LOSSES
The amount charged to provision for loan losses is based on Management's
evaluation of the loan portfolio. Management determines the adequacy of the
allowance for loan losses, based on past loan loss experience, current economic
conditions, composition of the loan portfolio, and the anticipated potential for
future loss.
The provision for loan losses for the three months ended March 31, 2000
decreased by $12,000 or 28.6% to $30,000 from $42,000 at March 31, 1999. The
decrease in the provision was the result of lower levels of nonperforming loans.
See "Nonperforming Assets and Allowance for Loan Losses" for further discussion.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 2000 increased
$227,000 or 164% to $365,000 from $138,000 in the first quarter of 1999. The
increase was primarily due to a gain recognized on stock received from the
demutualization of an insurance company of $196,000. The bank received the stock
in exchange for its previous membership interest as a participating
policyholder. Also, service charges on deposit accounts, debit card fees and
trust income slightly increased. Trust assets under management reached $19.8
million at March 31, 2000, a 24.5% increase from $15.9 million at March 31,
1999.
NONINTEREST EXPENSES
Noninterest expenses for the three months ended March 31, 2000 increased
$231,000 or 25.9% to $1.1 million from $893,000 in the first quarter of 1999.
These increases were primarily due to the loss on abandonment of fixed assets,
expenses related to the renovations of the main office and the professional
costs associated with the formation of CNB Financial Services, Inc.
Other operating expenses which increased were salaries and employee
benefits, Automated Teller Machine (ATM) expense, trust, and FDIC assessment.
Salaries and employee benefits increased as a result of increased personnel and
pension expense.
INCOME TAXES
The Bank's provision for income taxes increased $53,000 or 34.5% to
$205,000 for the three months ended March 31, 2000. The effective tax rates for
the first quarter of 2000 and 1999 were 34.0% and 32.8%, respectively. The
increase in the income tax provision in 2000 is attributable to increased
taxable income. The bank's income tax expense differs from the amount computed
at statutory rates primarily due to the tax-exempt earnings from certain
investment securities.
FINANCIAL CONDITION
The bank's total assets increased $1.8 million or 1.3% to $140.4 million
from December 31, 1999 to March 31, 2000, due primarily to a $1.8 million
increase in investment securities and a $2.0 million increase in loans, which
was partially offset by a $1.9 million decrease in cash and cash equivalents.
The bank's total liabilities increased $1.5 million or 1.2% to $127.9 million.
Shareholders' equity increased $324,000 to $12.6 million at March 31, 2000
primarily due to net income of $399,000 offset by a $75,000 decrease in
accumulated other comprehensive income. The only component of
27
<PAGE> 34
accumulated other comprehensive income at March 31, 2000 was unrealized losses
on available for sale securities, net of deferred income taxes. The unrealized
losses are primarily a function of available market interest rates relative to
the yield being generated on the available for sale portfolio. No earnings
impact results, however, unless the securities are actually sold.
LOAN PORTFOLIO
At March 31, 2000, total loans increased $1.9 million or 2.0% to $99.1
million from $97.2 million at December 31, 1999. The loan mix did not change in
any material respect compared with December 31, 1999. The loan portfolio
increase is the result of developing new real estate loan programs and efforts
to develop new commercial and indirect lending relationships in the bank's
expanded market area of Berkeley County, West Virginia. The bank feels
additional growth in all lending areas is possible during the remainder of 2000.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of nonaccrual loans, loans which are past due
90 days or more and still accruing interest, restructured loans and other real
estate owned. The following table summarized the Bank's nonperforming assets as
of the periods shown:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------- ------------
2000 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Nonaccrual loans.................. $ 35,620 $220,372 $ 22,157
Loans past due 90 days or more
still accruing interest......... 194,114 71,437 78,954
-------- -------- --------
Total nonperforming loans.... $229,734 $291,809 $101,111
-------- -------- --------
Other real estate owned......... $ 66,938 $122,379 $ 66,938
-------- -------- --------
Total nonperforming assets... $296,672 $414,188 $168,049
======== ======== ========
Nonperforming loans/Total loans... 0.23% 0.34% 0.10%
Nonperforming assets/Total
assets.......................... 0.21% 0.32% 0.12%
Allowance for loan losses/Total
loans........................... 1.19% 1.33% 1.18%
</TABLE>
As of March 31, 2000, the bank has no loans which are considered to be
impaired and is not aware of any potential problem loans other than those which
are on nonaccrual status or past due ninety days or more and still accruing
interest.
The bank maintains its allowance for loan losses at a level deemed
sufficient to provide for estimated potential losses in the credit extension
process. All losses which may be reasonably anticipated are accounted for in the
allowance for loan losses. Management makes this determination quarterly by its
analysis of overall loan quality, changes in the mix and
28
<PAGE> 35
size of the loan portfolio, previous loss experience, general economic
conditions, information about specific borrowers and other factors.
An analysis of the allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------- ------------
2000 1999 1999
---------- ---------- ------------
<S> <C> <C> <C>
Balance, Beginning............. $1,147,846 $1,122,155 $1,122,155
Provision charged to
operations................ 30,000 42,000 117,999
Recoveries................... 7,575 7,281 26,270
Loans charged off............ (9,100) (28,454) (118,578)
---------- ---------- ----------
Balance, Ending................ $1,176,321 $1,142,982 $1,147,846
========== ========== ==========
</TABLE>
DEPOSITS
The bank's deposits increased $37,000 or .03% during the three months ended
March 31, 2000. The deposit mix experienced changes during the first quarter
2000 by a decrease in rate sensitive jumbo certificates of deposit and an
offsetting increase in other certificates of deposit.
CAPITAL RESOURCES
Shareholders' equity increased $324,000 or 2.7% during the first three
months of 2000 due to $399,000 in net income offset by a decrease in
comprehensive income of $75,000. The Bank is subject to regulations of the
Office of the Comptroller of the Currency that impose certain minimum regulatory
capital requirements. Under each measure, the bank was substantially in excess
of the minimum regulatory requirements, and, by definition was "well
capitalized" at March 31, 2000. The following table summarized, as of March 31,
2000, the bank's capital ratios.
<TABLE>
<CAPTION>
COMPONENTS ACTUAL REQUIRED
OF CAPITAL RATIO RATIO
---------- ------ --------
<S> <C> <C> <C>
Tier 1 Capital......................... $13,539 9.7% 4.0%
Total Risk Based Capital.......... $14,599 17.2% 8.0%
</TABLE>
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following discussion and analysis presents the significant changes in
financial condition and results of operations of Citizens National, for the
years ended December 31, 1999, 1998 and 1997. This discussion and analysis
should be read in conjunction with the audited, consolidated financial
statements and the accompanying notes thereto. This discussion may include
forward looking statements based upon management's expectations and actual
results may differ. We have rounded amounts and percentages we use in this
discussion. All average balances are based on monthly averages.
29
<PAGE> 36
TABLE 1. FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
IN THOUSANDS EXCEPT FOR PER SHARE DATA
<S> <C> <C> <C> <C> <C>
AT YEAR-END
Total assets............... $138,648 $129,600 $115,402 $108,943 $101,901
Securities available for
sale.................... 31,187 33,594 28,944 23,861 25,600
Loans, net of unearned
income.................. 98,272 86,377 81,084 72,268 71,156
Deposits................... 124,510 115,320 102,250 97,076 90,963
Shareholders' equity....... 12,249 12,518 11,644 10,601 9,852
SIGNIFICANT RATIOS
Return on average assets... 0.90% 1.07% 1.16% 1.15% 1.07%
Return on average
shareholders' equity.... 9.66 10.60 11.76 11.88% 11.54%
Average shareholders'
equity to average
assets.................. 9.35 10.13 9.89 9.70% 9.26%
Net interest margin........ 3.95 4.21 4.26 4.42% 4.41%
SUMMARY OF OPERATIONS
Interest income............ $ 9,945 $ 9,243 $ 8,651 $ 7,985 $ 7,635
Interest expense........... 4,597 4,171 3,820 3,405 3,293
Net interest income........ 5,348 5,072 4,831 4,580 4,342
Provision for loan
losses.................. 118 196 174 134 146
Net interest income after
provision for loan
losses.................. 5,230 4,876 4,657 4,446 4,196
Non-interest income........ 565 415 304 293 277
Non-interest expense....... 3,954 3,372 3,008 2,966 3,002
Income before income
taxes................... 1,841 1,919 1,953 1,773 1,471
Income tax expense......... 621 618 636 558 400
Net income................. 1,220 1,301 1,317 1,215 1,071
PER SHARE DATA (1)
Net income................. $ 5.33 $ 5.68 $ 5.75 $ 5.31 $ 4.67
Cash dividends............. 2.00 2.00 1.87 1.75 1.60
Net book value............. 53.48 54.66 50.84 46.29 43.02
</TABLE>
(1) Adjusted to reflect 100% stock dividend on March 1, 1998
EARNINGS SUMMARY. Citizens National had net income totaling $1.2 million or
$5.33 per share, $1.3 million or $5.68 per share, and $1.3 million or $5.75 per
share for fiscal years 1999, 1998, and 1997, respectively. Annualized return on
average assets and average equity were .90% and 9.7%, respectively for 1999
compared to 1.07% and 10.6% for 1998 and 1.16% and 11.8% for 1997.
NET INTEREST INCOME. Net interest income represents the primary component
of the bank's earnings. It is the difference between interest and fee income
related to earning assets and interest expense incurred to carry
interest-bearing liabilities. Net interest income is impacted by changes in the
volume and mix of interest earning assets and interest bearing liabilities, as
well as by changing interest rates. In order to manage these changes, their
impact on net interest income and the risk associated with them, the bank
utilizes an ongoing asset/liability management program. This program includes
analysis of the difference between rate sensitive assets and rate sensitive
liabilities, earnings sensitivity to rate changes, and source and use of funds.
A discussion of net interest income and the factors impacting it is presented
below.
30
<PAGE> 37
Net interest income in 1999 increased by $276,000 or 5.4% over 1998.
Interest income in 1999 increased by $702,000 or 7.6% compared to 1998, while
interest expense increased by $426,000 or 10.2% during 1999 as compared to 1998.
Interest income increased during 1999 compared to 1998 as a result of an
increase in the average balance of loans and investment securities, which more
than offset the decrease in the average rates earned thereon. Interest expense
increased during 1999 compared to 1998 as a result of an increase in the average
balance of time deposits.
Net interest income in 1998 increased by $241,000 or 5.0% over 1997.
Interest income in 1998 increased by $592,000 or 6.9% compared to 1997, while
interest expense increased by $351,000 or 9.2% during 1998 as compared to 1997.
Interest income increased during 1998 compared to 1997 as a result of an
increase in the average balance of loans and investment securities. Interest
expense increased during 1999 compared to 1998 as a result of an increase in the
average balance of time deposits and the average cost of funds paid on deposits.
During both 1999 and 1998, the bank used funds generated from deposit account
growth to fund loan commitments and to increase the average balance of
investment securities.
The net interest margin is impacted by the change in the spread between
yields on earning assets and rates paid on interest bearing liabilities. Net
interest margin declined slightly from 1997 to 1999. See Table 2 -- Distribution
of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest
Differential.
31
<PAGE> 38
TABLE 2. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDER
INTEREST RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------- --------------------------- ---------------------------
AVG YTD YIELD AVG YTD YIELD AVG YTD YIELD
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ----- -------- -------- ----- -------- -------- -----
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold............. $ 1,202 $ 61 5.07% $ 2,037 $ 131 6.43% $ 2,587 $ 150 5.80%
Securities:
Taxable...................... 30,637 1,934 6.31 23,999 1,496 6.23 21,243 1,295 6.10
Tax-exempt(1)................ 3,337 171 7.76 5,051 275 8.25 5,753 311 8.19
Loans (net of unearned
interest)(2)................. 91,717 7,437 8.11 83,439 7,091 8.50 78,374 6,664 8.50
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total interest earning
assets(1)...................... $126,893 $9,603 7.57% $114,526 $8,993 7.85% $107,957 $8,420 7.80%
-------- ------ ---- -------- ------ ---- -------- ------ ----
Nonearning assets:
Cash and due from banks........ $ 3,666 $ 3,038 $ 2,421
Bank premises and equipment,
net.......................... 3,427 2,901 2,354
Other assets................... 2,117 1,812 1,570
Allowance for loan losses...... (1,155) (1,054) (969)
-------- -------- --------
Total assets..................... $134,948 $121,223 $113,333
======== ======== ========
Interest bearing liabilities:
Savings deposits............... $ 17,272 $ 373 2.16% $ 17,413 $ 456 2.62% $ 17,804 $ 496 2.79%
Time deposits.................. 65,607 3,638 5.55 54,894 3,093 5.63 48,069 2,646 5.50
NOW accounts................... 17,512 459 2.62 17,313 465 2.69 16,845 517 3.07
Money market accounts.......... 5,591 125 2.24 5,675 158 2.78 6,399 161 2.52
Borrowings..................... 25 2 8.00 -- -- -- 28 1 --
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total interest bearing
liabilities.................... $106,007 $4,597 4.34% $ 95,295 $4,172 4.38% $ 89,145 $3,821 4.29%
-------- ------ ---- -------- ------ ---- -------- ------ ----
Noninterest bearing liabilities:
Demand deposits
Other liabilities.............. $ 14,947 $ 12,175 $ 11,767
Shareholders' equity........... 1,371 1,477 1,218
12,623 12,276 11,203
-------- -------- --------
Total liabilities and
shareholders' equity........... $134,948 $121,223 $113,333
======== ======== ========
Net interest income(1)........... $5,006 $4,821 $4,599
====== ====== ======
Net interest spread(3)........... 3.23% 3.47% 3.51%
==== ==== ====
Net interest income to average
earning assets(1).............. 3.95% 4.21% 4.26%
==== ==== ====
</TABLE>
- ---------------
(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 ratios (expressed as a
percentage) of taxable equivalent interest income to earnings assets and of
interest expense to interest-bearing liabilities.
Table 3 sets forth a summary of the changes in interest earned and interest
expense detailing the amounts attributable to (i) changes in volume (change in
average volume times the prior year's average rate), (ii) changes in rate
(change in the average rate times the prior year's average volume). The changes
in rate/volume (change in the average volume times the change in the average
rate), has been allocated to the changes in volume and changes in rate in
proportion to the relationship of the absolute dollar amounts of the change in
each. During 1999, net interest income increased $327,000 due to changes in
volume and decreased $582,000 due to changes in interest rates. In 1998, net
interest income increased $145,000 due to changes in volume and increased
$77,000 due to changes in interest rates.
32
<PAGE> 39
TABLE 3. VOLUME AND RATE ANALYSIS OF CHANGES IN INTEREST INCOME
(Taxable equivalent basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 OVER 1998 1998 OVER 1997
----------------------- ----------------------
CHANGE DUE TO CHANGE DUE TO
-------------- TOTAL ------------- TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ----- ------ ------ ---- ------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold.............. $ (65) $ (5) $ (70) $(38) $ 19 $(19)
Taxable securities.............. 422 16 438 170 31 201
Tax-exempt securities........... (104) -- (104) (35) (1) (36)
Loans........................... 719 (373) 346 427 -- 427
----- ----- ----- ---- ---- ----
Total interest earned............. $ 972 $(362) $ 610 $524 $ 49 $573
===== ===== ===== ==== ==== ====
Interest expense on:
Savings deposits................ $ (5) $ (78) $ (83) $(12) $(28) $(40)
Time deposits................... 623 (78) 545 399 48 447
NOW accounts.................... 1 (7) (6) 6 (58) (52)
Money market accounts........... 26 (59) (33) (14) 11 (3)
Other borrowings................ -- 2 2 -- (1) (1)
----- ----- ----- ---- ---- ----
Total interest expense............ $ 645 $(220) $ 425 $379 $(28) $351
----- ----- ----- ---- ---- ----
Net interest income............... $ 327 $(582) $ 185 $145 $ 77 $222
===== ===== ===== ==== ==== ====
</TABLE>
Another method of analyzing the change in net interest income is to examine
the changes between interest rate spread and the net interest margin on earning
assets. The interest rate spread as shown in Table 4 is the difference between
the average rate earned on earning assets and the average rate on interest
bearing liabilities. The net interest margin takes into account the benefit
derived from assets funded by interest free sources such as non-interest bearing
demand deposits and capital.
