<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
Commission file number 0-30665
CNB Financial Services, Inc.
--------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
United States of America 55-0773918
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
212 S. Washington Street, Berkeley Springs, WV 25411
---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (304) 258-1520
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock $1 par value, 12,000 shares outstanding as of August 4, 2000
<PAGE> 2
CNB FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PAGE
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountant's Report............................. 3
Statement of Financial Condition as of
June 30, 2000 (Unaudited)............................... 4
Statement of Changes in Stockholders' Equity From the date
of incorporation through June 30, 2000 (Unaudited)...... 5
Notes to Consolidated Financial Statements (Unaudited)...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three
Months and Six Months ended June 30, 2000............... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 21
Item 2. Changes in Securities....................................... 21
Item 3. Defaults Upon Senior Securities............................. 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
SIGNATURES.................................................. 21
2
<PAGE> 3
INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors
CNB Financial Services, Inc.
Berkeley Springs, West Virginia
We have reviewed the accompanying statement of financial condition of
CNB Financial Services, Inc. as of June 30, 2000 and the related statement of
changes in stockholders' equity from the date of incorporation (March 20, 2000)
through June 30, 2000. These financial statements are the responsibility of CNB
Financial Services, Inc. management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
/s/ Smith Elliott Kearns & Company, LLC
SMITH ELLIOTT KEARNS & COMPANY, LLC
Hagerstown, Maryland
August 4, 2000
3
<PAGE> 4
CNB FINANCIAL SERVICES, INC.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30,
ASSETS 2000
--------
(Unaudited)
<S> <C>
$ --
--------
TOTAL ASSETS $ --
========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
$ --
--------
TOTAL LIABILITIES $ --
--------
SHAREHOLDERS' EQUITY
Common stock, $1 par value; 5,000,000 shares
authorized; 12,000 shares outstanding $ 12,000
Receivable from subscribed stock (12,000)
--------
TOTAL SHAREHOLDERS' EQUITY $ --
--------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ --
========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
4
<PAGE> 5
CNB FINANCIAL SERVICES, INC.
STATEMENT 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, MARCH 20, 2000 (1) $ -- $ -- $ -- $ -- $ --
Issuance of common stock 12,000 -- -- -- 12,000
Receivable for subscribed stock (12,000) -- -- -- (12,000)
-------- ---- ---- ---- --------
BALANCE, JUNE 30, 2000 $ -- $ -- $ -- $ -- $ --
======== ==== ==== ==== ========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
(1) Date of incorporation of CNB Financial Services, Inc.
Through June 30, 2000, CNB Financial Services, Inc. had no items of income or
expense and no cash transactions.
5
<PAGE> 6
CNB FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization
In March 2000, Citizens National Bank's (Bank) Board of Directors
approved the formation of CNB Financial Services, Inc., (CNB) a
financial services holding company. A special meeting of the Bank's
shareholders was held on August 4, 2000 and the shareholders approved
the Agreement and Plan of Merger between the Bank and CNB, whereby the
Bank will become a wholly-owned subsidiary of CNB and the shareholders
of the Bank will become shareholders of CNB. Each bank shareholder will
receive two shares of CNB stock for each share of the Bank's common
stock. The Bank has received approval of the reorganization from the
Comptroller of the Currency and the Federal Reserve Bank of Richmond.
Also, the Securities and Exchange Commission (SEC) declared the
registration statement on Form S-4 related to the Agreement and Plan of
Merger between the Bank and CNB effective on July 12, 2000. The merger
is expected to close on August 31, 2000. The Bank has incurred and
expensed all costs of start-up activities including activities related
to organizing the new entity and filings with the SEC and Bank
regulators.
Note 2. Basis of Presentation
In the opinion of CNB, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary for a fair presentation of CNB financial condition as of June
30, 2000.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q.
