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, 2008
[ ] 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 000-30665
CNB Financial Services, Inc.
(Exact Name of Registrant as specified in its charter)
West Virginia 55-0773918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
|
101 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 [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer [ ] Accelerated Filer [ ]
Non-Accelerated Filer [ ] Smaller Reporting Company [X]
(Do not check if a smaller reporting company)
|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
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: 450,549 shares of common stock,
par value $1 per share, as of August 14, 2008.
CNB FINANCIAL SERVICES, INC.
TABLE OF CONTENTS
PAGE
----
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2008 (Unaudited) and December 31, 2007......... 3
Consolidated Statements of Income for the Three and Six
Months ended June 30, 2008 and 2007 (Unaudited)......... 4
Consolidated Statements of Changes in Shareholders' Equity
for the Six Months Ended June 30, 2008 and 2007
(Unaudited)............................................. 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2008 and 2007 (Unaudited)................ 6
Notes to Consolidated Financial Statements (Unaudited)..... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three and Six Months
ended June 30, 2008..................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market
Risk.................................................... 25
Item 4. Controls and Procedures.................................... 26
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 27
Item 1a. Risk Factors............................................... 27
Item 4. Submission of Matters to a Vote of Security Holders........ 27
Item 6. Exhibits and Reports on Form 8-K........................... 27
SIGNATURES................................................. 28
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Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 indicates that
the disclosure of forward-looking information is desirable for investors and
encourages such disclosure by providing a safe harbor for forward-looking
statements that involve risk and uncertainty. All statements other than
statements of historical fact included in this Form 10-Q including statements in
Management's Discussion and Analysis of Financial Condition and Results of
Operations are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. In order to comply with the terms of the safe
harbor, CNB notes that a variety of factors could cause CNB's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in those forward-looking statements. These factors could
include the following possibilities: (1) competitive pressures among depository
and other financial institutions may increase significantly; (2) changes in the
interest rate environment may reduce margins; (3) general economic conditions
may become unfavorable resulting in reduced credit quality or demand for loans;
(4) legislative or regulatory changes could increase expenses; and (5)
competitors may have greater financial resources and develop products that
enable them to compete more successfully than CNB. Additionally, consideration
should be given to the cautionary language contained elsewhere in this Form 10-Q
and in the section on "Risk Factors," Item 1A in the company's Annual Report to
Shareholders on Form 10-K.
2
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
2008 2007
------------ ------------
(Unaudited) (Audited)
ASSETS
Cash and due from banks $ 7,852,361 $ 7,791,093
Securities available for sale
(at approximate market value) 61,976,432 66,017,231
Federal Home Loan Bank stock, at cost 2,484,200 2,623,600
Loans and lease receivable, net 198,829,832 202,668,845
Accrued interest receivable 1,299,582 1,406,804
Foreclosed real estate (held for sale), net 238,553 150,845
Premises and equipment, net 5,952,202 6,111,273
Deferred income taxes 1,490,724 927,843
Cash surrender value of life insurance 1,634,612 1,491,093
Intangible assets 329,903 385,661
Other assets 645,851 841,156
------------ ------------
TOTAL ASSETS $282,734,252 $290,415,444
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 42,445,401 $ 42,690,898
Interest-bearing demand 33,912,169 35,278,551
Savings 24,314,865 23,462,625
Time, $100,000 and over 48,980,517 44,493,979
Other time 76,065,744 80,718,661
------------ ------------
$225,718,696 $226,644,714
Accrued interest payable 1,122,550 1,281,166
FHLB borrowings 30,200,000 37,500,000
Accrued expenses and other liabilities 2,612,377 2,168,119
------------ ------------
TOTAL LIABILITIES $259,653,623 $267,593,999
============ ============
SHAREHOLDERS' EQUITY
Common stock, $1 par value; 5,000,000 shares
authorized; 458,048 shares issued at
June 30, 2008 and December 31, 2007 and
451,049 outstanding at June 30, 2008 and
454,949 outstanding at December 31, 2007 $ 458,048 $ 458,048
Capital surplus 4,163,592 4,163,592
Retained earnings 20,465,261 19,155,244
Accumulated other comprehensive income (loss) (1,541,764) (747,806)
------------ ------------
$23,545,137 $ 23,029,078
Less treasury stock, at cost, 6,999 shares in
2008 and 3,099 shares in 2007 (464,508) (207,633)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 23,080,629 $ 22,821,445
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $282,734,252 $290,415,444
============ ============
|
The Notes to Consolidated Financial Statements are an integral part of these
statements.