TABLE 4. INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS
(Taxable equivalent basis)
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ----- -------- ----- -------- -----
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Earning assets............... $126,893 7.57% $114,526 7.85% $107,957 7.80%
======== ======== ========
Interest bearing
liabilities................ $106,007 4.34% $ 95,295 4.38% 89,145 4.29%
----- ----- -----
Interest rate spread......... 3.23% 3.47% 3.51%
Interest free sources used to
fund earning assets(1)..... 20,886 0.72% 19,231 0.74% 18,812 0.75%
-------- ----- -------- ----- -------- -----
Total sources of
funds................. $126,893 $114,526 $107,957
======== ======== ========
Net interest margin.......... 3.95% 4.21% 4.26%
===== ===== =====
</TABLE>
- ---------------
(1) Noninterest bearing liabilities and shareholders' equity less noninterest
earning assets.
33
<PAGE> 40
The following discussion analyzes changes in Citizens National Bank's
spreads and margins in terms of basis points. A basis point is a unit of measure
for interest rates equal to .01%. One hundred basis points equals 1%.
Interest rate spread decreased 24 basis points in 1999 while the net
interest margin declined 26 basis points. Both the interest rate spread and
margin were negatively impacted by a 28 basis point decline in earning asset
yields and offset by a 4 basis point decline in interest bearing liability
costs. Loan yields declined 39 basis points despite three separate increases in
the prime rate during 1999. The competitive environment for higher quality loans
required us to make such loans with rates and related loan fees lower that those
realized in prior years. The yield on securities available for sale declined 12
basis points. The reduction in liability costs is primarily the result of lower
rates on interest bearing checking, savings and money market accounts during the
year.
Interest rate spread decreased 4 basis points in 1998. Earning asset yields
increased 5 basis points while funding costs increased 9 basis points. The net
interest margin declined from 4.26% in 1997 to 4.21% in 1998. The primary factor
in the decline in the interest margin and spread was the 13 basis point increase
in time deposit yields and 26 basis point increase in money market deposit
yields in 1998. These increases were due to the introduction of a new higher
yielding certificate of deposit product and the restructuring of the money
market deposit rates. These increases were partially offset by decreases in
yields on savings and money market accounts. Loan yields remained unchanged
during 1998 while yields on securities increased 5 basis points primarily due to
a larger investment in higher yielding callable agencies.
PROVISION FOR LOAN LOSSES. The amount charged to provision for loan losses
is based on management's evaluation of the loan portfolio. Management determines
the adequacy of the allowance for loan losses based on past loan loss
experience, current economic conditions, composition of the loan portfolio, and
the anticipated potential for future loss. See Nonperforming Loans and Allowance
for Loan Losses for a comprehensive analysis.
NONINTEREST INCOME. Noninterest income increased $149,000 or 36.0% during
1999 over the prior comparable period. The increase in 1999 was primarily due to
increased service charges on deposit accounts, insurance commissions, debit card
fees, and trust fees. These increases were offset by decreases in gains on sale
of other real estate owned and net gains on sale of securities. Trust assets
under management reached $20.3 million at December 31,1999, a 24.5% increase
from $16.3 million at December 31, 1998.
Noninterest income increased $111,000 or 36.5% during 1998 over 1997. The
increase was due primarily to increased service charges on deposit accounts,
debit card fees, insurance income and net gains on sale of securities.
NONINTEREST EXPENSES. Noninterest expenses increased $581,000 or 17.2%
during 1999 over the prior comparable period. The increase was primarily due to
an increase in salaries and employee benefits and other operating expenses.
Other operating expenses, which increased, were data processing expense, postage
expense, advertising expense and professional fees.
Noninterest expenses increased $364,000 or 12.1% during 1998 over the prior
comparable period. The increase was primarily due to an increase in salaries and
employee benefits and other operating expenses. Other operating expenses, which
increased, were data processing, stationery and supplies, postage, telephone and
ATM expense.
34
<PAGE> 41
The opening of an additional branch in Hedgesville in October 1998 and the
start-up of the insurance subsidiary in November, 1998 caused salaries and
benefits and other operating expenses to increase somewhat in 1998 over 1997 and
to increase to a greater degree in 1999 over 1998.
INCOME TAXES. The bank's provision for income tax totaled $621,000 in 1999,
$618,000 in 1998 and $636,000 in 1997. The effective tax rate was 33.7% in 1999
compared to 32.2% and 32.6% in 1998 and 1997, respectively. Lower tax exempt
earnings on investment securities was the primary reason for the increase in the
effective tax rate. See Note 13 of the Notes to Consolidated Financial
Statements for a comprehensive analysis of income tax expense.
FINANCIAL CONDITION. Table 5 examines Citizens National's financial
condition in terms of its sources and uses of funds. Average funding uses
increased $12.4 million or 10.8% in 1999 compared with an increase of $6.6
million or 6.1% in 1998.
TABLE 5. SOURCES AND USES OF FUNDS
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------
INCREASE INCREASE
(DECREASE) (DECREASE)
AVERAGE --------------- AVERAGE --------------- AVERAGE
BALANCE AMOUNT % BALANCE AMOUNT % BALANCE
-------- ------- ----- -------- ------ ------ --------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Funding uses:
Federal funds
sold............ $ 1,202 $ (835) (41.0)% $ 2,037 $ (550) (21.3)% $ 2,587
Securities
available for
sale............ 33,974 4,924 17.0 29,050 2,054 7.6 26,996
Loans.............. 91,717 8,278 9.9 83,439 5,065 6.5 78,374
-------- ------- -------- ------ --------
Total uses...... $126,893 $12,367 10.8% $114,526 $6,569 6.1% $107,957
======== ======= ===== ======== ====== ====== ========
Funding sources:
Interest-bearing
demand
deposits........ $ 23,103 $ 115 0.5% $ 22,988 $ (256) (1.1)% $ 23,244
Savings deposits... 17,272 (141) (0.8) 17,413 (391) (2.2) 17,804
Time deposits...... 65,607 10,713 19.5 54,894 6,825 14.2 48,069
Short-term
borrowings...... 25 25 -- (28) (100.0) 28
Noninterest bearing
funds, net(1)... 20,886 1,655 8.6 19,231 419 2.2 18,812
-------- ------- -------- ------ --------
Total sources... $126,893 $12,367 10.8% $114,526 $6,569 6.1% $107,957
======== ======= ===== ======== ====== ====== ========
</TABLE>
- ---------------
(1) Noninterest bearing liabilities and shareholders' equity less noninterest
earning assets.
The bank's total assets increased $9.0 million or 7.0% to $138.6 million
from December 31, 1998 to December 31,1999, due primarily to a $11.9 million
increase in loans and a $1.2 million increase in cash and cash equivalents,
which was partially offset by a $2.4 million decrease in securities available
for sale and a $2.0 million decrease in federal funds sold.
The bank's total liabilities increased $9.3 million or 8.0% to $126.4
million from December 31, 1998, to December 31, 1999, completely due to the
increase in deposits. Shareholders' equity decreased $270,000 to $12.2 million
at December 31,1999, primarily
35
<PAGE> 42
due to cash dividends of $458,000 and $1.0 million decrease in accumulated other
comprehensive income, offset by net income of $1.2 million. The decrease in
accumulated other comprehensive income was due to the unrealized market value
decline of the available for sale investment security portfolio.
LOAN PORTFOLIO. At December 31,1999, total loans increased $11.9 million or
13.9% to $97.1 million from $85.3 million at December 31, 1998. Table 6 presents
major classifications of loans receivable at December 31, 1999, 1998 and 1997.
Table 7 presents loan maturities and interest sensitivity for certain loan
classifications at December 31, 1999. The loan mix did not change in any
material respect compared with December 31, 1999. The loan portfolio increase is
the result of developing new real estate loan programs and efforts to develop
new commercial and indirect lending relationships in the bank's expanded market
area of Berkeley County, West Virginia. The bank's management believes
additional growth in all lending areas is possible into year 2000. Management's
intent is to control the loan volume in a manner which would produce a loan to
deposit ratio between 75% and 80% and maintain credit quality. Such efforts were
successful as the loan to deposit ratio was 78.9% at December 31, 1999, and
74.9% at December 31, 1998. The ratio of net charge-offs to average loans
outstanding was .10% in 1999 and .11% in 1998.
The loan portfolio classifications of installment and commercial real
estate did not change significantly in 1999 and 1998. Growth recorded in the
commercial loan area resulted in increases of 34.6% to $5.2 million outstanding
at December 31, 1999, and 39% to $3.9 million outstanding December 31, 1998.
These increases in commercial lending is primarily the result of efforts to
develop new relationships with commercial entities in the area. The bank's
market area was expanded to Berkeley County, West Virginia in 1998 which
provides a much larger area for commercial lending. The bank's management feels
additional growth in the commercial area is possible in 2000.
Real estate mortgage loans comprised mainly of single-family one to four
family residences continued to be the bank's dominant loan category. Mortgage
lending comprises approximately 63% or $61.6 million of the total loan portfolio
at December 31, 1999, compared to 64% or $55.4 million at December 31, 1998.
Demand for the bank's primary mortgage products, variable rate loans
carrying annual interest rate adjustments based on one, three and five year
Treasury rates continues to increase. The bank is beginning to see an increase
in the demand for fixed rate mortgage products, and for all loan products, as
the bank enters the Berkeley County, West Virginia real estate market. As of
December 31, 1999, 68% of the bank's mortgage loans were in adjustable rate
loans and 32% were fixed rate loans. Currently, the bank has approximately $1.7
million in fixed rate loans in the portfolio which were originated under terms
that would allow them to be sold on the secondary market.
Additional information on the composition of the loan portfolio may be
found in Note 4 of the Notes to the Consolidated Financial Statements.
Bank policy requires those loans which are past due 90 days or more be
placed on nonaccrual status unless they are both well secured and in the process
of collection. As of December 31, 1999 and 1998, nonaccrual loans approximated
.02% and .32% of total loans (net), respectively.
36
<PAGE> 43
TABLE 6. LOANS RECEIVABLE
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
IN THOUSANDS
<S> <C> <C> <C>
Real estate......................................... $61,625 $55,412 $51,495
Commercial real estate.............................. 9,569 8,541 8,367
Consumer............................................ 21,778 18,408 18,311
Commercial.......................................... 5,185 3,853 2,771
Overdrafts.......................................... 28 83 96
------- ------- -------
$98,185 $86,297 $81,040
Net deferred loan fees, premiums and discounts...... 88 80 45
Allowance for loan losses........................... (1,148) (1,122) (1,019)
------- ------- -------
$97,125 $85,255 $80,066
======= ======= =======
</TABLE>
TABLE 7. LOAN MATURITIES AND INTEREST SENSITIVITY (1)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------
ONE YEAR ONE THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- -------
IN THOUSANDS
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural....................... $5,530 $1,058 $8,166 $14,754
Real estate -- construction.......... 1,325 -- -- 1,325
------ ------ ------ -------
Total........................... $6,855 $1,058 $8,166 $16,079
====== ====== ====== =======
Loans with predetermined interest
rate............................... $3,583 $1,058 $1,879 $ 6,520
Loans with variable interest rate.... 3,272 -- 6,287 9,559
------ ------ ------ -------
Total........................... $6,855 $1,058 $8,166 $16,079
====== ====== ====== =======
</TABLE>
(1) Excludes residential mortgages and consumer loans.
NONPERFORMING LOANS AND ALLOWANCE FOR LOAN LOSSES. Nonperforming loans
consist of loans in nonaccrual status, loans which are past due 90 days or more
and still accruing interest and restructured loans. As of December 31, 1999,
management is not aware of any potential problem loans other than those which
are on nonaccrual status or past due 90 days or more and still accruing
interest. Table 8 sets forth the amounts of such loans as of the dates
indicated.
37
<PAGE> 44
TABLE 8. NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
IN THOUSANDS
<S> <C> <C> <C>
Nonaccrual loans........................................ $ 22 $275 $ 91
Loans past due 90 days or more still accruing
interest.............................................. 79 7 91
Restructured loans...................................... -- 1 5
---- ---- ----
Total nonperforming loans.......................... $101 $283 $187
---- ---- ----
Other real estate owned................................. $ 67 $122 $136
---- ---- ----
Total nonperforming assets......................... $168 $405 $323
==== ==== ====
Ratios:
Nonperforming loans/Total loans......................... 0.10% 0.33% 0.23%
Nonperforming assets/Total assets....................... 0.12% 0.31% 0.28%
Allowance for loan losses/Total loans................... 1.18% 1.32% 1.27%
</TABLE>
All losses which may be reasonably anticipated are accounted for in the
allowance for loan losses. Management makes this determination quarterly by its
analysis of overall loan quality, changes in the mix and size of the loan
portfolio, previous loss experience, general economic conditions, information
about specific borrowers and other factors. The bank has no loans which are
considered to be impaired as of December 31, 1999 and 1998. At December 31, 1999
and 1998, the allowance for loan losses totaled $1.1 million. The allowance for
loan losses as a percentage of loans was 1.17% and 1.30% as of December 31, 1999
and 1998. The provision for loan losses exceeded net charge-offs by $26,000 and
$104,000 in 1999 and 1998. An analysis of the allowance for loan losses for the
years ended December 31, 1999 and 1998 may be found in Note 4 of the Notes to
the Consolidated Financial Statements and Table 9.
The provision for loan losses is a charge to earnings which is made to
maintain the allowance for loan losses at a sufficient level. In 1999, 1998 and
1997, the provision totaled $118,000, $196,000 and $174,000, respectively. While
loan quality remains good and, as noted previously, past due and nonaccrual
loans are minimal, management decreased the provision for loan losses in 1999
based on the OCC's recommendation to management. Having thus decreased the
provision for loan losses, management believes the allowance for loan losses to
be adequate and is not aware of any information relating to the loan portfolio
which it expects will materially impact future operating results, liquidity or
capital resources. In addition, federal regulators may require additional
reserves as a result of their examination of the bank. The allowance for loan
losses reflects what management currently believes is an adequate level of
allowance, although there can be no assurance that future losses will not exceed
the estimated amounts, thereby adversely affecting future results of operations.
38
<PAGE> 45
TABLE 9. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
IN THOUSANDS
<S> <C> <C> <C>
Balance, beginning of year.......................... $1,122 $1,019 $ 917
------ ------ ------
Provision charged to expense........................ $ 118 $ 195 $ 174
------ ------ ------
Loans charged off:
Commercial, financial and agricultural......... $ 7 $ 5 $ 3
Consumer....................................... 97 107 81
Mortgage....................................... 14 16 18
------ ------ ------
Total loans charged off........................ $ (118) $ (128) $ (102)
------ ------ ------
Recoveries:
Commercial, financial and agricultural......... $ 5 $ 4 $ 7
Consumer....................................... 21 32 23
------ ------ ------
Total recoveries............................... $ 26 $ 36 $ 30
------ ------ ------
Net charge-offs................................ $ (92) $ (92) $ (72)
------ ------ ------
Balance, end of year................................ $1,148 $1,122 $1,019
====== ====== ======
</TABLE>
TABLE 10. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------- ------ ------------- ------ -------------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agriculture.... $ 89 5% $ 41 5% $ 32 3%
Real estate --
mortgage........... 284 73 531 74 373 74
Installment and
other.............. 558 22 265 21 188 23
Unallocated.......... 217 N/A 285 N/A 426 N/A
------ --- ------ --- ------ ---
Total............ $1,148 100% $1,122 100% $1,019 100%
====== === ====== === ====== ===
</TABLE>
SECURITIES PORTFOLIO AND FEDERAL FUNDS SOLD. The bank's securities
portfolio consists of only available for sale securities. Classifying the
securities portfolio as available for sale provides management with increased
ability to manage the balance sheet structure and address asset/liability
management issues when needed. The fair value of the investment portfolio has
decreased $2.4 million to $31.2 million at December 31, 1999 from 1998.
The composition of the portfolio continues to reflect the bank's
conservative philosophy which places greater importance on safety and liquidity
than on yield. At December 31, 1999, approximately 92.8% of the portfolio is
comprised of US Treasury and Agency securities and 6.8% in State and Political
Subdivision securities. The term to maturity is limited to seven years for
treasury and agency bonds and 10 years for municipal bonds. Typically,
investments in agency bonds contain a call feature. These bonds generally have a
39
<PAGE> 46
somewhat higher yield. The average term to maturity of the portfolio as of
December 31, 1999 was 5.5 years.
The bank generally participates in the overnight federal funds sold market.
Depending upon specific investing or funding strategies and/or normal
fluctuations in loan and deposit balances, the bank may need, on occasion, to
purchase funds on an overnight basis. At December 31, 1999, the bank had no
federal funds sold. In 1999 and 1998, the average balance in federal funds sold
was $1.2 million and $2.0 million, respectively.