Note 3. Shareholders' Equity
CNB initially issued 12,000 shares of common stock, which are
subscribed and unpaid. It is expected that these shares will be
redeemed and canceled on or about August 31, 2000, concurrent with the
closing of the merger with the Bank.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In March 2000, Citizens National Bank's (Bank) Board of Directors
approved the formation of CNB Financial Services, Inc.(CNB), a financial
services holding company. A special meeting of the Bank's shareholders was held
on August 4, 2000 and the shareholders approved the Agreement and Plan of Merger
between the Bank and CNB, whereby the Bank will become a wholly-owned subsidiary
of CNB and the shareholders of the Bank will become shareholders of CNB. Each
bank shareholder will receive two shares of CNB stock for each share of the
Bank's common stock. The Bank has received approval of the reorganization from
the Comptroller of the Currency and the Federal Reserve Bank of Richmond. Also,
the Securities and Exchange Commission declared the registration statement on
Form S-4 related to the Agreement and Plan of Merger between the Bank and CNB
effective on July 12, 2000. The merger is expected to close on August 31, 2000.
The Bank has incurred and expensed all costs of start-up activities including
activities related to organizing the new entity and filings with the SEC and
Bank regulators.
The Bank 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 Bank
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.
CNB had no financial transactions since its inception except for the
subscription of $12,000 of common stock. See Note 3 of the Notes to Financial
Statements. The following financial statements and discussion relate to the
Bank, which will be the wholly-owned subsidiary of CNB. This discussion and
analysis of the consolidated financial statements for the three and six months
ended June 30, 2000 and 1999 is presented to provide insight into management's
assessment of the Bank's financial results. 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.
7
<PAGE> 8
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Cash and due from banks $ 3,496,859 $ 4,035,293
Federal funds sold 493,722 --
Securities available for sale
(at approximate market value) 30,654,106 31,186,678
Loans receivable, net 100,873,436 97,124,993
Loans held for sale 85,000 65,300
Accrued interest receivable 872,300 871,671
Foreclosed real estate (held for sale), net 66,938 66,938
Premises and equipment, net 3,234,132 3,360,924
Deferred income taxes 857,609 849,721
Cash surrender value of life insurance 753,627 670,734
Intangible assets 118,195 108,267
Other assets 170,640 307,220
------------ ------------
TOTAL ASSETS $141,676,564 $138,647,739
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 15,576,480 $ 15,653,259
Interest-bearing demand 22,235,026 22,942,904
Savings 15,726,415 16,446,507
Time, $100,000 and over 16,944,138 18,042,001
Other time 56,435,525 51,425,277
------------ ------------
$126,917,584 $124,509,948
Accrued interest payable 892,707 816,619
Accrued expenses and other liabilities 1,184,294 1,072,451
------------ ------------
TOTAL LIABILITIES $128,994,585 $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 9,346,498 8,818,791
Accumulated other comprehensive income (986,159) (891,710)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 12,681,979 $ 12,248,721
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $141,676,564 $138,647,739
============ ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
8
<PAGE> 9
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,177,280 $1,898,568 $4,280,690 $3,732,548
Interest and dividends on securities
United States Treasury securities 6,309 18,142 12,583 40,005
U.S. Government agencies and
corporations 475,291 481,477 966,051 919,606
State and political subdivisions 15,509 43,273 42,279 95,037
Other 3,890 3,889 3,890 4,316
Interest on federal funds sold 13,429 16,909 17,203 49,224
---------- ---------- ---------- ----------
$2,691,708 $2,462,258 $5,322,696 $4,840,736
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on interest bearing demand, $1,274,632 $1,134,459 $2,510,472 $2,250,271
savings and time deposits
Interest on federal funds purchased 2,243 653 4,666 653
---------- ---------- ---------- ----------
$1,276,875 $1,135,112 $2,515,138 $2,250,924