3
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $3,444,702 $3,598,134 $7,061,430 $7,255,996
Interest and dividends on securities
U.S. Government agencies and
corporations 140,794 326,642 362,282 657,720
Corporate bonds 91,639 -- 146,717 --
Mortgage backed securities 344,170 102,957 663,014 205,359
State and political subdivisions 132,668 99,210 243,147 202,722
Dividend income 22,580 24,130 50,377 50,700
Interest on FHLB deposits 1,229 2,482 2,080 2,965
Interest on federal funds sold -- 28,142 -- 36,295
---------- ---------- ---------- ----------
$4,177,782 $4,181,697 $8,529,047 $8,411,757
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on interest bearing demand,
savings and time deposits $1,398,183 $1,778,088 $2,920,485 $3,389,969
Interest on FHLB borrowings 174,197 70,525 444,786 294,986
---------- ---------- ---------- ----------
$1,572,380 $1,848,613 $3,365,271 $3,684,955
---------- ---------- ---------- ----------
NET INTEREST INCOME $2,605,402 $2,333,084 $5,163,776 $4,726,802
PROVISION FOR LOAN LOSSES 120,000 35,500 225,000 97,999
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $2,485,402 $2,297,584 $4,938,776 $4,628,803
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts $ 344,265 $ 336,762 $ 674,806 $ 640,108
Other service charges, commissions
and fees 211,154 200,356 411,432 383,430
Other operating income 16,761 78,676 37,060 97,462
Income from title company 3,002 2,695 6,730 5,839
Net gain on sales of loans 9,383 28,953 35,970 55,169
Net gain (loss) on sales and calls of securities 4,315 238 94,256 (1,879)
Net gain (loss) on disposal of premises and equipment -- 1,100 (484) 54
---------- ---------- ---------- ----------
$ 588,880 $ 648,780 $1,259,770 $1,180,183
---------- ---------- ---------- ----------
NONINTEREST EXPENSES
Salaries $ 757,779 $ 784,139 $1,510,342 $1,526,740
Employee benefits 346,214 302,757 688,792 626,987
Occupancy of premises 123,179 134,270 241,866 263,248
Furniture and equipment expense 201,233 210,692 407,271 419,366
Other operating expenses 497,555 526,144 1,036,517 1,034,828
---------- ---------- ---------- ----------
$1,925,960 $1,958,002 $3,884,788 $3,871,169
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES $1,148,322 $ 988,362 $2,313,758 $1,937,817
PROVISION FOR INCOME TAXES 378,679 331,893 764,685 655,211
---------- ---------- ---------- ----------
NET INCOME $ 769,643 $ 656,469 $1,549,073 $1,282,606
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 1.70 $ 1.43 $ 3.42 $ 2.80
========== ========== ========== ==========
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED
OTHER TOTAL
COMMON TREASURY CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK STOCK SURPLUS EARNINGS INCOME EQUITY
-------- --------- ---------- ----------- ------------- -------------
BALANCE, JANUARY 1, 2007 $458,048 $ -- $4,163,592 $17,421,402 $(1,720,780) $20,322,262
Comprehensive income: -----------
Net income for six months
ended June 30, 2007 -- -- -- 1,282,606 -- 1,282,606
Change in unrealized gains
(losses) on securities
available for sale
(net of tax of $227,520) -- -- -- -- (371,216) (371,216)
-----------
Total Comprehensive Income 911,390
-----------
Cash dividends ($.50 per share) -- -- -- (229,024) -- (229,024)
-------- --------- ---------- ----------- ------------ -----------
BALANCE, JUNE 30, 2007 $458,048 $ -- $4,163,592 $18,474,984 $(2,091,996) $21,004,628
======== ========= ========== =========== ============ ===========
BALANCE, JANUARY 1, 2008 $458,048 $(207,633) $4,163,592 $19,155,244 $ (747,806) $22,821,445
-----------
Comprehensive income:
Net income for six months