DEPOSITS AND OTHER FUNDING SOURCES. Total deposits were $124.5 million at
December 31, 1999, an increase of $9.2 million or 8.0% of deposits at December
31, 1998. Average deposits, however, showed a $13.5 million, or 12.5% growth, to
$120.9 million in 1999. The growth is partially due to the bank entering an
expanded market into Berkeley County, West Virginia with the opening of the
Hedgesville Branch. Deposits at the Hedgesville Branch totaled $12.8 million at
December 31, 1999, an increase of $9.0 million over December 31, 1998.
Noninterest bearing deposits also grew by $1.7 million or 12.1%, during
1999 from $14.0 million at December 31, 1998, to $15.7 million at December 31,
1999. At December 31, 1999, noninterest bearing deposits represented 12.6% of
total deposits compared to 12.1% for 1998. Average noninterest bearing deposits
increased 22.8% from $12.2 million in 1998 to $14.9 million in 1999. The bank
has been promoting a new noninterest bearing deposit account with no minimum
balance and check truncation. Some growth has occurred in the noninterest
bearing deposit category, but a shift of dollars from other noninterest bearing
accounts to the no minimum balance account has also occurred.
Interest bearing deposits increased by $7.5 million or 7.4% to $108.9
million at December 31, 1999. Interest bearing checking decreased by $160,000 in
1999. Included in this category are NOW accounts and Money Market Accounts.
Savings accounts decreased $679,000 in 1999 over the previous year to $16.4
million while the average savings deposits fell $141,000 or .81% to $17.3
million at December 31, 1999. The bank's largest source of interest bearing
funds is certificates of deposit. These accounts totaled $69.5 million at
December 31, 1999, an increase of $8.3 million or 13.7%. While the certificate
of deposit accounts increased, the composition of the portfolio also changed.
Certificates of deposit with a term of one year or less fell by $384,000 while
certificates of deposit that mature beyond one year (includes 36-month Ultimate
CD) increased by $1.3 million. Certificates of deposit over $100,000 increased
by $8.1 million or 81.2% in 1999. The 36-month Ultimate CD is a product which
allows the customer to withdraw all or a portion of the CD on the first or
second year anniversary date without penalty. Deposits may also be made to this
CD at any time. This CD has become very popular and was used in the grand
opening promotion for the Hedgesville Branch. Much of the increase in
certificates of deposit that mature beyond one year was into the 36-month
Ultimate CD. A large portion of the increase in certificates of deposit over
$100,000 is due to the customers depositing money into their 36-month Ultimate
CD putting the balance over $100,000.
The following is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 1999:
40
<PAGE> 47
TABLE 11. MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
AMOUNT PERCENT
------- -------
(IN THOUSANDS)
<S> <C> <C>
Three months of less........................ $ 6,239 34.58%
Three through six months.................... 3,784 20.97%
Six through twelve months................... 2,482 13.76%
Over twelve months.......................... 5,537 30.69%
------- ------
Total.................................. $18,042 100.00%
======= ======
</TABLE>
CAPITAL RESOURCES. The bank is and has been well capitalized. Total
shareholders' equity at December 31, 1999 of $12.2 million represents 8.8% of
total assets. This compares to $12.5 million or 9.7%, at December 31, 1998.
Included in capital at December 31, 1999 are $892,000 of unrealized losses on
available for sale securities, net of deferred income taxes. At December 31,
1998, the bank had unrealized gains on available for sale securities, net of
deferred income taxes of $140,000. Such unrealized gains and losses are recorded
net of related deferred taxes and are primarily a function of available market
interest rates relative to the yield being generated on the available for sale
portfolio. No earnings impact results, however, unless the securities are
actually sold.
Although not heavily traded, information available to management indicates
the market value of the bank's stock traded during 1999 in a range from $100.00
to $150.00 per share. During 1998, the market value of the bank's stock ranged
from $75.00 immediately after the two for one stock split effected as a 100%
stock dividend in March 1998 to $90.00 per share in December 1998. Book value
per share decreased from $54.66 at December 31, 1998 to $53.48 at December 31,
1999. Dividends, which are declared by the board of directors semiannually,
remained stable at $2.00 per share for 1999 and 1998. All per share amounts have
been restated to reflect the stock split in March 1998, except for market
values.
The Federal Reserve's risk-based capital guidelines provide for the
relative weighting of both on-balance-sheet and off-balance-sheet items based on
their degree of risk. The bank continues to exceed all regulatory capital
requirements, and is unaware of any trends or uncertainties, nor do any plans
exist, which may materially impair or alter its capital position.
RETURN ON EQUITY AND ASSETS. The following table shows consolidated
operating and capital ratios for the periods indicated.
TABLE 12. OPERATING AND CAPITAL RATIOS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1999 1998
----- -----
<S> <C> <C>
Return on average assets....................... .90% 1.07%
Return on average equity....................... 9.66 10.60
Dividend payout ratio.......................... 37.54 35.20
Average equity to average assets ratio......... 9.35 10.13
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY. The objective of the bank's
liquidity management program is to ensure the continuous availability of funds
to meet the withdrawal demands of depositors and the credit needs of borrowers.
The basis of the bank's liquidity comes from the stability of its core deposits.
Liquidity is also available through the available
41
<PAGE> 48
for sale securities portfolio and short-term funds such as federal funds sold.
At December 31, 1999, these sources totaled $31.2 million, or 22.5% of total
assets. In addition, liquidity may be generated through loan repayments and over
$6.0 million of available borrowing arrangements with correspondent banks. At
December 31, 1999, management considered the bank's ability to satisfy its
anticipated liquidity needs over the next 12 months. Management believes that
the bank is well positioned and has ample liquidity to satisfy these needs.
Details on both the sources and uses of cash are presented in the Consolidated
Statements of Cash Flows contained in the financial statements.
The objective of the bank's interest rate sensitivity management program,
also known as asset/liability management, is to maximize net interest income
while minimizing the risk of adverse effects from changing interest rates. This
is done by controlling the mix and maturities of interest sensitive assets and
liabilities. The bank has established an asset/liability committee for this
purpose.
One common interest rate risk measure is the gap, or the difference between
rate sensitive assets and rate sensitive liabilities. A positive gap occurs when
rate sensitive assets exceed rate sensitive liabilities. This tends to be
beneficial in rising interest rate environments. A negative gap refers to the
opposite situation and tends to be beneficial in declining interest rate
environments. However, the gap does not consider future changes in the volume of
rate sensitive assets or liabilities or the possibility that interest rates of
various products may not change by the same amount or at the same time. In
addition, certain assumptions must be made in constructing the gap. For example,
the bank considers administered rate deposits, such as savings accounts, to be
immediately rate sensitive although their rate sensitivity could differ from
this assumption. The bank monitors its gap on a quarterly basis. Table 13
presents an interest sensitivity analysis of the bank's assets and liabilities
at December 31, 1999.
42
<PAGE> 49
TABLE 13. INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------------
INTEREST SENSITIVITY PERIOD
-------------------------------------------------------------------
0-90 91-180 181-365 ONE TO FIVE OVER FIVE
DAYS DAYS DAYS YEARS YEARS TOTAL
-------- -------- -------- ----------- --------- --------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Interest Sensitive
Assets
Securities........... $ 350 $ 270 $ 250 $ 5,931 $25,824 $ 32,625
Loans, net of
unearned
interest........... 6,217 8,714 12,298 51,124 18,772 97,125
-------- -------- -------- ------- ------- --------
Total interest
sensitive
assets.......... $ 6,567 $ 8,984 $ 12,548 $57,055 $44,596 $129,750
======== ======== ======== ======= ======= ========
Interest sensitive
liabilities
Deposits............. $ 29,917 $ 14,501 $ 10,209 $25,404 $ -- $ 80,031
-------- -------- -------- ------- ------- --------
Total interest
sensitive
liabilities..... $ 29,917 $ 14,501 $ 10,209 $25,404 $ -- $ 80,031
======== ======== ======== ======= ======= ========
GAP.................. $(23,350) $ (5,517) $ 2,339 $31,651 $44,596
Cumulative GAP....... $(23,350) $(28,867) $(26,528) $ 5,123 $49,719
GAP to sensitive
assets ratio....... (18.00)% (4.25)% 1.80% 24.39% 34.37%
Cumulative GAP to
sensitive assets
ratio.............. (18.00)% (22.25)% (20.45)% 3.95% 38.32%
</TABLE>
IMPACT OF INFLATION. The results of operations and financial position of
the bank have been presented based on historical cost, unadjusted for the
effects of inflation, except for the recording of unrealized gains and losses on
securities available for sale. Inflation could significantly impact the value of
the bank's interest rate sensitive assets and liabilities and the cost of
noninterest expenses, such as salaries, benefits and other operating expenses.
Management of the money supply by the Federal Reserve to control the rate of
inflation may have an impact on the earnings of the bank. Further, changes in
interest rates to control inflation may have a corresponding impact on the
ability of certain borrowers to repay loans granted by the bank.
As a financial intermediary, the bank holds a high percentage of interest
rate sensitive assets and liabilities. Consequently, the estimated fair value of
a significant portion of the bank's assets and liabilities change more
frequently than those of non-banking entities. The bank's policies attempt to
structure its mix of financial instruments and manage its interest rate
sensitivity in order to minimize the potential adverse effects of market forces
on its net interest income, earnings and capital. A comparison of the carrying
value of the bank's financial instruments to their estimated fair value as of
December 31, 1999 and December 31, 1998 is disclosed in Note 18 of the Notes to
the Consolidated Financial Statements.
43
<PAGE> 50
ADDITIONAL INFORMATION ABOUT THE HOLDING COMPANY
CNB Financial was incorporated on March 20, 2000, under the general
corporation laws of West Virginia to serve as a bank holding company in the
reorganization and, therefore, the holding company has no prior operating
history. Its principal office is located at 212 S. Washington Street, P. O. Box
130, Berkeley Springs, West Virginia 25411, and its telephone number is (304)
258-1520.
The holding company is authorized to issue 5,000,000 shares of common
stock, par value $1.00 per share. Certain directors currently own 12,000 shares
of the holding company's common stock, which will constitute all of the issued
and outstanding capital stock of the holding company immediately prior to the
reorganization. On the effective date of the reorganization, all of the stock
held by those persons will be redeemed and canceled.
OTHER MATTERS
As of the date of this proxy statement/prospectus, management is not aware
of any business to come before the special meeting other than the matters that
are described in this proxy statement/prospectus. However, if any other matters
properly come before the special meeting, we intend that the proxies solicited
by this proxy statement/prospectus will be voted on those other matters in
accordance with the judgment of the persons voting the proxies.
LEGAL MATTERS
Jackson & Kelly PLLC, Charleston, West Virginia, will pass upon the
validity of the holding company stock to be issued in the reorganization and
certain federal tax matters.
WHERE YOU CAN FIND MORE INFORMATION
CNB Financial has filed with the Securities and Exchange Commission a
Registration Statement on Form S-4 under the Securities Act of 1933, as amended,
with respect to the shares of its stock it will issue in the
merger/reorganization. This proxy statement/prospectus does not contain all
information set forth in the Registration Statement and the exhibits thereto.
You may obtain copies, at prescribed rates, of this additional information
from the following SEC locations.
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, 7 World Trade Center Citicorp Center
N.W. Suite 1300 500 West Madison Street
Room 1024 New York, NY 10048 Suite 1400
Washington, DC 20549 Chicago, IL 60661-2511
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. This SEC filing is also available to the public from commercial
document retrieval services and at Internet world wide web site maintained by
the SEC at "http://www.sec.gov."
44
<PAGE> 51
CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-1
Consolidated Financial Statements:
Consolidated Statements of Financial Condition............ F-2
Consolidated Statements of Income......................... F-3
Consolidated Statements of Changes in Shareholders'
Equity................................................. F-4
Consolidated Statements of Cash Flows..................... F-5
Notes to Consolidated Financial Statements................ F-6
Interim Consolidated Financial Statements: F-25
Consolidated Statements of Financial Condition............ F-26
Consolidated Statements of Income for the Three Months
Ended March 31, 2000 and 1999.......................... F-27
Consolidated Statements of Changes in Shareholders' Equity
for the Three Months Ended March 31, 2000 and 1999..... F-28
Statements of Cash Flows for the Three Months Ended March
31, 2000 and 1999...................................... F-29
Notes to Interim Financial Statements..................... F-30
</TABLE>
<PAGE> 52
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors
Citizens National Bank of Berkeley Springs and Subsidiary
Berkeley Springs, West Virginia
We have audited the accompanying consolidated statements of financial
condition of the Citizens National Bank of Berkeley Springs and Subsidiary as of
December 31, 1999 and 1998, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Citizens
National Bank of Berkeley Springs and Subsidiary as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
/s/ Smith Elliott Kearns & Company, LLC
Hagerstown, Maryland
January 21, 2000
F-1
<PAGE> 53
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks........................... $ 4,035,293 $ 2,862,300
Federal funds sold................................ -- 2,000,000
Securities available for sale (at approximate
market value)................................... 31,186,678 33,593,959
Loans receivable, net............................. 97,124,993 85,255,050
Loans held for sale............................... 65,300 --
Accrued interest receivable....................... 871,671 846,744
Foreclosed real estate (held for sale), net....... 66,938 122,379
Premises and equipment, net....................... 3,360,924 3,474,996
Deferred income taxes............................. 849,721 250,841
Cash surrender value of life insurance............ 670,734 604,731
Intangible assets................................. 108,267 116,000
Other assets...................................... 307,220 473,169
------------ ------------
TOTAL ASSETS................................. $138,647,739 $129,600,169
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand....................................... $ 15,653,259 $ 13,968,331
Interest-bearing demand...................... 22,942,904 23,103,186
Savings...................................... 16,446,507 17,125,907
Time, $100,000 and over...................... 18,042,001 9,954,710
Other time................................... 51,425,277 51,168,087
------------ ------------
$124,509,948 $115,320,221
Accrued interest payable........................ 816,619 731,879
Accrued expenses and other liabilities.......... 1,072,451 1,029,804
------------ ------------
TOTAL LIABILITIES............................ $126,399,018 $117,081,904
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $10 par value; 600,000 shares
authorized; 229,024 shares outstanding....... $ 2,290,240 $ 2,290,240
Capital surplus................................. 2,031,400 2,031,400
Retained earnings............................... 8,818,791 8,056,610
Accumulated other comprehensive income.......... (891,710) 140,015
------------ ------------
TOTAL SHAREHOLDERS' EQUITY................... $ 12,248,721 $ 12,518,265
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY... $138,647,739 $129,600,169
============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-2
<PAGE> 54
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............. $7,779,359 $7,342,065 $6,895,881
Interest and dividends on securities:
United States Treasury securities... 55,516 114,631 114,180
U.S. Government agencies and
corporations...................... 1,855,665 1,374,600 1,175,067
State and political subdivisions.... 185,680 274,453 310,718
Other............................... 8,206 6,926 5,718
Interest on federal funds sold......... 60,968 130,863 149,681
---------- ---------- ----------
$9,945,394 $9,243,538 $8,651,245
---------- ---------- ----------
INTEREST EXPENSE
Interest on interest bearing demand,
savings and time deposits........... $4,594,966 $4,171,379 $3,820,545
Interest on federal funds purchased.... 2,607 359 --
---------- ---------- ----------
$4,597,573 $4,171,738 $3,820,545
---------- ---------- ----------
NET INTEREST INCOME................. $5,347,821 $5,071,800 $4,830,700
PROVISION FOR LOAN LOSSES................ 117,999 195,600 174,292
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES................... $5,229,822 $4,876,200 $4,656,408
---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts.... $ 247,159 $ 191,406 $ 164,483
Other service charges, commissions and
fees................................ 176,951 139,071 111,961
Insurance income....................... 92,650 3,501 --
Other operating income................. 55,139 50,538 40,283
Net gain (loss) on sale of
securities.......................... (4,262) 17,570 (21,584)
Gain (loss) on sale of other real
estate owned........................ (2,890) 13,329 9,292
---------- ---------- ----------
$ 564,747 $ 415,415 $ 304,435
---------- ---------- ----------
NONINTEREST EXPENSES
Salaries............................... $1,713,298 $1,550,588 $1,405,811
Employee benefits...................... 532,762 456,735 385,320
Occupancy of premises.................. 203,442 168,411 149,186
Furniture and equipment expense........ 262,794 247,317 243,878
Other operating expenses............... 1,241,226 949,081 823,634
---------- ---------- ----------
$3,953,522 $3,372,132 $3,007,829
---------- ---------- ----------
INCOME BEFORE INCOME TAXES.......... $1,841,047 $1,919,483 $1,953,014
PROVISION FOR INCOME TAXES............... 620,818 618,249 635,965
---------- ---------- ----------
NET INCOME.......................... $1,220,229 $1,301,234 $1,317,049
========== ========== ==========
EARNINGS PER SHARE....................... $ 5.33 $ 5.68 $ 5.75
========== ========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-3
<PAGE> 55
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.............. $1,145,120 $2,031,400 $7,469,773 $ (45,511) $10,600,782
Comprehensive income:
Net income for 1997................... -- -- 1,317,049 -- --
Change in unrealized gains (losses) on
securities available for sale (net
of tax of $66,593).................. -- -- -- 154,163 --
Total Comprehensive Income.............. -- -- -- -- 1,471,212
Cash dividends ($1.87 per share)........ -- -- (428,278) -- (428,278)
---------- ---------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1997.............. $1,145,120 $2,031,400 $8,358,544 $ 108,652 $11,643,716
Comprehensive income:................... -- -- 1,301,234 -- --
Net income for 1998
Change in unrealized gains (losses) on
securities available for sale (net
of tax of $19,223).................. -- -- -- 31,363 --
Total Comprehensive Income.............. -- -- -- -- 1,332,597
Cash dividends ($2.00 per share)........ -- -- (458,048) -- (458,048)
Stock split effected in the form of a
100% dividend......................... 1,145,120 -- (1,145,120) -- --
---------- ---------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1998.............. $2,290,240 $2,031,400 $8,056,610 $ 140,015 $12,518,265
Comprehensive income:
Net income for 1999................... -- -- 1,220,229 -- --
Change in unrealized gains (losses) on
securities available for sale (net
of tax of $632,348)................. -- -- -- (1,031,725) --
Total Comprehensive Income.............. -- -- -- -- 188,504
Cash dividends ($2.00 per share)........ (458,048) (458,048)
---------- ---------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1999.............. $2,290,240 $2,031,400 $8,818,791 $ (891,710) $12,248,721
========== ========== ========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-4
<PAGE> 56
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 1,220,229 $ 1,301,234 $ 1,317,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 256,642 219,325 219,872
Provision for loan losses.................... 117,999 195,600 174,292
Deferred income taxes........................ 33,468 (34,543) (69,299)
Net (gain) loss on sale of securities........ 4,262 (17,570) 21,584
(Gain) loss on sale of real estate owned..... 2,890 (13,329) (9,292)
Loss on disposal of fixed assets............. 407 -- --
(Increase) in loans held for sale............ (65,300) -- --
(Increase) decrease in accrued interest
receivable................................ (24,927) 39,580 (154,829)
(Increase) decrease in other assets.......... 65,079 (447,154) (88,927)
Increase in accrued interest payable......... 84,740 115,653 111,555
Increase in accrued expenses and other
liabilities............................... 42,647 137,665 130,180
Amortization of deferred loan (fees) cost.... 44,375 51,806 47,272
Amortization (accretion) of premium and
discount on investments................... (1,030) (6,315) 3,262
------------ ------------ -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.............................. $ 1,781,481 $ 1,541,952 $ 1,702,719
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) in loans...................... $(12,094,817) $ (5,561,460) $(5,094,294)
Proceeds from sales of securities............ 7,290,995 8,648,700 8,462,366
Proceeds from maturities of securities....... 8,495,000 11,815,000 2,828,560
Purchases of securities...................... (15,046,019) (25,044,350) (16,150,000)
Purchases of premises and equipment.......... (100,377) (1,235,577) (322,283)
Proceeds from sale of other real estate
owned, net................................ 119,489 152,054 131,292
Net (increase) in real estate owned, net..... (4,438) -- --
Net (increase) decrease in federal funds
sold...................................... 2,000,000 (2,000,000) 2,995,000
------------ ------------ -----------
NET CASH (USED IN) INVESTING ACTIVITIES... $ (9,340,167) $(13,225,633) $(7,149,359)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings
deposits.................................. $ 845,246 $ 3,507,977 $(1,563,687)
Net increase in time deposits................ 8,344,481 9,562,669 6,737,497
Cash dividends paid.......................... (458,048) (458,048) (428,278)
------------ ------------ -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES.............................. $ 8,731,679 $ 12,612,598 $ 4,745,532
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. $ 1,172,993 $ 928,917 $ (701,108)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR... 2,862,300 1,933,383 2,634,491
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR......... $ 4,035,293 $ 2,862,300 $ 1,933,383
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year:
Interest..................................... $ 4,512,832 $ 4,056,085 $ 3,708,990
Income taxes................................. $ 639,000 $ 612,604 $ 696,881
Net transfer to foreclosed real estate, held for
sale from loans receivable..................... $ 62,500 $ 124,613 $ 158,491
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-5
<PAGE> 57
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS:
Citizens National Bank of Berkeley Springs provides a variety of banking
services to individuals and businesses through its two locations in Berkeley
Springs, West Virginia and its branch in Hedgesville, West Virginia which opened
in October 1998. Its primary deposit products are demand deposits and
certificates of deposit, and its primary lending products are commercial
business, real estate mortgage, and installment loans.