---------- ---------- ---------- ----------
NET INTEREST INCOME $1,414,833 $1,327,146 $2,807,558 $2,589,812
PROVISION FOR LOAN LOSSES 30,000 15,999 60,000 57,999
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $1,384,833 $1,311,147 $2,747,558 $2,531,813
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts $ 75,567 $ 50,524 $ 146,662 $ 102,664
Other service charges, commissions
and fees 53,114 40,437 106,040 81,321
Other operating income 34,414 24,356 79,965 69,562
Gain on demutualization of insurance company -- -- 195,889 --
Net gain (loss) on sale of securities (9,695) 3,933 (9,695) 3,933
---------- ---------- ---------- ----------
$ 153,400 $ 119,250 $ 518,861 $ 257,480
---------- ---------- ---------- ----------
NONINTEREST EXPENSES
Salaries $ 446,815 $ 457,208 $ 879,219 $ 817,938
Employee benefits 135,812 132,646 290,863 257,301
Occupancy of premises 66,760 48,184 148,283 97,918
Furniture and equipment expense 66,414 67,037 134,251 132,916
Other operating expenses 331,428 309,580 718,728 601,722
---------- ---------- ---------- ----------
$1,047,229 $1,014,655 $2,171,344 $1,907,795
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES $ 491,004 $ 415,742 $1,095,075 $ 881,498
PROVISION FOR INCOME TAXES 197,092 138,325 402,470 291,029
---------- ---------- ---------- ----------
NET INCOME $ 293,912 $ 277,417 $ 692,605 $ 590,469
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 1.28 $ 1.21 $ 3.02 $ 2.58
========== ========== ========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
9
<PAGE> 10
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 six months
ended June 30, 2000 -- -- 692,605 -- --
Change in unrealized gains
(losses) on securities
available for sale (net of tax
of $57,884) -- -- -- (94,449) --
Total Comprehensive Income -- -- -- -- 598,156
Cash dividends ($.72 per share) (164,898) (164,898)
---------- ---------- ---------- ----------- -----------
BALANCE, JUNE 30, 2000 $2,290,240 $2,031,400 $9,346,498 $ (986,159) $12,681,979
========== ========== ========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
10
<PAGE> 11
CITIZENS NATIONAL BANK OF BERKELEY SPRINGS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------------
2000 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 692,605 $ 590,469
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 127,329 125,179
Provision for loan losses 60,000 57,999
Deferred income taxes 50,000 -
Net (gain) loss on sale of securities 9,695 (3,933)
(Gain) on demutualization of insurance company (195,889) -
Loss on abandonment of fixed assets 55,254 -
Net (increase) in loans held for sale (19,700) -
(Increase) in accrued interest receivable (629) (43,870)
Decrease in other assets 127,041 127,589
Increase in accrued interest payable 76,088 27,835
(Increase) in cash surrender value on life insurance in excess
of premiums paid (33,000) --
Increase (decrease) in accrued expenses and other liabilities 111,843 (5,981)
Amortization of deferred loan (fees) cost 21,186 --
(Accretion) of premium and discount on investments (748) (1,539)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,081,075 $ 873,748
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans $(4,856,974) $ (4,844,782)
Proceeds from sale of loans 1,027,345 --
Proceeds from sales of securities 1,981,168 2,600,438
Proceeds from maturities of securities 620,000 7,545,000
Purchases of securities (2,033,992) (12,238,836)
Purchases of premises and equipment (56,179) (60,867)
Net (increase) decrease in federal funds sold (493,722) 1,686,357
Premiums paid on life insurance (49,893) (5,921)
----------- ------------
NET CASH (USED IN) INVESTING ACTIVITIES $(3,862,247) $ (5,318,611)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand and savings deposits $(1,504,749) $ 876,984
Net increase in time deposits 3,912,385 4,024,950
Cash dividends paid (164,898) (160,317)
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 2,242,738 $ 4,741,617
----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (538,434) $ 296,754
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,035,293 2,862,300
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,496,859 $ 3,159,054
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 2,435,123 $ 2,222,435
Income taxes $ 266,000 $ 260,000
</TABLE>
The Notes to Consolidated Financial Statements are an intregral part of these
statements.