ended June 30, 2008 -- -- -- 1,549,073 -- 1,549,073
Change in unrealized gains
(losses) on securities
available for sale
(net of tax of $486,619) -- -- -- -- (793,958) (793,958)
-----------
Total Comprehensive Income 755,115
-----------
Acquisition of treasury stock, at cost,
3,900 shares -- (256,875) -- -- -- (256,875)
-----------
Cash dividends ($.53 per share) -- -- -- (239,056) -- (239,056)
-------- --------- ---------- ----------- ------------ -----------
BALANCE, JUNE 30, 2008 $458,048 $(464,508) $4,163,592 $20,465,261 $(1,541,764) $23,080,629
======== ========= ========== =========== ============ ===========
|
The Notes to Consolidated Financial Statements are an integral part of these
statements.
5
CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,549,073 $ 1,282,606
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization on premises, equipment and software 281,961 287,306
Provision for loan losses 225,000 97,999
Deferred income taxes (76,262) 33,231
Net (gain) loss on sale of securities (94,256) 1,879
Loss on sale of real estate owned 484 --
Net (gain) on disposal of premises and equipment -- (54)
Net (gain) on loans sold (35,970) (55,169)
Loans originated for sale (3,208,550) (3,248,550)
Proceeds from loans sold 3,244,520 3,303,719
Decrease in accrued interest receivable 107,222 30,320
Decrease in other assets 232,759 387,908
Gain on sale of stock -- (59,369)
Increase (decrease) in accrued interest payable (158,616) 140,094
(Increase) in cash surrender value on life insurance in excess
of premiums paid (85,085) (58,321)
Increase (decrease) in accrued expenses and other liabilities 444,258 (97,726)
Amortization of deferred loan (fees) cost 36,326 38,478
Amortization (accretion) of premium and discount on investments 421 16,182
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,463,285 $ 2,100,533
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans, not originated for sale $ 3,343,934 $ 2,935,092
Proceeds from sales and calls of securities 2,803,399 1,977,492
Proceeds from maturities, repayments and calls of securities 26,724,313 1,439,269
Purchases of securities (26,668,104) (6,322,957)
Purchases of Federal Home Loan Bank stock (1,125,000) (656,000)
Redemptions of Federal Home Loan Bank stock 1,264,400 1,179,000
Purchases of premises, equipment and software (110,137) (256,020)
Proceeds from sales of premises and equipment -- 1,100
Proceeds from sale of stock -- 59,369
Proceeds from sale of real estate owned 150,361 --
Costs to acquire foreclosed real estate (4,800) --
Net (increase) in federal funds sold -- (2,409,000)
Premiums paid on life insurance (58,434) (58,434)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 6,319,932 $ (2,111,089)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in demand and savings deposits $ (759,639) $ (1,182,553)
Net increase (decrease) in time deposits (166,379) 14,452,949
Net (decrease) in FHLB borrowings (7,300,000) (11,700,000)
Purchase of treasury stock (256,875) --
Cash dividends paid (239,056) (229,024)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ (8,721,949) $ 1,341,372
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 61,268 $ 1,330,816
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,791,093 7,358,773
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,852,361 $ 8,689,589
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest $ 3,523,887 $ 3,544,861
Income taxes $ 722,150 $ 440,000
Net transfer to foreclosed real estate, held for sale
from loans receivable $ 233,753 $ --
|
The Notes to Consolidated Financial Statements are an integral part of these
statements.