CNB Insurance Services, Inc., wholly owned subsidiary of Citizens National
Bank, (collectively referred to as "the bank"), began operations in November,
1998. CNB Insurance Services, Inc. is a property and casualty insurance agency
selling primarily personal lines of insurance in Morgan and Berkeley Counties.
The accounting policies of the Bank conform to generally accepted
accounting principles and to general practices of the banking industry.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Citizens
National Bank of Berkeley Springs and its wholly owned subsidiary. All
significant intercompany transactions and balances have been eliminated.
USE OF ESTIMATES:
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SECURITIES AND MORTGAGE-BACKED SECURITIES:
The Bank classifies and accounts for investments in equity securities that
have readily determinable fair values and for all investments in debt securities
as follows:
a. Debt securities that the Bank has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
b. Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
c. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
shareholders' equity as accumulated other comprehensive income.
F-6
<PAGE> 58
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
Gain or loss on sale of securities is based on specific identification
method.
IMPAIRED LOANS:
Impaired loans are defined as those loans for which it is probable that
contractual amounts due will not be received. Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by SFAS No. 118, requires that the measurement of impaired loans is
based on the present value of expected future cash flows discounted at the
historical effective interest rate, except that all collateral-dependent loans
are measured for impairment based on the fair value of the collateral. Larger
groups of small-balance loans such as residential mortgage and installment loans
that are considered to be part of homogeneous loan pools are aggregated for the
purpose of measuring impairment, and therefore, are not subject to these
statements. Management has established a dollar-value threshold for commercial
loans. The larger commercial loans are evaluated in accordance with the
statements. The Bank has no loans which are considered to be impaired at
December 31, 1999 and 1998.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to impaired
loans are charged or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's estimate of
credit losses inherent in the loan portfolio and the related allowance may
change in the near term.
LOANS HELD FOR SALE:
The Bank underwrites certain loan originations in a manner so they are
eligible for sale in the secondary market. If mortgage loans are originated and
held for sale to investors they are classified as held for sale and recorded at
the lower of cost or market value. Gains and losses realized from the sale of
loans and adjustments to market value are included in non-interest income. The
Bank has from time to time sold mortgage loans to the Federal Home Loan Mortgage
Corporation (Freddie Mac) and other commercial banks.
F-7
<PAGE> 59
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS:
The intangible asset represents the acquisition in November 1998 by CNB
Insurance Services, Inc. of a customer list, contracts and records in the amount
of $116,000. The intangible asset is being amortized over fifteen years on a
straight line basis.
LOAN SERVICING:
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the predominant risk characteristics of the underlying loans: product
type, investor type, interest rate, term and geographic location. An analysis of
the risk characteristics of the Bank's loan servicing portfolio allows for all
loans to be defined by one risk category.
INTEREST INCOME ON LOANS:
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discontinued when, in
the opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all unpaid
accrued interest is reversed.
NONPERFORMING/NONACCRUAL ASSETS:
Nonperforming/nonaccrual assets consist of loans on which interest is no
longer accrued, loans which have been restructured in order to allow the
borrower the ability to maintain control of the collateral, real estate acquired
by foreclosure and real estate upon which deeds in lieu of foreclosure have been
accepted. Interest previously accrued but not collected on nonaccrual loans is
reversed against current income when a loan is placed on a nonaccrual basis.
LOANS RECEIVABLE:
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs or specific valuation
accounts and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
LOAN ORIGINATION FEES AND COSTS:
Certain direct costs of originating loans are being capitalized and
amortized over the contractual life of the loan as an adjustment of the yield on
the related loan.
F-8
<PAGE> 60
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT:
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated on both straight-line and accelerated methods over
the estimated useful lives of 15 to 50 years for buildings and 3 to 20 years for
equipment. Maintenance and repairs are charged to operating expenses as
incurred.
INCOME TAXES:
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
PENSION PLAN:
The Bank's policy is to fund pension costs by annual contributions as
required by applicable regulations.
CASH AND CASH EQUIVALENTS:
For purposes of the Consolidated Statements of Cash Flows, the Bank has
defined cash and cash equivalents as all highly liquid debt instruments
purchased with a maturity of three months or less except for federal funds sold.
Those amounts are included in the balance sheet captions "Cash and Due From
Banks." The Bank has elected to present the net increase or decrease in loans
and time deposits in the Consolidated Statements of Cash Flows.
EARNINGS AND DIVIDENDS PER SHARE:
Earnings and dividends per share are computed on the basis of the weighted
average number of 229,024 shares of common stock outstanding during each year.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
In the ordinary course of business the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commercial lines of credit and letters of credit. Such financial
instruments are recorded in the financial statements when they become payable.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS:
During the years that the employee renders the necessary service, the Bank
accrues the cost of providing postretirement health and life insurance benefits
to the employee.
F-9
<PAGE> 61
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FORECLOSED REAL ESTATE:
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less estimated cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
loss on foreclosed real estate. The historical average holding period for such
properties is twelve to eighteen months.
TRUST FEES:
Trust fees are recorded on the accrual basis.
ADVERTISING COSTS:
The Bank expenses advertising costs in the period in which they are
incurred. Advertising cost amounted to $82,459, $55,220 and $58,544 for the
years ended December 31, 1999, 1998 and 1997, respectively.
COMPREHENSIVE INCOME:
In 1998 the Bank adopted Statement of Financial Accounting Standards (SFAS)
No. 130 -- Reporting Comprehensive Income. Under SFAS No. 130, comprehensive
income is defined as the change in equity from transactions and other events
from nonowner sources. It includes all changes in equity except those resulting
from investments by shareholders and distributions to shareholders.
Comprehensive income includes net income and certain elements of "other
comprehensive income" such as foreign currency transactions; accounting for
futures contracts; employers accounting for pensions; and accounting for certain
investments in debt and equity securities.
The Bank has elected to report its comprehensive income in the Consolidated
Statements of Changes in Shareholders' Equity. The only element of "other
comprehensive income" that the Bank has is the unrealized gain or losses on
available for sale securities. The 1997 financial statements have been
reclassified to reflect these changes in reporting format.
F-10
<PAGE> 62
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The components of the change in net unrealized gains (losses) on securities
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during the year.............................. $(1,668,335) $ 68,156 $199,172
Reclassification adjustment for (gains) losses
realized in net income....................... 4,262 (17,570) 21,584
----------- -------- --------
Net unrealized holding gains (losses) before
taxes........................................ $(1,664,073) $ 50,586 $220,756
Tax effect..................................... 632,348 (19,223) (66,593)
----------- -------- --------
Net change..................................... $(1,031,725) $ 31,363 $154,163
=========== ======== ========
</TABLE>
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average daily reserve balances with the
Federal Reserve Bank. The amount of these required reserves, calculated based on
percentages of certain deposit balances was $1,000,000 at December 31, 1999.
NOTE 3. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of debt securities at
December 31, 1999 and December 31, 1998 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.
F-11
<PAGE> 63
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. SECURITIES AVAILABLE FOR SALE (CONTINUED)
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities
After 1 but within 5
years.................. $ 400,699 $ 51 $ -- $ 400,750
----------- ------ ---------- -----------
U.S. Government agencies and
corporations
Within 1 year............ $ 250,000 $ -- $ 1,094 $ 248,906
After 1 but within 5
years.................. 4,499,367 -- 181,006 4,318,361
After 5 but within 10
years.................. 25,230,736 -- 1,250,698 23,980,038
----------- ------ ---------- -----------
$29,980,103 $ -- $1,432,798 $28,547,305
----------- ------ ---------- -----------
States and political
subdivision
Within 1 year............ $ 620,637 $6,466 $ -- $ 627,103
After 1 but within 5
years.................. 1,030,759 2,742 2,237 1,031,264
After 5 but within 10
years.................. 363,085 -- 8,694 354,391
After 10 years........... 100,000 -- 3,785 96,215
----------- ------ ---------- -----------
$ 2,114,481 $9,208 $ 14,716 $ 2,108,973
----------- ------ ---------- -----------
Federal Reserve Bank
stock.................... $ 129,650 $ -- $ -- $ 129,650
----------- ------ ---------- -----------
Total securities
available for sale..... $32,624,933 $9,259 $1,447,514 $31,186,678
=========== ====== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities
Within 1 year............. $ 299,978 $ 1,052 $ -- $ 301,030
After 1 but within 5
years................... 1,151,200 70,320 -- 1,221,520
----------- -------- ------- -----------
$ 1,451,178 $ 71,372 $ -- $ 1,522,550
----------- -------- ------- -----------
U.S. Government agencies and
corporations
Within 1 year............. $ 349,994 $ -- $ -- $ 349,994
After 1 but within 5
years................... 4,192,505 40,991 17,970 4,215,526
After 5 but within 10
years................... 22,694,937 87,563 49,436 22,733,064
----------- -------- ------- -----------
$27,237,436 $128,554 $67,406 $27,298,584
----------- -------- ------- -----------
</TABLE>
F-12
<PAGE> 64
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. SECURITIES AVAILABLE FOR SALE (CONTINUED)
<TABLE>
<CAPTION>
1998
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
States and political
subdivisions
Within 1 year............. $ 815,156 $ 6,365 $ -- $ 821,521
After 1 but within 5
years................... 3,206,008 76,168 -- 3,282,176
After 5 but within 10
years................... 428,700 6,567 -- 435,267
After 10 years............ 100,000 4,211 -- 104,211
----------- -------- ------- -----------
$ 4,549,864 $ 93,311 $ -- $ 4,643,175
----------- -------- ------- -----------
Federal Reserve Bank stock... $ 129,650 $ -- $ -- $ 129,650
----------- -------- ------- -----------
Total securities available for
sale......................... $33,368,128 $293,237 $67,406 $33,593,959
=========== ======== ======= ===========
</TABLE>
The carrying value of securities pledged to secure public deposits and for
other purposes as required or permitted by law totaled $9,467,490 at December
31, 1999 and $9,018,282 at December 31, 1998.
Proceeds from sales of securities available for sale (excluding maturities)
for the years ended December 31, 1999, 1998 and 1997 were $7,290,995,
$8,648,700, and $8,462,366, respectively. Gross gains (losses) of $15,829 and
$(20,091) in 1999, $33,483 and $(15,913) in 1998, and $14,189 and $(35,773) in
1997 were realized on the respective sales.
NOTE 4. LOANS RECEIVABLE
Major classifications of loans at December 31, 1999 and 1998, were as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Real estate................................. $61,624,632 $55,412,444
Commercial real estate...................... 9,568,985 8,540,639
Consumer.................................... 21,778,574 18,407,662
Commercial.................................. 5,184,988 3,852,914
Overdrafts.................................. 28,121 83,226
----------- -----------
$98,185,300 $86,296,885
Net deferred loan fees, premiums and
discounts................................. 87,539 80,320
Allowance for loan losses................... (1,147,846) (1,122,155)
----------- -----------
$97,124,993 $85,255,050
=========== ===========
</TABLE>
At December 31, 1999, approximately $22,764,000 or 32.0% of the real estate
loans had fixed rates of interest and $48,430,000 or 68.0% had adjustable rates
of interest.
F-13
<PAGE> 65
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. LOANS RECEIVABLE (CONTINUED)
An analysis of the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance, Beginning............... $1,122,155 $1,018,818 $ 916,736
Provision charged to
operations.................. 117,999 195,600 174,292
Recoveries..................... 26,270 35,634 29,793
Loans charged off.............. (118,578) (127,897) (102,003)
---------- ---------- ----------
Balance, Ending.................. $1,147,846 $1,122,155 $1,018,818
========== ========== ==========
</TABLE>
Loans are placed on nonaccrual status when, in the judgement of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. A summary of nonaccrual loans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
------- --------
<S> <C> <C>
Real estate loans................................. $ -- $232,288
Consumer loans.................................... 22,157 42,293
Commercial loans.................................. -- --
------- --------
$22,157 $274,581
======= ========
</TABLE>
The contractual amount of interest that would have been recorded on
nonaccrual loans during 1999 and 1998 was $29,292 and $16,594, respectively. The
amount of interest income that was recorded on nonaccrual loans during 1999 and
1998 was $23,025 and $14,987, respectively.