11
<PAGE> 12
CITIZENS NATIONAL BANK AND SUBSIDARY
NOTES TO CONSOLIDATED 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 June 30, 2000 and the results of operations for the three months and
six months ended June 30, 2000 and 1999 and cash flows for the six
months ended June 30, 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
June 30, 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>
JUNE 30, 2000 WEIGHTED
-------------------------------------------------------------- AVERAGE
GROSS GROSS ESTIMATED TAX
AMORTIZED UNREALIZED UNREALIZED FAIR EQUIVALENT
COST GAINS LOSSES VALUE YIELD
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities
After 1 but within 5 years $ 400,566 $ -- $ 2,441 $ 398,125 6.77%
----------- ---- ---------- ----------- ----
U.S. Government agencies
and corporations
Within 1 year $ -- $ -- $ -- $ -- --
After 1 but within 5 years 6,946,956 -- 305,876 6,641,080 6.36
After 5 but within 10 years 23,534,458 -- 1,271,780 22,262,678 6.66
----------- ---- ---------- ----------- ----
$30,481,414 $ -- $1,577,656 $28,903,758 6.59
----------- ---- ---------- ----------- ----
States and political subdivision
Within 1 year $ - $ -- $ -- $ -- -
After 1 but within 5 years 770,497 342 2,724 768,115 6.99
After 5 but within 10 years 362,566 -- 5,636 356,930 7.86
After 10 years 100,000 -- 2,472 97,528 8.72
----------- ---- ---------- ----------- ----
$ 1,233,063 $342 $ 10,832 $ 1,222,573 7.38
----------- ---- ---------- ----------- ----
Federal Reserve Bank stock 129,650 -- -- 129,650 6.00
----------- ---- ---------- ----------- ----
$ 129,650 $ -- $ -- $ 129,650 6.00
----------- ---- ---------- ----------- ----
Total securities available for sale $32,244,693 $342 $1,590,929 $30,654,106 6.62%
=========== ==== ========== =========== ----
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
DECEMBER 31, 1999 WEIGHTED
-------------------------------------------------------------- AVERAGE
GROSS GROSS ESTIMATED TAX
AMORTIZED UNREALIZED UNREALIZED FAIR EQUIVALENT
COST GAINS LOSSES VALUE YIELD
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities
After 1 but within 5 years $ 400,699 $ 51 $ -- $ 400,750 6.77%
----------- ------ ---------- ----------- ----
U.S. Government agencies
and corporations
Within 1 year $ 250,000 $ -- $ 1,094 $ 248,906 5.00
After 1 but within 5 years 4,499,367 -- 181,006 4,318,361 6.25
After 5 but within 10 years 25,230,736 -- 1,250,698 23,980,038 6.60
----------- ------ ---------- ----------- ----
$29,980,103 $ -- $1,432,798 $28,547,305 6.53
----------- ------ ---------- ----------- ----
States and political subdivision
Within 1 year $ 620,637 $6,466 $ -- $ 627,103 9.68
After 1 but within 5 years 1,030,759 2,742 2,237 1,031,264 7.41
After 5 but within 10 years 363,085 -- 8,694 354,391 7.86
After 10 years 100,000 -- 3,785 96,215 8.72
----------- ------ ---------- ----------- ----
$ 2,114,481 $9,208 $ 14,716 $ 2,108,973 8.22
----------- ------ ---------- ----------- ----
Federal Reserve Bank stock $ 129,650 $ -- $ -- $ 129,650 6.00
----------- ------ ---------- ----------- ----
Total securities available for sale $32,624,933 $9,259 $1,447,514 $31,186,678 6.64%
=========== ====== ========== =========== ----
</TABLE>
The carrying value of securities pledged to secure public deposits and
for other purposes as required or permitted by law totaled $9,716,791
at June 30, 2000 and $9,467,490 at December 31, 1999.
Proceeds from sales of securities available for sale (excluding
maturities) during the six months ended June 30, 2000 and the year
ended December 31, 1999 were $1,981,168 and $7,290,995, respectively.
Gross gains (losses) of $5,965 and $(15,660) during the six months
ended June 30, 2000 and $15,829 and $(20,091) for the year ended
December 31, 1999 were realized on the respective sales.