6
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation and Contingencies
In the opinion of CNB Financial Services, Inc. ("CNB" or the
"Company"), the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary for a
fair presentation of CNB's financial condition as of June 30, 2008 and the
results of operations for the three and six months ended June 30, 2008 and 2007,
changes in shareholders' equity and cash flows for the six months ended June 30,
2008 and 2007.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q. These financial statements
should be read in conjunction with the audited consolidated financial statements
and the notes included in CNB's Annual Report for the year ended December 31,
2007.
In the ordinary course of business, the company and its subsidiary are
involved in various legal proceedings. In the opinion of the management of CNB,
there are no proceedings pending to which CNB is a party or to which its
property is subject, which, if determined adversely to CNB, would be material in
relation to CNB's financial condition. There are no proceedings pending other
than ordinary routine litigation incident to the business of CNB. In addition,
no material proceedings are pending or are known to be threatened or
contemplated against CNB by government authorities.
Earnings per share have been computed based on the following weighted
average shares outstanding:
6/30/2008 6/30/2007
--------- ---------
Quarter ending 451,573 458,048
Year to date ending 453,261 458,048
|
7
Note 2. Securities
The amortized cost and estimated market value of debt securities at
June 30, 2008 and December 31, 2007 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Securities are summarized as follows:
JUNE 30, 2008 WEIGHTED
--------------------------------------------------- AVERAGE
GROSS GROSS ESTIMATED TAX
AMORTIZED UNREALIZED UNREALIZED FAIR EQUIVALENT
COST GAINS LOSSES VALUE YIELD
----------- ---------- ---------- ----------- ----------
Available for sale:
U.S. Government agencies and
corporations
After 1 but within 5 years $ 2,640,765 $ 1,978 $ 6,893 $ 2,635,850 3.95%
After 5 but within 10 years 10,650,277 26,061 172,783 10,503,555 4.41
----------- -------- ---------- -----------
$13,291,042 $ 28,039 $ 179,676 $13,139,405 4.32%
----------- -------- ---------- -----------
Corporate Bonds
After 1 but within 5 years $ 1,475,659 $ -- $ 46,742 $ 1,428,917 5.73%
After 5 but within 10 years 5,476,017 -- 309,507 5,166,510 5.47
----------- -------- ---------- -----------
$ 6,951,676 $ -- $ 356,249 6,595,427 5.53%
----------- -------- ---------- -----------
States and political subdivisions
Within one year $ 1,645,921 $ 5,076 $ -- $ 1,650,997 2.73%
After 1 but within 5 years 3,569,478 6,705 21,032 3,555,151 3.40
After 5 but within 10 years 10,543,383 -- 230,288 10,313,095 3.51
----------- -------- ---------- -----------
$15,758,782 $ 11,781 $ 251,320 $15,519,243 3.40%
----------- -------- ---------- -----------
Mortgage backed securities:
Government issued or
guaranteed $16,629,273 $ 39,250 $ 301,411 $16,367,112 5.35%
----------- -------- ---------- -----------
Collateralized mortgage
obligations:
Government issued or
guaranteed $ 8,799,477 $ 50,791 $ 111,069 $ 8,739,199 5.19%
Privately issued 1,843,377 -- 227,331 1,616,046 5.84
----------- -------- ---------- -----------
$10,642,854 $ 50,791 $ 338,400 $10,355,245 5.31%
----------- -------- ---------- -----------
Total securities available for sale $63,273,627 $129,861 $1,427,056 $61,976,432 4.66%
=========== ======== ========== ===========
Restricted:
Federal Home Loan Bank stock $ 2,484,200 $ -- $ -- 2,484,200 3.75%
=========== ======== ========== ===========
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8
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2. Securities (continued)
DECEMBER 31, 2007 WEIGHTED
--------------------------------------------------- AVERAGE
GROSS GROSS ESTIMATED TAX
AMORTIZED UNREALIZED UNREALIZED FAIR EQUIVALENT