The Bank is not committed to lend additional funds to debtors whose loans
are nonperforming or on nonaccrual status.
NOTE 5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
financial statements. The unpaid principal balances of mortgage loans serviced
for others was $6,189,932 and $7,655,856 at December 31, 1999 and 1998,
respectively.
Custodial balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were $143,486 and $113,674 at
December 31, 1999 and 1998, respectively.
Mortgage servicing rights of $12,253 were capitalized in 1998. The Bank did
not capitalize any mortgage servicing rights in 1999. An analysis of the
predominant risk characteristics indicates that there is not more that a normal
amount of prepayment risk and thus no write down is necessary. Amortization of
mortgage servicing rights was $2,258 and $2,439 in 1999 and 1998, respectively.
Mortgage servicing rights at the end of the years December 31, 1999 and 1998
were $36,370 and $38,472, respectively.
F-14
<PAGE> 66
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land and land improvements.............................. $ 981,150 $ 981,150
Banking house -- main................................... 1,282,560 1,281,085
Banking house -- Valley Road branch..................... 521,431 521,431
Banking house -- Hedgesville branch..................... 765,137 738,462
Furniture, fixtures and equipment....................... 1,680,757 1,637,706
---------- ----------
$5,231,035 $5,159,834
Less accumulated depreciation......................... 1,925,365 1,744,382
---------- ----------
$3,305,670 $3,415,452
Construction in progress -- addition.................... 55,254 59,544
---------- ----------
$3,360,924 $3,474,996
========== ==========
</TABLE>
Depreciation and amortization expense amounted to $256,642, $219,325, and
$219,872 in 1999, 1998 and 1997, respectively.
NOTE 7. OPERATING LEASES
The Bank has two lease agreements, one for a lot to be utilized for
additional parking and the other for a postage meter and mailing system.
The lease on the lot has a term of one year, expiring March 1, 2000 with an
annual payment of $2,500. The lease provides for automatic renewals for
successive one-year terms at the same payment. The lease on the postage meter
and mailing system is for a 57 month period expiring in January 2000, requiring
monthly payments of $771. Both leases are classified as operating leases.
Lease expense under operating leases for the periods ending December 31,
1999, 1998 and 1997 amounted to $11,752, $11,752, and $11,964, respectively.
NOTE 8. PENSION PLAN
The Bank is a member of The West Virginia Bankers Association Retirement
Plan, a multi-employer, defined benefit pension plan. All employees participate
in the plan after completing one year of service and attaining the age of 21.
The benefits are based on years of service and the highest average earnings
during any five consecutive calendar years. Plan assets are invested primarily
in corporate bonds, common stocks and U.S. Government and Agency Securities.
F-15
<PAGE> 67
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. PENSION PLAN (CONTINUED)
The following table sets forth information about the Bank's plan as of
October 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year... $2,451,242 $2,008,099 $1,736,731
Service cost.............................. 116,483 100,431 74,803
Interest cost............................. 167,701 156,741 132,532
Accrual gain (loss)....................... (5,239) 200,476 134,141
Change in discount rate................... (350,612) 89,231 28,576
Benefits paid............................. (114,357) (103,736) (98,684)
---------- ---------- ----------
Benefit obligation at end of year......... $2,265,218 $2,451,242 $2,008,099
---------- ---------- ----------
Change in plan assets:
Fair value of plan assets at beginning of
year................................... $2,008,519 $1,936,710 $1,717,386
Actual return on plan assets.............. 98,484 113,192 318,008
Employer contribution..................... 120,095 62,353 --
Benefits paid............................. (114,357) (103,736) (98,684)
---------- ---------- ----------
Fair value of plan assets at end of
year................................... $2,112,741 $2,008,519 $1,936,710
---------- ---------- ----------
Funded status............................... $ (152,477) $ (442,723) $ (71,389)
Unrecognized net actuarial (gain) loss...... (155,193) 131,366 (205,777)
Unrecognized prior service cost............. 76,376 112,980 107,943
Unrecognized net transition (asset)......... (36,081) (45,651) (55,221)
---------- ---------- ----------
Prepaid (accrued) benefit cost......... $ (267,375) $ (244,028) $ (224,444)
========== ========== ==========
Weighted average assumptions as of October
31:
Discount rate.......................... 8.0% 7.0% 7.25%
Expected return on plan assets......... 8.5% 8.5% 8.5%
Rate of compensation increase.......... 5.0% 5.0% 5.0%
Components of net periodic cost:
Service cost.............................. $ 116,483 $ 100,431 $ 74,803
Interest cost............................. 167,701 156,741 132,532
Expected return on plan assets............ (167,776) (171,093) (142,075)
Net amortization.......................... 11,446 11,446 11,446
---------- ---------- ----------
Net Periodic Plan Cost................. $ 127,854 $ 97,525 $ 76,706
========== ========== ==========
</TABLE>
NOTE 9. 401(k) PROFIT SHARING PLAN
All employees are eligible to participate in the Citizens National Bank of
Berkeley Springs 401(k) Profit Sharing Plan after completing one year of
service. Employees may defer up to 15% of their salary in 1999 and 1998, and 10%
of their salary in 1997. The Bank may, at the discretion of the Board of
Directors, match all or part of the employee deferrals. For 1999, 1998 and 1997,
the Bank matched 50% of employee deferrals up to 5% of salary. The percentage of
match varies based on the Bank's profit level.
The Bank's contribution charged to income during 1999, 1998 and 1997 was
$19,800, $15,534, and $22,400, respectively.
F-16
<PAGE> 68
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. DEFERRED COMPENSATION PLAN
The Bank has a plan pursuant to which a director may elect to waive receipt
of all or a portion of his fees for Board of Directors' meetings or committee
meetings in exchange for a retirement benefit to be received during a ten-year
period after attaining a certain age. The Bank has acquired life insurance on
the lives of participating directors to fund its obligation under the plan. The
cash surrender value of these life insurance policies has been recorded as an
asset. The present value of payments to be paid to directors or their
beneficiaries for services rendered to date has been recorded as a liability.
The expense for these benefits was $33,727, $26,464, and $40,126, for 1999,
1998, and 1997, respectively.
NOTE 11. TIME DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- -----------
<S> <C> <C>
2000.............................................. $12,505,334 $43,497,355
2001.............................................. 4,482,438 18,895,857
2002.............................................. 954,229 5,613,530
2003.............................................. 100,000 1,025,593
2004.............................................. -- 434,943
----------- -----------
$18,042,001 $69,467,278
=========== ===========
</TABLE>
NOTE 12. SHAREHOLDERS' EQUITY
At a special meeting of the shareholders of the Bank on January 22, 1998,
the authorized shares of the Bank were increased from 125,000 shares to 600,000
shares. The increase in authorized shares was necessary to complete a proposed
stock dividend. The authorized but unissued shares may only be issued for the
purpose of declaring stock dividends to the Bank's shareholders.
On January 22, 1998, the Board of Directors approved a stock split effected
in the form of a 100% stock dividend to shareholders of record on January 22,
1998. On March 1, 1998, the Bank distributed 114,512 shares of common stock to
shareholders in connection with the stock split effected in the form of a 100%
stock dividend. As a result of the stock dividend, common stock was increased by
$1,145,120 and retained income was decreased by $1,145,120.
All references in the accompanying consolidated financial statements and
notes to per-share amounts have been restated to reflect the above stock split.
Earnings and dividends per share has been computed based on 229,024 weighted
average number of shares outstanding in 1999, 1998 and 1997.
F-17
<PAGE> 69
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. INCOME TAXES
Income taxes reflected in the statements of income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal:
Current........................................ $526,454 $573,908 $623,010
Deferred....................................... 30,090 (26,467) (52,827)
State:
Current........................................ 60,896 78,884 82,254
Deferred....................................... 3,378 (8,076) (16,472)
-------- -------- --------
Provision for Income Taxes.................. $620,818 $618,249 $635,965
======== ======== ========
</TABLE>
Deferred income taxes reflect the impact of "temporary differences" between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations.
The following is a reconciliation of the statutory federal income tax rate
applied to pre-tax accounting income, with the income tax provisions in the
statements of income.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income tax expense at the statutory rate (34%)..... $625,956 $652,624 $664,025
Increases (decreases) resulting from:
Nontaxable interest income, net of
non-deductible interest expense............. (66,084) (90,371) (96,960)
State income taxes, net of federal income tax
benefit..................................... 64,274 70,808 65,782
Other......................................... (3,328) (14,812) 3,118
-------- -------- --------
Provision for Income Taxes.................. $620,818 $618,249 $635,965
======== ======== ========
</TABLE>
Federal and state income taxes receivable included in the balance sheet as
other assets were $83,543 and $29,800 at December 31, 1999 and 1998,
respectively.
F-18
<PAGE> 70
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. INCOME TAXES (CONTINUED)
The components of deferred taxes included in the balance sheet as of
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Deferred tax assets:
Provision for loan losses.............................. $ 348,863 $ 339,614
Deferred compensation plan............................. 190,043 182,758
Postretirement benefits................................ 33,069 24,701
Defined benefit plan................................... 96,255 87,850
Net unrealized loss on securities available for sale... 546,531 --
---------- ---------
$1,214,761 $ 634,923
---------- ---------
Deferred tax liabilities:
Deferred compensation plan............................. $ (134,147) $(120,946)
Mortgage servicing rights.............................. (13,201) (14,010)
Net unrealized gain on securities available for sale... -- (85,816)
Depreciation........................................... (217,692) (163,310)
---------- ---------
$ (365,040) $(384,082)
---------- ---------
Net Deferred Tax Asset................................... $ 849,721 $ 250,841
========== =========
</TABLE>
Generally accepted accounting principles require a valuation allowance
against deferred tax assets if, based on the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized. The Bank believes that the deferred tax assets will be realized and
therefore no valuation allowance was established.
NOTE 14. OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Stationery, supplies and printing.............. $ 117,146 $117,879 $ 75,315
Data processing................................ 131,213 110,679 82,189
Director's fees................................ 137,002 119,275 116,960
Postage........................................ 77,043 62,722 47,028
Telephone...................................... 57,823 45,476 35,284
Professional fees.............................. 123,981 81,422 82,547
ATM fees....................................... 84,676 96,133 39,779
Advertising and public relations............... 96,133 75,476 77,513
Other.......................................... 416,209 240,019 267,019
---------- -------- --------
Total Other Operating Expenses............ $1,241,226 $949,081 $823,634
========== ======== ========
</TABLE>
NOTE 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing need of its customers. These
financial instruments include commitments to extend credit, and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk which are not reflected in
F-19
<PAGE> 71
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
the statements of financial condition. The contractual amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend funds as long as there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. Commercial
line of credit arrangements usually require payment of a fee.
The Bank evaluates each customer's creditworthiness and related collateral
on a case-by-case basis. The amount of collateral obtained if deemed necessary
by the Bank upon extension of credit is based on management's credit evaluation
of the customer. Collateral held varies but may include accounts receivable,
inventory, real estate, equipment, and income-producing commercial properties.
Standby letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are issued to support public and private borrowing arrangements, bond
financing, and similar transactions. The credit risk involved in issuing a
letter of credit is essentially the same as that involved in extending loan
facilities to customers.
A summary of off-balance sheet instruments as of December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Commitments:
To originate:
Fixed rate loans................................. $ 547,205 $ 168,000
Adjustable rate loans............................ 197,250 384,800
---------- ----------
$ 744,455 $ 552,800
Letters of credit....................................... 874,299 113,733
Undisbursed portion of construction loans............... 967,784 1,053,820
Available credit granted on commercial loans............ 2,390,204 1,986,879
Available credit on personal lines of credit............ 505,997 379,623
Undisbursed portion of home equity loans................ 1,013,380 760,643
---------- ----------
$6,496,119 $4,847,498
========== ==========
</TABLE>
F-20
<PAGE> 72
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Bank's primary business is mortgage loans, which consists of
originating residential, construction, multi-family, and commercial real estate
loans and consumer and commercial loans. Citizen's National Bank's primary
lending area is Morgan County, West Virginia. Loans are occasionally made in
surrounding counties in West Virginia, Maryland and Virginia and Pennsylvania.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Bank upon
the extension of credit is based on management's credit evaluation of the
customer. Collateral held varies but generally includes vehicles, equipment and
real estate.
NOTE 17. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets (as defined), and of Tier I capital (as defined)
to average assets (as defined). Management believes, as of December 31, 1999,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1999 and 1998, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval.
F-21
<PAGE> 73
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17. REGULATORY MATTERS (CONTINUED)
The Bank's actual capital amounts and ratios are also presented in the
table. There were no deductions from capital for interest-rate risk in 1999 and
1998.
<TABLE>
<CAPTION>
RATIO
----------------------------------------------
ACTUAL TO BE WELL
AMOUNT CAPITALIZED UNDER
IN FOR CAPITAL PROMPT CORRECTIVE
THOUSANDS ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------- ------ ----------------- -----------------
<S> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted
Assets)................ $14,176 17.13% 8.0% 5.0%
Tier I Capital
(to Risk Weighted
Assets)................ $13,140 15.87% 4.0% 6.0%
Tier I Capital
(to Average Assets).... $13,140 9.52% 4.0% 5.0%
As of December 31, 1998:
Total Capital
(to Risk Weighted
Assets)................ $13,302 18.11% 8.0% 10.0%
Tier I Capital
(to Risk Weighted
Assets)................ $12,382 16.86% 4.0% 6.0%
Tier I Capital
(to Average Assets).... $12,382 9.73% 4.0% 5.0%
</TABLE>
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in many of the estimates.
F-22
<PAGE> 74
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of significant financial instruments:
FINANCIAL ASSETS:
The carrying amounts of cash, due from banks and federal funds sold are
considered to approximate fair value. The fair value of investment securities,
including available for sale, are generally based on quoted market prices. The
fair value of loans is estimated using a combination of techniques, including
discounting estimated future cash flows and quoted market prices of similar
instruments where available.
FINANCIAL LIABILITIES:
The carrying amounts of deposit liabilities payable on demand are
considered to approximate fair value. For fixed maturity (time) deposits, fair
value is estimated by discounting estimated future cash flows using currently
offered rates for deposits of similar remaining maturities.
OFF-BALANCE-SHEET-FINANCIAL INSTRUMENTS:
The fair value of commitments to extend credit and standby letters of
credit is estimated using the fees currently charged to enter into similar
agreements.
The estimated fair value of financial instruments at December 31, is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash, due from banks and
federal funds sold...... $ 4,035,293 $ 4,035,293 $ 2,862,300 $ 2,862,300
Securities available for
sale.................... 31,186,678 31,186,678 33,593,959 33,593,959
Loans...................... 97,190,293 97,060,268 85,255,050 85,012,608
Accrued interest
receivable.............. 871,671 871,671 846,744 846,744
Mortgage servicing
rights.................. 42,260 42,260 38,472 38,472
Financial Liabilities:
Demand deposits............ $55,042,670 $55,042,670 $54,197,424 $54,197,424
Time deposits.............. 69,467,278 70,575,049 61,122,797 62,127,845
Accrued interest payable... 816,619 816,619 731,879 731,879
Off Balance -- Sheet
Financial Instruments:
Letters of credit.......... $ -- $ 3,055 $ -- $ 600
</TABLE>
F-23
<PAGE> 75
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank had granted loans to officers,
directors, and their affiliates amounting to $1,463,356 and $1,488,737 at
December 31, 1999 and 1998, respectively. During 1999, $1,016,225 of new loans
were made, or became reportable, and repayments and other decreases totaled
$1,041,606. Deposits from related parties held by the Bank at December 31, 1999
and 1998 amounted to $2,257,550 and $1,913,513, respectively.