Note 3. Loans Receivable
Major classifications of loans at June 30, 2000 and December 31, 1999,
were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ -----------
<S> <C> <C>
Real estate $ 62,606,089 $61,624,632
Commercial real estate 10,096,955 9,568,985
Consumer 23,189,624 21,778,574
Commercial 6,013,642 5,184,988
Overdrafts 39,557 28,121
------------ -----------
$101,945,867 $98,185,300
Net deferred loan fees,
premiums and discounts 88,872 87,539
Allowance for loan losses (1,161,303) (1,147,846)
------------ -----------
$100,873,436 $97,124,993
============ ===========
</TABLE>
13
<PAGE> 14
An analysis of the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------------ ------------
2000 1999 1999
---------- ---------- ----------
<S> <C> <C> <C>
Balance, Beginning $1,147,846 $1,122,155 $1,122,155
Provision charged to
operations 60,000 57,999 117,999
Recoveries 10,222 14,811 26,270
Loans charged off (56,765) (35,125) (118,578)
---------- ---------- ----------
Balance, Ending $1,161,303 $1,159,840 $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>
JUNE 30, DECEMBER 31,
------------------------------ ------------
2000 1999 1999
---------- ---------- ----------
<S> <C> <C> <C>
Real estate loans $ -- $ -- $ --
Consumer loans 26,644 18,885 22,157
Commercial loans -- - --
---------- ---------- ----------
$ 26,644 $ 18,885 $ 22,157
========== ========== ==========
</TABLE>
Proceeds from sale of loans during the six months ended June 30, 2000
and the year ended December 31, 1999 were $1,027,345 and $0,
respectively. There were no gains or losses on sale of loans.
Note 4. Shareholders' Equity
Basic 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 on August 4,
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. The Bank has received
approval of the reorganization from the Comptroller of the Currency and
the Federal Reserve Bank of Richmond. Also, the Securities and Exchange
Commission declared the registration statement on Form S-4 related to
the Agreement and Plan of Merger between the Bank and CNB Financial
Services, Inc. effective on July 12, 2000.
Note 6. Time Deposits
At June 30, 2000, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- -----------
<S> <C> <C>
Within 3 months $ 1,207,532 $ 7,868,113
3 months thru 6 months 1,664,965 6,936,249
6 months thru 12 months 2,044,425 7,838,948
Over 12 months 12,027,216 50,736,353
----------- -----------
$16,944,138 $73,379,663
=========== ===========
</TABLE>
14
<PAGE> 15
Note 7. Gain on Demutualization of Insurance Company
The Bank owns several life insurance policies which were issued by a
mutual insurance company. In January 2000, the insurance company
demutualized and converted to a stock company. The Bank received stock
from the insurance company as part of the demutualization. There was no
direct effect on the Bank's interest as a policy holder. The receipt of
the stock was accounted for at fair value with a gain recognized in
income from continuing operations.
EARNINGS SUMMARY
Net income for the three months ended June 30, 2000 was $294,000, or
$1.28 per share compared to $277,000 or $1.21 per share for the same period in
1999. Annualized return on average assets and average equity were .84% and 9.27%
respectively, for the three months ended June 30, 2000 compared with .84% and
8.80%, respectively, for the three months ended June 30, 1999.
Net income for the six months ended June 30, 2000 was $693,000, or
$3.02 per share compared to $590,000 or $2.58 per share for the same period in
1999. Annualized return on average assets and average equity were .99% and
11.02% respectively, for the six months ended June 30, 2000 compared with .88%
and 9.32%, respectively, for the six months ended June 30, 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 June 30, 2000 increased
by $88,000 or 6.6% over the same period in 1999. Interest income for the three
months ended June 30, 2000 increased by $230,000 or 9.3% compared to the same
period in 1999, while interest expense increased by $142,000 or 12.5% during the
three months ended June 30, 2000 as compared to the same period in the prior
year.
Net interest income for the six months ended June 30, 2000 increased
by $218,000 or 8.4% over the same period in 1999. Interest income for the six
months ended June 30, 2000 increased by $482,000 or 10.0% compared to the same
period in 1999, while interest expense increased by $264,000 or 11.7% during the
six months ended June 30, 2000 as compared to the same period in the prior year.
Increased net interest income for the three and six month periods 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 and six
month periods in 2000 compared to the same periods in 1999 as a result of an
increase in the average balance of loans, which more than offset the decrease in
the average balance of federal funds sold and investment securities. Total
interest expense increased for the three and six month periods 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 and Table
2 - Distribution of Assets, Liabilities, and Shareholders' Equity; Interest
Rates and Interest Differential.