COST GAINS LOSSES VALUE YIELD
----------- ---------- ---------- ----------- ----------
Available for sale:
U.S. Government agencies and
corporations
Within one year $13,892,949 $ 21,851 $ 4,802 $13,909,998 4.58%
After 1 but within 5 years 15,236,652 33,176 31,057 15,238,771 4.09
After 5 but within 10 years 1,987,371 33,929 -- 2,021,300 5.86
----------- -------- -------- -----------
$31,116,972 $ 88,956 $ 35,859 $31,170,069 4.42%
----------- -------- -------- -----------
States and political subdivisions
Within one year $ 551,482 $ 311 $ 1,711 $ 550,082 2.85%
After 1 but within 5 years 2,064,702 24,344 22,266 2,066,780 3.40
After 5 but within 10 years 8,990,636 2,330 132,262 8,860,704 3.55
----------- -------- -------- -----------
$11,606,820 $ 26,985 $156,239 $11,477,566 3.49%
----------- -------- -------- -----------
Mortgage backed securities:
Government issued or
guaranteed $14,149,889 $ 86,271 $ 97,135 $14,139,025 5.37%
----------- -------- -------- -----------
Collateralized mortgage
obligations:
Government issued or
guaranteed $ 7,236,286 $ 80,871 $ 7,907 $ 7,309,250 5.54%
Privately issued 1,923,882 12,116 14,677 1,921,321 5.92
----------- -------- -------- -----------
$ 9,160,168 $ 92,987 $ 22,584 $ 9,230,571 5.62%
----------- -------- -------- -----------
Total securities available for sale $66,033,849 $295,199 $311,817 $66,017,231 4.63%
=========== ======== ======== ===========
Restricted:
Federal Home Loan Bank stock $ 2,623,600 $ -- $ -- $ 2,623,600 6.00%
=========== ======== ======== ===========
|
The fair value of securities pledged to secure public deposits and for
other purposes as required or permitted by law totaled $14,712,373 at June 30,
2008 and $19,138,493 at December 31, 2007.
Proceeds from sales of securities available for sale (excluding
maturities and calls) during the six months ended June 30, 2008 and 2007 were
$2,803,399 and $1,977,492, respectively. Gross gains (losses) of $55,278 and
$(0) during the six months ended June 30, 2008 on respective sales of securities
and $1,066 and $(3,002) for the six months ended June 30, 2007 were realized on
the respective sales. Gross gains of $38,978 and $57 during the six months ended
June 30, 2008 and 2007, respectively were realized on called securities.
9
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2. Securities (continued)
The following tables show our investments' gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at June 30, 2008
and December 31, 2007.
Securities with unrealized losses are summarized as follows:
JUNE 30, 2008
---------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------ --------------------- ------------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES
------------------------- ----------- ---------- -------- ---------- ----------- ----------
U.S. Government agencies and
corporations $10,136,334 $ 179,676 $ -- $ -- $10,136,334 $ 179,676
Corporate bonds 6,595,427 356,249 -- -- 6,595,427 356,249
State and political subdivisions 12,290,909 243,109 211,198 8,211 12,502,107 251,320
Mortgage backed securities:
Government issued or guaranteed 12,840,276 276,773 509,486 24,638 13,349,762 301,411
Collateralized mortgage obligations:
Government issued or guaranteed 4,129,433 111,069 -- -- 4,129,433 111,069
Privately issued 1,616,046 227,331 -- -- 1,616,046 227,331
----------- ---------- -------- ------- ----------- ----------
Total temporarily impaired
securities $47,608,425 $1,394,207 $720,684 $32,849 $48,329,109 $1,427,056
=========== ========== ======== ======= =========== ==========
|
DECEMBER 31, 2007
------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------ ------------------------ ------------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES
------------------------- ----------- ---------- ----------- ---------- ----------- ----------
U.S. Government agencies and
corporations $ 6,999,300 $ 700 $12,876,348 $ 35,159 $19,875,648 $ 35,859