NOTE 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1999
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income.............................. $2,379 $2,462 $2,529 $2,575
Interest expense............................. 1,116 1,135 1,155 1,191
------ ------ ------ ------
Net interest income.......................... $1,263 $1,327 $1,374 $1,384
Provision for loan losses.................... 42 16 30 30
Noninterest income........................... 138 119 157 151
Noninterest expense.......................... 893 1,015 932 1,114
------ ------ ------ ------
Income before income taxes................... 466 415 569 391
Provision for income taxes................... 153 138 197 133
------ ------ ------ ------
Net income................................... $ 313 $ 277 $ 372 $ 258
====== ====== ====== ======
Earnings per share........................... $ 1.37 $ 1.21 $ 1.62 $ 1.13
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income.............................. $2,234 $2,326 $2,333 $2,350
Interest expense............................. 1,001 1,032 1,043 1,095
------ ------ ------ ------
Net interest income.......................... $1,233 $1,294 $1,290 $1,255
Provision for loan losses.................... 30 55 51 60
Noninterest income........................... 90 105 92 128
Noninterest expense.......................... 758 853 815 946
------ ------ ------ ------
Income before income taxes................... 535 491 516 377
Provision for income taxes................... 175 161 172 110
------ ------ ------ ------
Net income................................... $ 360 $ 330 $ 344 $ 267
====== ====== ====== ======
Earnings per share........................... $ 1.57 $ 1.44 $ 1.50 $ 1.17
====== ====== ====== ======
</TABLE>
F-24
<PAGE> 76
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition.............. F-26
Consolidated Statements of Income........................... F-27
Consolidated Statements of Changes in Shareholders'
Equity.................................................... F-28
Statements of Cash Flows.................................... F-29
Notes to Interim Financial Statements....................... F-30
</TABLE>
F-25
<PAGE> 77
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks............................. $ 2,111,513 $ 4,035,293
Securities available for sale (at approximate market
value)............................................ 32,946,728 31,186,678
Loans receivable, net............................... 99,089,261 97,124,993
Loans held for sale................................. -- 65,300
Accrued interest receivable......................... 1,083,927 871,671
Foreclosed real estate (held for sale), net......... 66,938 66,938
Premises and equipment, net......................... 3,266,085 3,360,924
Deferred income taxes............................... 845,464 849,721
Cash surrender value of life insurance.............. 694,656 670,734
Intangible assets................................... 120,366 108,267
Other assets........................................ 204,796 307,220
------------ ------------
TOTAL ASSETS................................... $140,429,734 $138,647,739
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand....................................... $ 15,621,726 $ 15,653,259
Interest-bearing demand...................... 22,075,498 22,942,904
Savings...................................... 16,796,644 16,446,507
Time, $100,000 and over...................... 16,096,790 18,042,001
Other time................................... 53,956,185 51,425,277
------------ ------------
$124,546,843 $124,509,948
Accrued interest payable.......................... 845,999 816,619
Accrued expenses and other liabilities............ 1,206,065 1,072,451
Excess outstanding checks over bank balance....... 1,258,048 --
------------ ------------
TOTAL LIABILITIES.............................. $127,856,955 $126,399,018
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $10 par value; 600,000 shares
authorized; 229,024 shares outstanding......... $ 2,290,240 $ 2,290,240
Capital surplus................................... 2,031,400 2,031,400
Retained earnings................................. 9,217,484 8,818,791
Accumulated other comprehensive income............ (966,345) (891,710)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY..................... $ 12,572,779 $ 12,248,721
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..... $140,429,734 $138,647,739
============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-26
<PAGE> 78
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---------- ----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans...................... $2,103,410 $1,833,980
Interest and dividends on securities United
States Treasury securities................... 6,274 21,863
U.S. Government agencies and
corporations............................ 490,760 438,129
State and political subdivisions........... 26,770 51,764
Other...................................... -- 427
Interest on federal funds sold.................. 3,774 32,315
---------- ----------
$2,630,988 $2,378,478
---------- ----------
INTEREST EXPENSE
Interest on interest bearing demand, savings and
time deposits................................ $1,235,840 $1,115,812
Interest on federal funds purchased............. 2,423 --
---------- ----------
$1,238,263 $1,115,812
---------- ----------
NET INTEREST INCOME.......................... $1,392,725 $1,262,666
PROVISION FOR LOAN LOSSES......................... 30,000 42,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES............................ $1,362,725 $1,220,666
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts............. $ 71,095 $ 52,140
Other service charges, commissions and fees..... 52,926 40,884
Other operating income.......................... 45,551 45,206
Gain on demutualization of insurance company.... 195,889 --
---------- ----------
$ 365,461 $ 138,230
---------- ----------
NONINTEREST EXPENSES
Salaries........................................ $ 432,404 $ 360,730
Employee benefits............................... 155,051 124,655
Occupancy of premises........................... 81,523 49,734
Furniture and equipment expense................. 67,837 65,879
Other operating expenses........................ 387,300 292,142
---------- ----------
$1,124,115 $ 893,140
---------- ----------
INCOME BEFORE INCOME TAXES................... $ 604,071 $ 465,756
PROVISION FOR INCOME TAXES........................ 205,378 152,704
---------- ----------
NET INCOME................................... $ 398,693 $ 313,052
========== ==========
EARNINGS PER SHARE................................ $ 1.74 $ 1.37
========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-27
<PAGE> 79
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998.............. $2,290,240 $2,031,400 $8,056,610 $ 140,015 $12,518,265
Comprehensive income:
Net income for 1999................... -- -- 1,220,229 -- --
Change in unrealized gains (losses) on
securities available for sale (net
of tax of $632,348)................. -- -- -- (1,031,725) --
Total Comprehensive Income.............. -- -- -- -- 188,504
Cash dividends ($2.00 per share)........ -- -- (458,048) -- (458,048)
---------- ---------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1999.............. $2,290,240 $2,031,400 $8,818,791 $ (891,710) $12,248,721
Comprehensive income:
Net income for three months ended
March 31, 2000...................... -- -- 398,693 -- --
Change in unrealized gains (losses) on
securities available for sale (net
of tax of $45,743).................. -- -- -- (74,635) --
Total Comprehensive Income.............. -- -- -- -- 324,058
---------- ---------- ---------- ----------- -----------
BALANCE, MARCH 31, 2000................. $2,290,240 $2,031,400 $9,217,484 $ (966,345) $12,572,779
========== ========== ========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-28
<PAGE> 80
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 398,693 $ 313,052
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 63,802 62,238
Provision for loan losses........................ 30,000 42,000
Deferred income taxes............................ 50,000 --
(Gain) on demutualization of insurance company... (195,889) --
Loss on abandonment of fixed assets.............. 55,254 --
Net decrease in loans held for sale.............. 65,300 --
(Increase) in accrued interest receivable........ (212,256) (133,283)
Decrease in other assets......................... 71,705 116,648
Increase (decrease) in accrued interest
payable........................................ 29,380 (18,496)
Increase in accrued expenses and other
liabilities.................................... 133,614 118,359
Amortization of deferred loan (fees) cost........ 10,459 --
(Accretion) of premium and discount on
investments.................................... (548) (1,242)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES...... $ 499,514 $ 499,276
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans.......................... $(2,004,727) $ (476,906)
Proceeds from maturities of securities........... 350,000 4,445,000
Purchases of securities.......................... (2,033,992) (5,994,805)
Purchases of premises and equipment.............. (29,518) (38,995)
Net decrease in federal funds sold............... -- 1,036,356
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES........ $(3,718,237) $(1,029,350)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in demand and savings deposits.... $ (548,802) $(1,869,783)
Net increase in time deposits.................... 585,697 3,034,745
Increase in outstanding checks over bank
balance........................................ 1,258,048 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... $ 1,294,943 $ 1,164,962
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS...... $(1,923,780) $ 634,888
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........ 4,035,293 2,862,300
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............. $ 2,111,513 $ 3,497,188
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest......................................... $ 1,206,461 $ 1,134,308
Income taxes..................................... $ -- $ --
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-29
<PAGE> 81
CITIZENS NATIONAL BANK AND SUBSIDIARY
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
In the opinion of Citizens National Bank of Berkeley Springs (the Bank),
the accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary for a fair
presentation of the Bank's financial condition as of March 31, 2000 and the
results of operations for the three months ended March 31, 2000 and 1999 and
cash flows for the three months ended March 31, 2000 and 1999.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-QSB. These financial
statements should be read in conjunction with the consolidated financial
statements and the notes included in the Bank's Annual Report for the year ended
December 31, 1999.
NOTE 2. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of debt securities at March
31, 2000 and December 31, 1999 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 available for sale are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities
After 1 but within 5
years.................... $ 400,633 $ -- $ 2,883 $ 397,750
----------- ------ ---------- -----------
U.S. Government agencies and
corporations
Within 1 year.............. $ -- $ -- $ -- $ --
After 1 but within 5
years.................... 5,247,679 -- 237,912 5,009,767
After 5 but within 10
years.................... 26,517,706 -- 1,311,325 25,206,381
----------- ------ ---------- -----------
$31,765,385 $ -- $1,549,237 $30,216,148
----------- ------ ---------- -----------
</TABLE>
F-30
<PAGE> 82
CITIZENS NATIONAL BANK AND SUBSIDIARY
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. SECURITIES AVAILABLE FOR SALE (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
States and political
subdivision
Within 1 year.............. $ 520,313 $3,547 $ -- $ 523,860
After 1 but within 5
years.................... 1,030,669 1,020 3,442 1,028,247
After 5 but within 10
years.................... 362,820 -- 8,305 354,515
After 10 years............. 100,000 -- 2,752 97,248
----------- ------ ---------- -----------
$ 2,013,802 $4,567 $ 14,499 $ 2,003,870
----------- ------ ---------- -----------
Equity securities............. $ 195,889 $3,421 $ -- $ 199,310
Federal Reserve Bank stock.... 129,650 -- -- 129,650
----------- ------ ---------- -----------
$ 325,539 $3,421 $ -- $ 328,960
----------- ------ ---------- -----------
Total securities available
for sale................. $34,505,359 $7,988 $1,566,619 $32,946,728
=========== ====== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities
After 1 but within 5
years.................... $ 400,699 $ 51 $ -- $ 400,750
----------- ------ ---------- -----------
U.S. Government agencies and
corporations
Within 1 year.............. $ 250,000 $ -- $ 1,094 $ 248,906
After 1 but within 5
years.................... 4,499,367 -- 181,006 4,318,361
After 5 but within 10
years.................... 25,230,736 -- 1,250,698 23,980,038
----------- ------ ---------- -----------
$29,980,103 $ -- $1,432,798 $28,547,305
----------- ------ ---------- -----------
States and political
subdivision
Within 1 year.............. $ 620,637 $6,466 $ -- $ 627,103
After 1 but within 5
years.................... 1,030,759 2,742 2,237 1,031,264
After 5 but within 10
years.................... 363,085 -- 8,694 354,391
After 10 years............. 100,000 -- 3,785 96,215
----------- ------ ---------- -----------
$ 2,114,481 $9,208 $ 14,716 $ 2,108,973
----------- ------ ---------- -----------
Federal Reserve Bank stock.... $ 129,650 $ -- $ -- $ 129,650
----------- ------ ---------- -----------
Total securities available for
sale.......................... $32,624,933 $9,259 $1,447,514 $31,186,678
=========== ====== ========== ===========
</TABLE>
The carrying value of securities pledged to secure public deposits and for
other purposes as required or permitted by law totaled $9,467,229 at March 31,
2000 and $9,467,490 at December 31, 1999.
F-31
<PAGE> 83
CITIZENS NATIONAL BANK AND SUBSIDIARY
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. SECURITIES AVAILABLE FOR SALE (CONTINUED)
Proceeds from sales of securities available for sale (excluding maturities)
for the year ended December 31, 1999 were $7,290,995. Gross gains (losses) of
$15,829 and $(20,091) for the year ended December 31, 1999 were realized on the
respective sales.
NOTE 3. LOAN RECEIVABLE
Major classifications of loans at March 31, 2000 and December 31, 1999,
were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Real estate.................................. $ 62,220,886 $61,624,632
Commercial real estate....................... 9,434,085 9,568,985
Consumer..................................... 22,505,092 21,778,574
Commercial................................... 5,988,763 5,184,988
Overdrafts................................... 28,917 28,121
------------ -----------
$100,177,743 $98,185,300
Net deferred loan fees, premiums and
discounts.................................. 87,839 87,539
Allowance for loan losses.................... (1,176,321) (1,147,846)
------------ -----------
$ 99,089,261 $97,124,993
============ ===========
</TABLE>
An analysis of the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------- DECEMBER 31,
2000 1999 1999
---------- ---------- ------------
<S> <C> <C> <C>
Balance, Beginning.................. $1,147,846 $1,122,155 $1,122,155
Provision charged to operations... 30,000 42,000 117,999
Recoveries........................ 7,575 7,281 26,270
Loans charged off................. (9,100) (28,454) (118,578)
---------- ---------- ----------
Balance, Ending..................... $1,176,321 $1,142,982 $1,147,846
========== ========== ==========
</TABLE>
Loans are placed in nonaccrual status when, in the judgement of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. A summary of nonaccrual loans is as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
2000 1999 1999
------- -------- ------------
<S> <C> <C> <C>
Real estate loans...................... $ -- $200,322 $ --
Consumer loans......................... 35,620 20,050 22,157
------- -------- -------
$35,620 $220,372 $22,157
======= ======== =======
</TABLE>
F-32
<PAGE> 84
CITIZENS NATIONAL BANK AND SUBSIDIARY
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. SHAREHOLDERS' EQUITY
Earnings and dividends per share have been computed based on 229,024
weighted average number of shares outstanding in 2000 and 1999.
NOTE 5. FORMATION OF CNB FINANCIAL SERVICES, INC.
In March 2000, the Bank's Board of Directors approved the formation of CNB
Financial Services, Inc., a financial services holding company. A special
meeting of the Bank's shareholders will be held in June 2000 for the
shareholders to vote on an Agreement and Plan of Merger between the Bank and CNB
Financial Services, Inc., whereby the Bank will become a wholly-owned subsidiary
of CNB Financial Services, Inc. and the shareholders of the Bank will become
shareholders of CNB Financial Services, Inc. If the reorganization is approved,
each bank shareholder will receive two shares of CNB Financial Services, Inc.
stock for each share of the Bank's common stock.
F-33
<PAGE> 85
APPENDIX I
AGREEMENT
AND
PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Agreement"), is made and entered into
as of the 5th day of April, 2000, by and between CNB FINANCIAL SERVICES, INC., a
West Virginia corporation ("CNB Financial"), and CITIZENS NATIONAL BANK OF
BERKELEY SPRINGS, a national banking association ("Bank"), to be joined in by
CNB INTERIM BANK, N.A., a national banking association.
W I T N E S S E T H:
RECITALS
WHEREAS, the parties hereto have agreed that subject to the necessary
approval by the shareholders of the Bank, and subject to obtaining all necessary
approvals as hereinafter provided, CNB Financial shall acquire all of the
outstanding stock of the Bank pursuant to a plan of reorganization which
satisfies the requirements of Internal Revenue Code Section 368(a)(1)(A) and
Section 368(a)(2)(E); and
WHEREAS, it has been determined that the "Interim Bank Method" will be used
to implement such plan of reorganization; and
WHEREAS, in furtherance thereof, CNB Financial has been formed as a West
Virginia corporation; and
WHEREAS, CNB Financial will cause a new national banking association to be
chartered under the laws of the United States under the name CNB Interim Bank,
N.A. ("Interim Bank"); and
WHEREAS, the Interim Bank will merge with and into the Bank pursuant to
this Agreement; and
WHEREAS, the Board of Directors of the Bank, by a majority vote of all of
the members thereof, has approved this Agreement and has authorized the
execution hereof in counterparts; and
WHEREAS, the Board of Directors of CNB Financial, by a majority vote of all
of the members thereof, has approved this Agreement and has authorized the
execution hereof in counterparts.
AGREEMENT
Now, therefore, for and in consideration of the premises and the mutual
agreements hereinafter set forth, and in accordance with the provisions of
applicable law, the parties agree as follows:
I-1
<PAGE> 86
SECTION 1
THE MERGER
1.1 THE MERGER. On the Effective Date (as defined in Section 7.3), Interim
Bank shall merge with and into the Bank (the "Merger"), under the charter of the
Bank. The Bank shall be the surviving bank (hereinafter sometimes called the
"Surviving Bank").
1.2 EFFECTS OF MERGER. On the Effective Date, the corporate organization
and separate existence of Interim Bank shall cease and the Bank as the Surviving
Bank shall succeed to all the rights, assets, liabilities and obligations of
Interim Bank in accordance with the West Virginia Corporation Act, except where
the laws of the United States apply. The Bank as the Surviving Bank shall
continue to be governed by the laws of the State of West Virginia, except where
the laws of the United States apply.
SECTION 2
ARTICLES OF ASSOCIATION; BYLAWS; BOARD OF DIRECTORS AND OFFICERS
2.1 ARTICLES OF ASSOCIATION. From and after the Effective Date, the
Articles of Association of the Bank, as the same may be amended from time to
time as provided by law, shall be the Articles of Association of the Surviving
Bank.
2.2 BYLAWS. The Bylaws of the Bank as in effect on the Effective Date shall
continue as the Bylaws of the Surviving Bank until the same shall thereafter be
altered, amended or repealed in accordance with the law, its Articles of
Association, or said Bylaws.