15
<PAGE> 16
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
----------------------------------- ------------------------------------
QTR QTR
AVERAGE QTR YIELD/ AVERAGE QTR YIELD/
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
----------------------------------- ------------------------------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 295 $ 13 6.15% $ 1,111 $ 17 6.12%
Securities:
Taxable 29,939 489 6.53 32,454 504 6.21
Tax-exempt (1) 973 12 7.47 3,460 43 7.53
Loans (net of unearned interest) (2) 101,608 2,086 8.21 89,839 1,814 8.08
----------------------------------- -----------------------------------
Total interest earning assets (1) $132,815 $2,600 7.83% $126,864 $2,378 7.50%
----------------------------------- -----------------------------------
Nonearning assets:
Cash and due from banks $ 3,477 $ 3,412
Bank premises and equipment, net 3,243 3,442
Other assets 2,206 2,140
Allowance for loan losses (1,176) (1,155)
-------- --------
Total assets $140,565 $134,703
======== ========
Interest bearing liabilities:
Savings deposits $ 16,310 $ 82 2.01% $ 17,692 $ 95 2.15%
Time deposits 71,682 1,031 5.75 65,286 901 5.52
NOW accounts 17,377 133 3.06 17,194 100 2.33
Money market accounts 5,128 29 2.26 5,657 38 2.69
Borrowings 126 2 -- 49 1 --
----------------------------------- -----------------------------------
Total interest bearing liabilities $110,623 $1,277 4.62% $105,878 $1,135 4.29%
----------------------------------- -----------------------------------
Noninterest bearing liabilities:
Demand deposits $ 16,081 $ 14,676
Other liabilities 1,180 1,513
Shareholders' equity 12,681 12,636
-------- --------
Total liabilities and
shareholders' equity $140,565 $134,703
======== ========
------ ------
Net interest income (1) $1,323 $1,243
====== ======
Net interest spread (3) 3.21% 3.21%
==== ====
Net interest income to average
interest earning assets (1) 3.76% 3.69%
==== ====
</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 weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(4) Yields/Rates are expressed on annualized basis.
16
<PAGE> 17
TABLE 2. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
----------------------------------- ------------------------------------
YTD YTD
AVERAGE YTD YIELD/ AVERAGE YTD YIELD/
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
----------------------------------- ------------------------------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 161 $ 17 5.84% $ 2,021 $ 49 4.85%
Securities:
Taxable 30,506 990 6.49 30,950 964 6.23
Tax-exempt (1) 1,235 35 5.67 3,765 95 5.05
Loans (net of unearned interest) (2) 100,510 4,101 8.16 88,177 3,569 8.10
----------------------------------- -----------------------------------
Total interest earning assets (1) $132,412 $5,143 7.77% $124,913 $ 4,677 7.49%
----------------------------------- -----------------------------------
Nonearning assets:
Cash and due from banks $ 3,142 $ 3,525
Bank premises and equipment, net 3,277 3,455
Other assets 2,227 2,160
Allowance for loan losses (1,170) (1,142)
-------- --------
Total assets $139,888 $132,911
======== ========
Interest bearing liabilities:
Savings deposits $ 16,515 $ 165 2.00% $ 17,506 $ 200 2.28%
Time deposits 71,356 2,031 5.69 64,278 1,773 5.52
NOW accounts 17,327 258 2.98 16,977 201 2.37
Money market accounts 4,997 56 2.24 5,674 76 2.68
Borrowings 131 5 7.63 25 1 --
----------------------------------- -----------------------------------
Total interest bearing liabilities $110,326 $2,515 4.56% $104,460 $ 2,251 4.31%
----------------------------------- -----------------------------------
Noninterest bearing liabilities:
Demand deposits $ 15,848 $ 14,249
Other liabilities 1,143 1,543
Shareholders' equity 12,571 12,659
-------- --------
Total liabilities and
shareholders' equity $139,888 $132,911
======== ========
------ -------
Net interest income (1) $2,628 $ 2,426
====== =======
Net interest spread (3) 3.21% 3.18%
==== ====
Net interest income to average
interest earning assets (1) 3.76% 3.65%
==== ====
</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 weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(4) Yields/Rates are expressed on annualized basis.
17
<PAGE> 18
PROVISION FOR LOAN LOSSES
The amount charged to provision for loan losses is based on
Management's evaluation of the loan portfolio. Management determines the
adequacy of the allowance for loan losses, based on past loan loss experience,
current economic conditions and composition of the loan portfolio. The allowance
for loan losses is the best estimate by management of the probable losses which
have been incurred as of a balance sheet date.