State and political subdivisions 2,067,956 24,596 8,102,090 131,643 10,170,046 156,239
Mortgage backed securities:
Government issued or guaranteed 846,880 4 5,448,594 97,131 6,295,474 97,135
Collateralized mortgage obligations:
Government issued or guaranteed 1,548,343 7,907 -- -- 1,548,343 7,907
Privately issued 467,086 14,677 -- -- 467,086 14,677
----------- ------- ----------- -------- ----------- --------
Total temporarily impaired
securities $11,929,565 $47,884 $26,427,032 $263,933 $38,356,597 $311,817
=========== ======= =========== ======== =========== ========
|
10
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Loans and Leases Receivable
Major classifications of loans at June 30, 2008 and December 31, 2007,
were as follows:
JUNE 30, DECEMBER 31,
2008 2007
------------ ------------
Loans:
Real estate $138,652,895 $143,012,227
Commercial real estate 38,788,575 37,587,676
Consumer 15,148,212 15,544,183
Commercial 8,084,859 8,179,019
Overdrafts 76,243 104,240
------------ ------------
$200,750,784 $204,427,345
Leases 107,852 112,838
------------ ------------
$200,858,636 $204,540,183
Net deferred loan fees, costs,
premiums and discounts 244,017 273,123
Allowance for loan losses (2,272,821) (2,144,461)
------------ ------------
$198,829,832 $202,668,845
============ ============
|
An analysis of the allowance for possible loan losses is as follows:
JUNE 30,
----------------------- DECEMBER 31,
2008 2007 2007
---------- ---------- ------------
Balance, Beginning $2,144,461 $2,131,523 $2,131,523
Provision charged to operations 225,000 97,999 168,999
Recoveries 63,508 75,625 183,281
Loans charged off (160,148) (165,665) (339,342)
---------- ---------- ----------
Balance, Ending $2,272,821 $2,139,482 $2,144,461
========== ========== ==========
|
11
The following is a summary of information pertaining to impaired
loans:
JUNE 30,
--------------- DECEMBER 31,
2008 2007 2007
-------- ---- ------------
(in thousands)
Impaired loans without a valuation allowance $ -- $-- $ --
Impaired loans with a valuation allowance (1) 867,908 -- 1,410,100
-------- --- ----------
Total impaired loans $867,908 $-- $1,410,100
======== === ==========
Valuation allowance related to impaired loans $229,052 $-- $ 254,680
|
(1) Some of these loans have government agency guarantees reducing the bank's
exposure by $71,191 for June 30, 2008 and $261,592 for December 31, 2007
JUNE 30,
----------------- DECEMBER 31,
2008 2007 2007
---------- ---- ------------
(in thousands)
Average investment in impaired loans $1,139,004 $-- $705,050
========== === ========
Interest income recognized on impaired loans $ 12,237 $-- $ 85,185
========== === ========
Interest income recognized on a cash basis on
impaired loans $ 12,237 $-- $ 85,185
========== === ========
|
Loans are placed on nonaccrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When interest accruals are
discontinued, interest credited to income is reversed. Nonaccrual loans are
restored to accrual status when all delinquent principal and interest becomes
current or the loan is considered secured and in the process of collection.
Certain loans that are determined to be sufficiently collateralized may continue
to accrue interest after reaching 90 days past due. A summary of nonperforming
assets is as follows:
JUNE 30,
--------------------- DECEMBER 31,
2008 2007 2007
---------- -------- ------------
Foreclosed real estate (other real estate
owned) $ 238,553 $ -- $ 150,845
Impaired loans, not on nonaccrual 297,088 -- 847,852
Nonaccrual loans, impaired (1) 570,820 -- 562,248
Nonaccrual loans, not impaired 680,119 658,768 551,904
Loans past due 90 days or more still
accruing interest -- -- --
---------- -------- ----------
Total non-performing assets $1,786,580 $658,768 $2,112,849
========== ======== ==========
|
(1) Some of these loans have government agency guarantees reducing the bank's
exposure by $71,191 at June 30, 2008 and $261,592 at December 31, 2007.