2.3 DIRECTORS AND OFFICERS. The directors and officers of the Bank on the
Effective Date shall continue as the directors and officers of the Surviving
Bank and shall hold office as prescribed in the Bylaws of the Surviving Bank and
applicable law until their successors shall have been elected and shall qualify.
SECTION 3
CONVERSION OF SHARES
3.1 CONVERSION OF SHARES. On the Effective Date:
(a) Each share of common stock of the Bank ("Bank Common Stock") then
issued and outstanding, excluding any shares as to which dissenter's rights
are exercised pursuant to the requirements of 12 U.S.C. Section 215a, which
shares shall be canceled, shall automatically be converted into and be
exchanged for two (2) shares of common stock of CNB Financial.
(b) From and after the Effective Date, the holders of the certificates
representing Bank Common Stock shall cease to have any rights with respect
to such shares (except such rights as they may have as dissenting
shareholders in accordance with 12 U.S.C. Section 215a), and their sole
right shall be to receive common stock of CNB Financial, as herein
provided.
I-2
<PAGE> 87
3.2 CLOSING OF STOCK TRANSFER BOOKS. On the Effective Date, the stock
transfer books of the Bank shall be deemed closed, and no shares of Bank Common
Stock outstanding immediately prior to the Effective Date shall thereafter be
transferred.
3.3 EXCHANGE OF CERTIFICATES. As soon as practicable after the Effective
Date, any certificates or the right to receive certificates representing the
outstanding shares of the Bank Common Stock shall be surrendered to CNB
Financial or any agent designated by it and, upon such surrender, CNB Financial
shall issue and deliver in substitution therefor, certificates representing the
number of shares of common stock of CNB Financial into which such surrendered
shares have been converted as hereinabove provided. Certificates representing
shares of Bank Common Stock or the right to receive such certificates which are
not surrendered shall be deemed for all purposes to evidence the ownership of
the number of shares of common stock of CNB Financial into which said shares of
Bank shall have been converted as hereinbefore set forth; provided, however,
that management of CNB Financial may elect not to distribute to the holder of an
unsurrendered certificate for Bank Common Stock or right to receive such
certificate of dividends declared with respect to common stock of CNB Financial
until such owner shall surrender such certificate or right to receive such
certificate, at which time the holder thereof shall be paid the amount of any
dividends previously declared with respect to the common stock without interest.
SECTION 4
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BANK
The Bank represents and warrants to and covenants with CNB Financial and
Interim Bank that:
4.1 ASSOCIATION ORGANIZATION AND QUALIFICATION OF THE BANK. The Bank is
duly organized, validly existing and in good standing as a national banking
association under the laws of the United States and has the association power to
own all of its properties and assets and to carry on its business as it is now
being conducted.
4.2 AUTHORIZATION OF AGREEMENT. The Board of Directors of the Bank has
authorized the execution of this Agreement as set forth herein, and subject to
the approval of this Agreement by the shareholders of the Bank as provided in 12
U.S.C. Section 215a, the Bank has the association power and is duly authorized
to merge with Interim Bank pursuant to this Agreement.
4.3 CAPITALIZATION. The authorized capital stock of the Bank consists of
600,000 shares of common stock, par value of $10.00 per share, of which 229,024
shares are issued and outstanding and are fully paid and nonassessable.
4.4 PROXY STATEMENT. The information pertaining to the Bank which has been
or will be furnished by or on behalf of the Bank or its management for inclusion
in the proxy statement referred to in Section 9 or any amendment or supplement
thereto mailed to the holders of the common stock of the Bank will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they are made, not
misleading.
I-3
<PAGE> 88
4.5 ADDITIONAL COVENANTS. The Bank covenants and agrees:
(a) That it will promptly advise CNB Financial in writing of the name
and address of, and number of shares of the Bank held by, each shareholder
who elects to exercise his right to dissent to the Merger pursuant to 12
U.S.C. Section 215a; and
(b) Subsequent to the date of this Agreement and prior to the
Effective Date that it will operate its business only in the normal course
and in a normal manner consistent with past practice.
SECTION 5
REPRESENTATIONS, WARRANTIES AND COVENANTS OF CNB FINANCIAL
CNB Financial represents and warrants to and covenants with the Bank that:
5.1 CORPORATE ORGANIZATION OF CNB FINANCIAL. CNB Financial is a corporation
duly organized, validly existing and in good standing under the laws of the
State of West Virginia.
5.2 CORPORATE POWER AND ACTION. CNB Financial has the corporate power to
execute and deliver this Agreement and has taken all action required by law, its
Articles of Incorporation, its Bylaws or otherwise to authorize such execution
and delivery, the Merger and the consummation of the transactions contemplated
hereby, and upon its execution and delivery, this Agreement is a valid and
binding agreement of CNB Financial in accordance with its terms. No action of
CNB Financial shareholders is or will be required to approve this Agreement or
the Merger.
5.3 APPLICATION FOR INTERIM BANK. Promptly following the execution of this
Agreement, CNB Financial shall cause to be filed with the Office of Comptroller
of the Currency (the "OCC") an application to organize Interim Bank as a
national banking association, in accordance with the provisions of 12 C.F.R.
5.33, with all its capital stock owned by CNB Financial. Upon the approval of
such application and the issuance of a certificate of association for Interim
Bank by the OCC, CNB Financial shall promptly cause Interim Bank to execute and
enter into a supplementary agreement in substantially the form attached as
Exhibit A to this Agreement and cause Interim Bank to take such action as it
provided in this Agreement on Interim Bank's part to be taken.
5.4 APPROVAL OF MERGER OF INTERIM BANK. Prior to the Effective Date, CNB
Financial shall cause this Agreement to be submitted to the shareholder of
Interim Bank for approval, ratification and confirmation in accordance with the
applicable law of West Virginia, except where the law of the United States
applies, and the certificate of association and bylaws of Interim Bank. CNB
Financial shall vote all of the stock of Interim Bank in favor of the approval,
ratification and confirmation of this Agreement and the Merger.
5.5 REGULATORY APPROVALS. Prior to the Effective Date, CNB Financial
separately and jointly with the Bank, shall use and cause Interim Bank to use
its best efforts in good faith to take or cause to be taken as promptly as
practicable all such steps as shall be necessary to obtain (i) the prior
approval of the OCC for the organization of the Interim Bank and for the Merger,
(ii) the prior approval of the West Virginia Board of Banking and Financial
Institutions (the "Banking Board") for CNB Financial's acquisition of the shares
of the Bank, (iii) the prior approval of the Board of Governors of the Federal
Reserve System ("FRB") under the Bank Holding Company Act of 1956, as amended,
for the formation of
I-4
<PAGE> 89
CNB Financial as a financial holding company owning 100% of the voting shares of
the Bank, and (iv) all other consents and approvals of governmental agencies as
are required by law or otherwise, and shall do any and all things deemed by CNB
Financial and the Bank to be necessary or appropriate in order to cause the
Merger to be consummated on the terms provided herein.
5.6 CAPITALIZATION. The authorized capital stock of CNB Financial consists
of 5,000,000 shares of common stock, par value of $1.00 per share, of which
12,000 shares of common stock are issued and outstanding and are fully paid and
nonassessable.
5.7 REGISTRATION. To the extent required by law, CNB Financial will cause a
Registration Statement (or other appropriate form) to be filed with and declared
effective by the Securities and Exchange Commission, appropriate agencies
regulating securities, and other governmental agencies having jurisdiction. The
information pertaining to CNB Financial and Interim Bank which will appear in
any required Registration Statement will contain no untrue statement of any
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading.
SECTION 6
NON-SURVIVAL
The representations and warranties included or provided herein shall not
survive the Effective Date.
SECTION 7
CONDITIONS PRECEDENT; CLOSING DATE AND EFFECTIVE DATE
7.1 CONDITIONS PRECEDENT. The consummation of this Agreement and the Merger
is conditioned upon the following:
(a) The shareholders of the Bank and Interim Bank shall have approved
this Agreement by vote as required by law and final approval of this
Agreement shall have taken place as provided in Section 9 hereof;
(b) The OCC shall have granted its final approval of the organization
of Interim Bank as a national banking association and the Merger pursuant
to this Agreement;
(c) The OCC shall have issued a Certificate of Association for Interim
Bank;
(d) The Banking Board shall have granted its final approval of the
acquisition of the Bank by CNB Financial pursuant to this Agreement;
(e) The FRB shall have approved the application of CNB Financial to
acquire the Bank pursuant to this Agreement;
(f) Any required Registration Statement shall have become effective
under the Securities Act of 1933, no stop order suspending the
effectiveness of such Registration Statement shall be in effect and no
proceedings for such purpose shall have been initiated or threatened by or
before the Securities and Exchange Commission, and all
I-5
<PAGE> 90
state securities and "blue sky" permits or approvals required (in the
opinion of CNB Financial) to carry out the transactions contemplated by
this Agreement shall have been received;
(g) All other consents, approvals and permissions and the satisfaction
of all the requirements prescribed by law which are necessary to the
carrying out of the transactions contemplated hereby shall have been
procured;
(h) All delay periods and all periods for review, objection or appeal
of or to any of the consents, approvals or permissions required with
respect to the consummation of the Merger and this Agreement shall have
expired;
(i) The approvals referred to in subparagraphs (b) through (e) of this
section 7.1 shall not have required the divestiture or cessation of any
significant part of the present operations conducted by CNB Financial, the
Bank, or any of their subsidiaries, and shall not have imposed any other
condition, which divestiture, cessation or condition which CNB Financial or
the Bank reasonably deems to be materially disadvantageous or burdensome;
(j) CNB Financial shall have received an opinion of its counsel,
Jackson & Kelly PLLC, that if the Merger is consummated in accordance with
the terms of this Agreement (i) the Merger will constitute a reorganization
in the meaning of Section 368(a)(1)(A) and Section 368(a)(2)(E) of the
Internal Revenue Code of 1986, as amended, (ii) the Bank, CNB Financial and
Interim Bank will each be a party to the reorganization within the meaning
of 368(b) of the Code, (iii) no gain or loss will be recognized to the Bank
as a consequence of the Merger, (iv) no gain or loss will be recognized by
any Bank shareholder as a result of the Merger except in respect of cash
received in conjunction with the perfection of dissenter's rights, (v) the
basis of CNB Financial common stock received by Bank shareholders will be
the same as the basis of their shares of Bank Common Stock exchanged, and
(vi) the holding period for any Bank shareholder of the CNB Financial
common stock received in the Merger will include the period for which the
shares of the Bank Common Stock was held, provided that the Bank Common
Stock was a capital asset in the hands of such Bank shareholder on the
Effective Date; and
(k) Unless waived by CNB Financial, the holders of not more than 5% of
the outstanding shares of the Bank Common Stock shall have elected to
exercise their statutory right to dissent from the transactions
contemplated hereby at the special meeting of Bank shareholders referred to
in Section 9 hereof.
7.2 CLOSING DATE. The closing shall be held at the Bank's offices in
Berkeley Springs, West Virginia, at such time and place as the Bank and CNB
Financial shall agree. The time and date of closing are herein called the
"Closing Date." The Closing Date shall not be earlier than the 15th day
following the date (the "Approval Date") on which the approvals referred to in
Section 5.5 shall have been received, and shall not be later that the last day
of the sixth calendar month next succeeding the Approval Date. CNB Financial
shall cause the Articles of Merger with respect to the Merger to be filed with
the OCC on the Closing Date.
7.3 EFFECTIVE DATE. The Merger shall become effective (the "Effective
Date") on the date on which the certificate of merger approving the Merger is
issued by the OCC.
I-6
<PAGE> 91
SECTION 8
TERMINATION OF AGREEMENT
8.1 GROUNDS FOR TERMINATION. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the Closing Date
either before or after the meeting of the shareholders of the Bank:
(a) By mutual consent of the Bank and CNB Financial;
(b) By CNB Financial if there has been a material misrepresentation or
breach of warranty in the representations and warranties of the Bank set
forth herein, or by the Bank if there has been a material misrepresentation
or breach of warrant in the representations and warranties of CNB Financial
or Interim Bank set forth herein; or
(c) By either the Bank or CNB Financial if the Merger shall violate
any nonappealable final order, decree or judgment of any court or
governmental body having competent jurisdiction.
8.2 EFFECT OF TERMINATION; RIGHT TO PROCEED. In the event this Agreement
shall be terminated pursuant to Section 8.1, all further obligations of CNB
Financial and the Bank under this Agreement shall terminate without further
liability of CNB Financial to the Bank or of the Bank to CNB Financial.
SECTION 9
MEETING OF SHAREHOLDERS OF THE BANK
The Bank shall take all steps necessary to call and hold a special meeting
of its shareholders, in accordance with applicable law and the Articles of
Association and Bylaws of the Bank, as soon as practicable for the purpose of
submitting this Agreement to its shareholders for their consideration and
approval and will send to its shareholders for purposes of such meeting a proxy
statement, which as to information pertaining the Bank which has been furnished
by or on behalf of the Bank or its management, will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein, in light
of the circumstances under which they are made, not misleading, and which
otherwise complies with all applicable laws, rules and regulations. Information
pertaining to CNB Financial or Interim Bank which has been or will be furnished
to the Bank by or on behalf of CNB Financial or its management for inclusion in
such proxy statement will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements contained therein, in light of the circumstances under which they
are made, not misleading.
SECTION 10
REDEMPTION OF SHARES
Subsequent to the Effective Date, CNB Financial will repurchase from each
of the initial directors of CNB Financial those shares of the common stock of
CNB Financial purchased by them, which shares represent the initial
capitalization of CNB Financial, in an amount equal to the price paid per share
plus an amount equal to the interest, if any, paid by said directors on funds
borrowed to purchase such shares.
I-7
<PAGE> 92
SECTION 11
GOVERNING LAW; SUCCESSORS AND ASSIGNS;
COUNTERPARTS; ENTIRE AGREEMENT
This Agreement (a) shall be governed by and construed under and in
accordance with the laws of the State of West Virginia, except where the laws of
the United States apply, (b) shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that this Agreement may not be assigned by any party without
the written consent of the other parties hereto, (c) may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective and binding as to CNB Financial and the Bank when one
or more counterparts shall have been signed and delivered by CNB Financial and
the Bank, and shall become effective and binding as to Interim Bank when Interim
Bank receives its Certificate of Association and its officers execute the
Supplemental Agreement, and (d) embodies the entire agreement and understanding,
and supersedes all prior agreements and understandings, between the Bank and CNB
Financial relating to the subject matter hereof.
SECTION 12
EFFECT OF CAPTIONS
The captions in this Agreement are included for convenience only and shall
not in any way affect the interpretation or construction of any of the
provisions hereof.
SECTION 13
AMENDMENTS
This Agreement may be amended by the written agreement of CNB Financial and
the Bank and without the approval of the shareholders of the Bank before or
after the meeting of Bank shareholders at any time prior to the Closing Date
with respect to any of the terms contained herein; provided, however, that after
any such shareholder approval, no amendment shall be made to and of this
Agreement, which substantially and adversely changes the terms of the particular
Agreement as to the Bank, CNB Financial, or both, without obtaining the further
approval of the shareholders of the Bank. If this Agreement is amended after the
meeting of shareholders of the Bank provided for in Section 9 of this Agreement,
the number of shares of CNB Financial common stock into which each share of
common stock of the Bank shall be converted in the Merger shall not be amended
after such meeting of Bank shareholders.
SECTION 14
EXPENSES
Each of the parties hereto agrees to pay, without a right of reimbursement
from the other party and whether or not the transactions contemplated by this
Agreement shall be consummated, the costs incurred by it incident to the
performance of its obligations under
I-8
<PAGE> 93
this Agreement and to the consummation of the Merger and of the other
transactions contemplated herein, including the fees and disbursements of
counsel, accountants and consultants employed by such party in connection
therewith.
SECTION 15
AGREEMENT TO TAKE NECESSARY AND DESIRABLE ACTIONS
The Bank, CNB Financial and Interim Bank each agree to execute and deliver
such other documents, certificates and other writings and to take such other
actions as may be necessary or desirable in order to consummate or implement
expeditiously the transactions contemplated by this Agreement.
IN WITNESS WHEREOF, CNB Financial and the Bank have each caused this
Agreement to be executed on its behalf by its officers thereunto duly authorized
all as of the day and year first above written.
Seal: CNB FINANCIAL SERVICES, INC.
By: /s/ T. F. ROKISKY
--------------------------------
Its: President
Attest:
By: /s/ ARNOLD K. STOTLER
-------------------------------
Secretary
Seal: CITIZENS NATIONAL BANK OF
BERKELEY SPRINGS
By: /s/ T. F. ROKISKY
--------------------------------
Its: President
Attest:
By: /s/ ARNOLD K. STOTLER
-------------------------------
Secretary
I-9
<PAGE> 94
STATE OF WEST VIRGINIA,
COUNTY OF MORGAN, to-wit:
The foregoing instrument was acknowledged before me this 5 day of April,
2000, by Thomas F. Rokisky, President of CNB FINANCIAL SERVICES, INC., as being
the act and deed of said corporation.