The provision for loan losses for the three months ended June 30, 2000
increased by $14,000 or 87.5% to $30,000 from $16,000 at June 30, 1999. The
provision for loan losses for the six months ended June 30, 2000 increased by
$2,000 or 3.5% to $60,000 from $58,000 at June 30, 1999. While loan quality
remains good and past due and nonaccruals are minimal, management increased the
provision for loan losses in 2000 to maintain a consistent ratio between the
allowance for loan losses and loans outstanding. 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. See "Nonperforming Assets and Allowance for Loan Losses" for further
discussion.
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 2000 increased
$34,000 or 28.6% to $153,000 from $119,000 in the second quarter of 1999.
Noninterest income for the six months ended June 30, 2000 increased $261,000 or
101.5% to $519,000 from $257,000 for the same time period in 1999. These
increases were 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 $19.4
million at June 30, 2000, a 15.5% increase from $16.8 million at June 30, 1999.
NONINTEREST EXPENSES
Noninterest expenses for the three months ended June 30, 2000 increased
$33,000 or 3.2% primarily due to increased occupancy expense and other operating
expenses. Occupancy expense increased due to routine building repairs and
maintenance. Other operating expenses increased due to professional fees
associated with the formation of the holding company and debit card expenses.
Noninterest expenses for the six months ended June 30, 2000 increased
$264,000 or 13.8% to $2.2 million from $1.9 million for the first six months of
1999. The increases were primarily due to higher costs associated with salaries
and benefits, occupancy of premises and other operating expenses. Salaries and
employee benefits increases were the result of merit salary adjustments and
additional pension expense. Occupancy of premises increased due to the painting
of the Main Office building, routine building repairs and maintenance and the
loss associated with the abandonment of fixed assets. Other operating expenses
increased due to professional fees associated with the formation of the holding
company, and FDIC insurance premium increase.
INCOME TAXES
The Bank's provision for income taxes increased $59,000 or 42.5% to
$197,000 for the three months ended June 30, 2000 and $111,000 or 38.3% to
$402,000 for the six months ended June 30, 2000. The effective tax rates for the
second quarter of 2000 and 1999 were 40.1% and 33.3%, respectively and for the
first six months of 2000 and 1999 were 36.8% and 33.0%, respectively. The
increase in the income tax provision in 2000 is attributable to higher 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 $3.0 million or 2.2% to $141.7
million from December 31, 1999 to June 30, 2000, due primarily to a $3.8 million
increase in loans and a $494,000 increase in federal funds sold, which was
partially offset by a $381,000 decrease in investment securities and a $690,000
decrease in cash and cash equivalents. The Bank's total liabilities increased
$2.6 million or 2.1% to $129.0 million. Shareholders' equity increased $433,000
to $12.7 million at June 30, 2000 primarily due to net income of $693,000 offset
by the semi-annual cash dividend of $165,000 and a $95,000 decrease in
accumulated other comprehensive income. The only component of accumulated other
comprehensive income at June 30, 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.
18
<PAGE> 19
LOAN PORTFOLIO
At June 30, 2000, total loans increased $3.8 million or 3.9% to $100.9
million from $97.1 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>
JUNE 30, DECEMBER 31,
------------------------------- ------------
2000 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Nonaccrual loans $ 26,644 $ 18,885 $ 22,157
Loans past due 90 days or more
still accruing interest 235,505 133,729 78,954
-------- -------- --------
Total nonperforming loans $262,149 $152,614 $101,111
-------- -------- --------
Other real estate owned $ 66,938 122,379 $ 66,938
-------- -------- --------
Total nonperforming assets $329,087 $274,993 $168,049
======== ======== ========
Nonperforming loans/Total loans 0.26% 0.17% 0.10%
Nonperforming assets/Total assets 0.23% 0.20% 0.12%
Allowance for loan losses/Total loans 1.15% 1.29% 1.18%
</TABLE>
As of June 30,2000, 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 allowance for loan losses is the best estimate by management of
the probable losses which have been incurred as of a balance sheet date.