12
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. Time Deposits
At June 30, 2008, the scheduled maturities of time deposits are as
follows:
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- ------------
Within 3 months $13,236,207 $ 31,674,621
3 months thru 6 months 3,806,284 13,339,099
6 months thru 12 months 2,058,069 7,457,603
Over 12 months 29,879,956 72,574,938
----------- ------------
$48,980,516 $125,046,261
=========== ============
|
Note 5. Federal Home Loan Bank Borrowings
JUNE 30,
------------------------ DECEMBER 31,
2008 2007 2007
----------- ---------- ------------
Federal Home Loan Bank advances $30,200,000 $6,800,000 $37,500,000
|
CNB Bank, Inc. is a member of the Federal Home Loan Bank ("FHLB") of
Pittsburgh and, as such, can take advantage of the FHLB program for overnight
and term advances at published daily rates. At June 30, 2008, the Bank has short
term and long term advances with FHLB. Under the terms of a blanket collateral
agreement, advances from the FHLB are collateralized by qualifying mortgages and
US government agencies and mortgage-backed securities. In addition, all of the
Bank's stock in the FHLB is pledged as collateral for such debt. Term advances
available under this agreement are limited by available and qualifying
collateral and the amount of FHLB stock held by the borrower.
Note 6. Pension Plan
CNB Bank, Inc. has an obligation under a defined benefit plan covering
all eligible employees. See Note 11 "Pension Plan" to our consolidated financial
statements in our most recently filed Annual Report on Form 10-K for further
information.
The components of net periodic plan cost charged to operations are as
follows:
JUNE 30,
---------------------
2008 2007
--------- ---------
Service cost $ 121,433 $ 123,911
Interest cost 153,951 133,622
Expected return on plan assets (151,314) (133,577)
Amortization of prior service costs 6,172 6,172
Recognized net actuarial loss 25,951 39,707
--------- ---------
Net periodic plan cost $ 156,193 $ 169,835
========= =========
|
Employer contributions paid during the periods ended June 30, 2008 and
2007 were $250,000 and $386,764, respectively.
13
CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 7. Supplemental Retirement Plan
On January 2, 2004, the Bank entered into a nonqualified supplemental
retirement benefit agreement with the President which when fully vested would
pay the President or his beneficiary an amount of $30,000 per year for 10 years
beginning September 11, 2011, if he retires on or after May 29, 2011.
Termination of employment prior to that date other than by reasons of death or
disability will result in a reduced benefit. The expense for the six months
ended June 30, 2008 and 2007 was $19,713.
Note 8. Health Insurance Plan
Effective January 1, 2005, the Bank changed its health insurance
program to a high deductible plan and concurrently established health
reimbursement accounts for each employee in the plan. The Bank has committed for
2008 to fund $750 for each participant. The expense incurred for the health
reimbursement accounts for the six months ended June 30, 2008 and 2007 was
$27,169 and $28,519, respectively.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
CNB Financial Services, Inc. ("CNB" or the "Company") was organized
under the laws of West Virginia in March 2000 at the direction of the Board of
Directors of CNB Bank, Inc. formerly Citizens National Bank, (the "Bank") for
the purpose of becoming a financial services holding company. The Company's
primary function is to direct, plan and coordinate the business activities for
the Bank and its subsidiary. We refer to the Company and its subsidiary as
"CNB".
On August 31, 2000, the Bank, via merger, became a wholly-owned
subsidiary of the Company and the shareholders of the Bank became shareholders
of the Company. Each Bank shareholder received two shares of the Company stock
for each share of the Bank's common stock. The merger was accounted for as a
pooling of interests.
The Bank was organized on June 20, 1934, and has operated in Berkeley
Springs in Morgan County, West Virginia, as a national banking association
continuously until October 16, 2006, at which time the Bank obtained a West
Virginia state charter and began operating as a state banking association.
The Bank is a full-service commercial bank conducting general banking
and trust activities through six full-service offices and six automated teller
machines located in Morgan and Berkeley Counties, West Virginia and Washington
County, Maryland.