My commission expires July 2, 2007.
/s/ TERESA L. HOSKINS
------------------------------------
Notary Public
STATE OF WEST VIRGINIA,
COUNTY OF MORGAN, to-wit:
The foregoing instrument was acknowledged before me this 5 day of April,
2000, by Thomas F. Rokisky, President of CITIZENS NATIONAL BANK OF BERKELEY
SPRINGS, as being the act and deed of said banking association.
My commission expires July 2, 2007.
/s/ TERESA L. HOSKINS
------------------------------------
Notary Public
<PAGE> 95
EXHIBIT A
SUPPLEMENTARY AGREEMENT
THIS SUPPLEMENTARY AGREEMENT, made and entered into as of this day of
, 2000, by and among CNB INTERIM BANK, N.A., a national banking
association ("Interim Bank"), CITIZENS NATIONAL BANK OF BERKELEY SPRINGS, a
national banking association (the "Bank"), and CNB FINANCIAL SERVICES, INC., a
West Virginia corporation ("CNB Financial").
R E C I T A L S
WHEREAS, the Bank and CNB Financial have entered into an Agreement and Plan
of Merger dated as of April 5, 2000 (the "Agreement"), a copy of which is
attached hereto and by this reference incorporated herein and made a part
hereof; and
WHEREAS, it is provided in Section 5.3 of the Agreement that upon issuance
of the Certificate of Association for Interim Bank by the Office of Comptroller
of Currency ("OCC"), CNB Financial shall cause Interim Bank to execute and enter
into a Supplementary Agreement so as to cause Interim Bank to be bound by the
applicable terms and provisions of the Agreement; and
WHEREAS, the Certificate of Association for Interim Bank was issued in
, 2000, and Interim Bank and CNB Financial are entering into this
Supplementary Agreement pursuant to Section 5.3 of the Agreement.
NOW, THEREFORE, THIS AGREEMENT WITNESSETH: That for and in consideration of
the premises and the mutual agreements of the parties, it is hereby agreed as
follows:
(1) Interim Bank hereby joins in and agrees to be bound by the terms
and conditions of the Agreement applicable to it, to the same extent as if
Interim Bank were an original party thereto.
(2) Interim Bank agrees that it shall use its best efforts in good
faith to take or cause to be taken as promptly as practicable all action on
its part to be taken so as to permit the consummation of the Agreement and
the Merger (as defined in the Agreement) at the earliest possible date and
that it shall cooperate fully with CNB Financial and the Bank to that end.
(3) Interim Bank represents and warrants to the Bank and CNB Financial
as follows:
(a) Interim Bank is a national banking association duly organized,
validly existing and in good standing of the laws of the United
States; and
(b) Interim Bank has the corporate power to execute and deliver this
Supplementary Agreement and has taken all action as required by
law, its Articles of Association, its Bylaws or otherwise to
authorize such execution and delivery, said Merger and the
consummation of the transaction as contemplated by the Agreement,
and this Supplementary Agreement is a valid and binding agreement
of Interim Bank.
<PAGE> 96
IN WITNESS WHEREOF, he parties have caused this Supplementary Agreement to
be executed by their officers thereunto duly authorized as of the date and year
first above written.
CNB INTERIM BANK, N.A.
By:
--------------------------------
Its: President
[SEAL]
CITIZENS NATIONAL BANK OF
BERKELEY SPRINGS
By:
--------------------------------
Its: President
[SEAL]
CNB FINANCIAL SERVICES, INC.
By:
--------------------------------
Its: President
[SEAL]
<PAGE> 97
STATE OF WEST VIRGINIA,
COUNTY OF MORGAN, to-wit:
The foregoing instrument was acknowledged before me this ____ day of
________ , 2000, by Thomas F. Rokisky, President of CNB INTERIM BANK, N. A., as
being the act and deed of said banking association.
My commission expires ____________ .
------------------------------------
Notary Public
STATE OF WEST VIRGINIA,
COUNTY OF MORGAN, to-wit:
The foregoing instrument was acknowledged before me this ____ day of
________ , 2000, by Thomas F. Rokisky, President of CITIZENS NATIONAL BANK OF
BERKELEY SPRINGS, as being the act and deed of said banking association.
My commission expires ____________ .
------------------------------------
Notary Public
STATE OF WEST VIRGINIA,
COUNTY OF MORGAN, to-wit:
The foregoing instrument was acknowledged before me this ____ day of
________ , 2000, by Thomas F. Rokisky, President of CNB FINANCIAL SERVICES,
INC., as being the act and deed of said corporation.
My commission expires ____________ .
------------------------------------
Notary Public
<PAGE> 98
APPENDIX II
12 C.F.R. SECTIONS 215a(b), (c) AND (d)
(b) Dissenting shareholders
If a merger shall be voted for at the called meetings by the necessary
majorities of the shareholders of each association or State bank participating
in the plan of merger, and thereafter the merger shall be approved by the
Comptroller, any shareholder of any association or State bank to be merged into
the receiving association who has voted against such merger at the meeting of
the association or bank of which he is a stockholder, or has given notice in
writing at or prior to such meeting to the presiding officer that he dissents
from the plan of merger, shall be entitled to receive the value of the share so
held by him when such merger shall be approved by the Comptroller upon written
request made to the receiving association at any time before thirty days after
the date of consummation of the merger, accompanied by the surrender of his
stock certificates.
(c) Valuation of shares
The value of the shares of any dissenting shareholder shall be ascertained,
as of the effective date of the merger, by an appraisal made by a committee of
three persons, composed of (1) one selected by the vote of the holders of the
majority of the stock, the owners of which are entitled to payment in cash; (2)
one selected by the directors of the receiving association; and (3) one selected
by the two so selected. The valuation agreed upon by any two of the three
appraisers shall govern. If the value so fixed shall not be satisfactory to any
dissenting shareholder who has requested payment, that shareholder may, within
five days after being notified of the appraised value of his shares, appeal to
the Comptroller, who shall cause a reappraisal to be made which shall be final
and binding as to the value of the shares of the appellant.
(d) Application to shareholders of merging associations: appraisal by
Comptroller; expenses of receiving association; sale and resale of shares;
State appraisal and merger law
If, within ninety days from the date of consummation of the merger, for any
reason one or more of the appraisers is not selected as herein provided, or the
appraisers fail to determine the value of such shares, the Comptroller shall
upon written request of any interested party cause an appraisal to be made which
shall be final and binding on all parties. The expenses of the Comptroller in
making the reappraisal or the appraisal, as the case may be, shall be paid by
the receiving association. The value of the shares ascertained shall be promptly
paid to the dissenting shareholders by the receiving association. The shares of
stock of the receiving association which would have been delivered to such
dissenting shareholders had they not requested payment shall be sold by the
receiving association at an advertised public auction, and the receiving
association shall have the right to purchase any of such shares at such public
auction, if it is the highest bidder therefor, for the purpose of reselling such
shares within thirty days thereafter to such person or persons and at such price
not less than par as its board of directors by resolution may determine. If the
shares are sold at public auction at a price greater than the amount paid to the
dissenting shareholders, the excess in such sale price shall be paid to such
dissenting shareholders. The appraisal of such shares of stock in any State bank
shall be determined in the manner prescribed by the law of the State in such
cases, rather than as provided in this section, if such provision is made in the
State law; and no such merger shall be in contravention of the law of the State
under which such bank is incorporated. The provisions of this subsection shall
apply only to shareholders of (and stock owned by them in) a bank or association
being merged into the receiving association.
<PAGE> 99
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to the provisions of Article V.1 of CNB Financial
Services, Inc. articles of incorporation below.
V.1. INDEMNIFICATION:
A. INDEMNIFICATION. Each person who was or is a party or is threatened
to be made a party to or is involved (including, without limitation, as a
witness or deponent) in any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative, investigative or
otherwise in nature ("Proceeding"), by reason of the fact that he or she,
or a person of whom he or she is the legal representative, is or was a
director or officer of the corporation or is or was serving at the written
request of the corporation's Board of Directors, president or their
delegate as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such
Proceeding is alleged action or omission in an official capacity as a
director, officer, trustee, employee or agent or in any other capacity,
shall be indemnified and held harmless by the corporation to the fullest
extent authorized by law, including but not limited to the West Virginia
Code, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
corporation to provide broader indemnification rights than said Code
permitted the corporation to provide prior to such amendment), against all
expenses, liability and loss (including, without limitation, attorneys'
fees and disbursements, judgments, fines, ERISA or other similar or
dissimilar excise taxes or penalties and amounts paid or to be paid in
settlement) incurred or suffered by such person in connection therewith;
provided, however, that the corporation shall indemnify any such person
seeking indemnity in connection with a Proceeding (or part thereof)
initiated by such person only if such Proceeding (or part thereof) was
authorized by the Board of Directors of the corporation; provided, further,
that the corporation shall not indemnify any person for civil money
penalties or other matters, to the extent such indemnification is
specifically not permissible pursuant to federal or state statute or
regulation, or order or rule of a regulatory agency of the federal or state
government with authority to enter, make or promulgate such order or rule.
Such right shall include the right to be paid by the corporation expenses,
including, without limitation, attorneys' fees and disbursements, incurred
in defending or participating in any such Proceeding in advance of its
final disposition; provided, however, that the payment of such expenses in
advance of the final disposition of such Proceeding shall be made only upon
delivery to the corporation of an undertaking, by or on behalf of such
director or officer, in which such director or officer agrees to repay all
amounts so advanced if it should be ultimately determined that such person
is not entitled to be indemnified under this Article or otherwise. The
termination of any Proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interest of the corporation, or that such person did have reasonable cause
to believe that his conduct was unlawful.
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<PAGE> 100
B. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under this Article is
not paid in full by the corporation within thirty days after a written
claim therefor has been received by the corporation, the claimant may at
any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim and, if successful, in whole or in part, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending or
participating in any Proceeding in advance of its final disposition where
the required undertaking has been tendered to the corporation) that the
claimant has not met the standards of conduct which make it permissible
under the applicable law for the corporation to indemnify the claimant for
the amount claimed, but the burden of proving such defense shall be on the
corporation.
Neither the failure of the corporation (including its Board of
Directors, independent legal counsel, or its shareholders) to have made a
determination prior to the commencement of such action that indemnification
or reimbursement of the claimant is permitted in the circumstances because
he or she has met the applicable standard of conduct, nor an actual
determination by the corporation (including its Board of Directors,
independent legal counsel, or its shareholders) that the claimant has not
met such applicable standard of conduct, shall be a defense to the action
or create a presumption that the claimant has not met the applicable
standard of conduct.
C. CONTRACTUAL RIGHTS: APPLICABILITY. The right to be indemnified or
to the reimbursement or advancement of expenses pursuant hereto (i) is a
contract right based upon good and valuable consideration, pursuant to
which the person entitled thereto may bring suit as if the provisions
hereof were set forth in a separate written contract between the
corporation and the director or officer, (ii) is intended to be retroactive
and shall be available with respect to events occurring prior to the
adoption hereof, and (iii) shall continue to exist after the rescission or
restrictive modification hereof with respect to events occurring prior
thereto.
D. REQUESTED SERVICE. Any director or officer of the corporation
serving, in any capacity, (i) another corporation of which five percent
(5%) or more of the shares entitled to vote in the election of its
directors is held by the corporation, or (ii) any employee benefit plan of
the corporation or of any corporation referred to in clause (i), shall be
deemed to be doing so at the request of the corporation.
E. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person
hereunder shall not be exclusive of and shall be in addition to any other
right which such person may have or may hereafter acquire under any
statute, provision of the Certificate of Incorporation, Bylaws, agreement,
vote of shareholders or disinterested directors or otherwise.
F. INSURANCE. The corporation may purchase and maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent
of the corporation or another corporation, partnership, joint venture,
trust or other enterprise against such expense, liability or loss, whether
or not the corporation would have the power to indemnify such person
against such expense, liability or loss under West Virginia law.
CNB Financial is a West Virginia corporation subject to the applicable
indemnification provisions of the General Corporation Law of West Virginia.
The foregoing indemnity provisions have the effect of reducing directors'
and officers' exposure to personal liability for actions taken in connection
with their respective positions.
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<PAGE> 101
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of CNB
Financial pursuant to the foregoing provisions, or otherwise, CNB Financial has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by CNB
Financial of expenses incurred or paid by a director, officer or controlling
person of CNB Financial in the successful defense of any action, suite or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, CNB Financial will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of April 5, 2000, by
and among CNB Financial Services, Inc. and Citizens National
Bank of Berkeley Springs (included as Appendix I to the
Proxy Statement/ Prospectus)
3.1 Articles of Incorporation.
3.2 Bylaws.
5 Opinion of Jackson & Kelly PLLC, as to the validity of the
securities registered hereunder, including the consent of
that firm.
8 Form of Opinion of Jackson & Kelly PLLC as to certain United
States tax matters, including the consent of that firm.
23.1 Consent of Jackson & Kelly PLLC (included as part of Exhibit
5 and Exhibit 8).
23.2 Consent of Smith Elliott Kearns & Company, LLC.
24 Power of Attorney.
99.1 Form of Proxy Card.
</TABLE>
(b) Not required.
(c) Not required.
II-3
<PAGE> 102
ITEM 22. UNDERTAKINGS.
(a) CNB Financial hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of the securities offered would not exceed
that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424(b)
(sec. 230.424(b) of this chapter) if, in the aggregate,
the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set
forth in the "Calculation of the Registration Fee" table
in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) CNB Financial hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning
of Rule 145(c), CNB Financial undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(c) CNB Financial undertakes that every prospectus: (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports
to meet the requirements of section 10(a)(3) of the Securities Act of
1933 and is used in connection with an offering of securities subject
to Rule 415 will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under
the Securities Act of 1933,
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<PAGE> 103
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(d) The undertaking concerning indemnification is included as part of the
response to Item 20.
(e) CNB Financial hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by
first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to
the request.
(f) CNB Financial hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE> 104
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, CNB FINANCIAL
SERVICES, INC., HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BERKELEY
SPRINGS, WEST VIRGINIA, ON THE 16TH DAY OF MAY, 2000.
CNB FINANCIAL SERVICES, INC.
By /s/ T. F. ROKISKY
--------------------------------------
Thomas F. Rokisky
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director May 16, 2000
- -------------------------------------
J. Robert Ayers
* Director May 16, 2000
- -------------------------------------
John E. Barker
* Director May 16, 2000
- -------------------------------------
Jay E. Dick
* Director May 16, 2000
- -------------------------------------
Herbert L. Eppinger
* Director May 16, 2000
- -------------------------------------
Robert L. Hawvermale
/s/ J. PHILIP KESECKER Director May 16, 2000
- -------------------------------------
J. Philip Kesecker
* Director May 16, 2000
- -------------------------------------
Raymond H. Lawyer
* Director May 16, 2000
- -------------------------------------
Jerald McGraw
* Director May 16, 2000
- -------------------------------------
Martha H. Quarantillo
/s/ T. F. ROKISKY Director May 16, 2000
- -------------------------------------
Thomas F. Rokisky
* Director May 16, 2000
- -------------------------------------
Charles S. Trump, IV
* Director May 16, 2000
- -------------------------------------
Arlie R. Yost
</TABLE>
* /s/ T. F. ROKISKY
----------------------------------------------
Thomas F. Rokisky
Attorney-in-Fact
/s/ J. PHILIP KESECKER
- ------------------------------------------------
J. Philip Kesecker
Attorney-in-Fact
II-6
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<S> <C>
2.1 Agreement and Plan of Merger, dated as of April 5, 2000, by
and among CNB Financial Services, Inc. and Citizens National
Bank of Berkeley Springs (included as Appendix I to the
Proxy Statement/Prospectus)(1)
3.1 Articles of Incorporation.(2)
3.2 Bylaws.(2)
5 Opinion of Jackson & Kelly PLLC, as to the validity of the
securities registered hereunder, including the consent of
that firm.(2)
8 Form of Opinion of Jackson & Kelly PLLC as to certain United
States tax matters, including the consent of that firm.(2)
23.1 Consent of Jackson & Kelly PLLC (included as part of Exhibit
5 and Exhibit 8).(2)
23.2 Consent of Smith Elliott Kearns & Company, LLC.(2)
24 Power of Attorney.(2)
99.1 Form of Proxy Card.(2)
</TABLE>
- ---------------
(1) Filed herewith.
(2) Previously filed.
II-7