Management makes this determination quarterly by its analysis of overall loan
quality, changes in the mix and size of the loan portfolio, previous loss
experience, general economic conditions, information about specific borrowers
and other factors. The Bank's methodology for determining the allowance for loan
losses established both an allocated and an unallocated component. The allocated
portion of the allowance represents the results of analyses of individual loans
that are being monitored for potential credit problems and pools of loans with
the portfolio. The allocated portion of the allowance for loans is based
principally on current loan risk ratings, historical loan loss rates adjusted to
reflect current conditions, as well as analyses of other factors that may have
affected the collectibility of loans in the portfolio. The Bank analyzes all
commercial loans that are being monitored as potential credit problems to
determine whether such loans are impaired, with impairment measured by reference
to the borrowers' collateral values and cash flows. The unallocated portion of
the allowance for loan losses represents the results of analyses that measure
probable losses inherent in the portfolio that are not adequately captured in
the allocated allowance analyses. These analyses include consideration of
unidentified losses inherent in the portfolio resulting from changing
underwriting criteria, changes in the types and mix of loans originated,
industry concentrations and evaluations, allowance levels relative to selected
overall credit criteria and other economic indicators used to estimate probable
incurred losses. The Bank has no loans which are considered to be impaired as of
June 30, 2000 and December 31, 1999. At June 30, 2000 and December 31, 1999, the
allowance for loans losses totaled $1.2 million and $1.1 million, respectively.
The allowance for loans losses as a percentage of loans was 1.15% and 1.18% as
of June 30, 2000 and December 31, 1999.
19
<PAGE> 20
An analysis of the allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------------ ------------
2000 1999 1999
---------- ---------- ------------
<S> <C> <C> <C>
Balance, Beginning $1,147,846 $1,122,155 $1,122,155
Provision charged to
operations 60,000 57,999 117,999
Recoveries 10,222 14,811 26,270
Loans charged off (56,765) (35,125) (118,578)
---------- ---------- ----------
Balance, Ending $1,161,303 $1,159,840 $1,147,846
========== ========== ==========
</TABLE>
An analysis of the allocation of allowance for loan losses is
summarized below:
<TABLE>
<CAPTION>
In thousands JUNE 30, DECEMBER 31,
-------------------------- ---------------------------
2000 1999
-------------------------- ---------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------- ------ -------------
<S> <C> <C> <C> <C>
Commercial, financial $ 124 6% $ 89 5%
and agriculture
Real estate - mortgage 332 71 284 73
Installment and other 245 23 558 22
Unallocated 460 N/A 217 N/A
------ --- ------ ---
TOTAL $1,161 100% $1,148 100%
====== === ====== ===
</TABLE>
DEPOSITS
The Bank's deposits increased $2.4 million or 1.9% during the six
months ended June 30, 2000. The deposit mix experienced changes during the first
six months of 2000 by a decrease in rate sensitive jumbo certificates of deposit
and an offsetting increase in other certificates of deposit. The Bank offers a
36-month Ultimate Certificate of Deposit 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. The decrease in jumbo
certificates of deposits experienced during 2000 is due to the maturity and
withdrawals of 36-month Ultimate Certificate of Deposits. However, the majority
of these maturities and withdrawals shifted to a new 26 month certificate with
an attractive interest rate relative to competition which caused other
certificates of deposit to increase.
CAPITAL RESOURCES
Shareholders' equity increased $433,000 or 3.5% during the first six
months of 2000 due to $693,000 in net income offset by the semi-annual cash
dividend of $165,000 and a decrease in accumulated comprehensive income of
$95,000. 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 June 30, 2000. The
following table summarized, as of June 30, 2000, the Bank's capital ratios.
Components Actual Required
of Capital Ratio Ratio
Tier 1 Capital $13,668 9.7% 4.0%
Total Risk Based Capital $14,746 17.1% 8.0%
20
<PAGE> 21
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
None; however, the Bank is involved in various legal proceedings
occurring in the ordinary course of business. There are no material
legal proceedings to which the Bank or its subsidiary is a part, or to
which any of their property is subject.
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CNB Financial Services, Inc.
----------------------------
(Registrant)
Date 8-25-00 /s/ Rebecca S. Brock, Vice President/CFO
-------------------------- ----------------------------------------
Date 8-25-00 /s/ Thomas F. Rokisky, President/CEO
-------------------------- ----------------------------------------
21