The Bank formed CNB Insurance Services, Inc., a wholly owned
subsidiary, which was a property and casualty insurance agency selling primarily
personal lines of insurance. On April 27, 2006, CNB Insurance Services, Inc.
entered into an agreement with Maiden Financial, Inc. Under the terms of the
agreement, which was completed on June 1, 2006, CNB Insurance Services, Inc.
sold to Maiden Financial Inc. certain assets constituting CNB Insurance
Services, Inc.'s insurance business for a purchase price of $153,332 resulting
in a gain of $143,913.
The following discussion and analysis presents the significant changes
in financial condition and results of operations of CNB for the three and six
months ended June 30, 2008 and 2007. This discussion may include forward-looking
statements based upon management's expectations. Actual results may differ. We
have rounded amounts and percentages used in this discussion and have based all
average balances on daily averages.
CRITICAL ACCOUNTING POLICIES
CNB has established various accounting policies which govern the
application of accounting principles generally accepted in the United States of
America in the preparation and presentation of CNB's consolidated financial
statements. The significant accounting policies of CNB are described in "Item 1,
Critical Accounting Policies" and Note 1: Summary of Significant Accounting
Policies of the Consolidated Financial Statements on Form 10-K as of December
31, 2007, and along with the disclosures presented in other financial statement
notes, provide information on how significant assets and liabilities are valued
in the financial statements and how those values are determined. Certain
accounting policies involve significant judgments, assumptions and estimates by
management that have a material impact on the carrying value of certain assets
and liabilities, which management considers to be critical accounting policies.
The judgments, assumptions and estimates used by management are based on
historical experience, knowledge of the accounts and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgment and assumptions made by management, actual results could differ from
these judgments and estimates, which could have a material impact on the
carrying values of assets and liabilities and the results of operations of the
Company.
CNB views the determination of the allowance for loan losses as a
critical accounting policy that requires the most significant judgments,
assumptions and estimates used in the preparation of its consolidated financial
statements. For a more detailed discussion on the allowance for loan losses, see
Nonperforming Loans and Allowance For Loan Losses in the Management's Discussion
and Analysis and Allowance for Loan Losses in Note 1: Summary of Significant
Accounting Policies and Note 4: Loans and Leases Receivable in the Notes to
Consolidated Financial Statements in the Form 10-K for December 31, 2007.
EARNINGS SUMMARY
Net income for the three months ended June 30, 2008 was $770,000 or
$1.70 per share compared to $656,000 or $1.43 per share for the same period in
2007. Annualized return on average assets and average equity were 1.1% and 13.0%
respectively, for the three months ended June 30, 2008, compared with 1.0% and
12.5%, respectively, for the three months ended June 30, 2007.
15
Net income for the six months ended June 30, 2008 was $1.5 million or
$3.42 per share compared to $1.3 million or $2.80 per share for the same period
in 2007. Annualized return on average assets and average equity were 1.1% and
13.3% respectively, for the six months ended June 30, 2008, compared with .9%
and 12.4% respectively, for the six months ended June 30, 2007.
Earnings projections for the remainder of 2008 are expected to be
impacted by the continued slowing in the Bank's loan demand along with the
anticipated tightening of the Bank's net interest margin. Another significant
factor affecting the 2008 net income is the increased expense of FDIC insurance
which is expected to be approximately $57,000 higher for the second half of 2008
compared to the same period in 2007.
NET INTEREST INCOME
Net interest income represents the primary component of CNB's
earnings. It is the difference between interest and fee income related to
earning assets and interest expense incurred to carry interest-bearing
liabilities. Changes in the volume and mix of interest earning assets and
interest bearing liabilities, as well as changing interest rates, impact net
interest income. To manage these changes, their impact on net interest income
and the risk associated with them, CNB utilizes an ongoing asset/liability
management program. This program includes analysis of the difference between
rate sensitive assets and rate sensitive liabilities, earnings sensitivity to
rate changes, and source and use of funds. A discussion of net interest income
and the factors impacting it is presented below.
Net interest income for the three months ended June 30, 2008 increased
by $272,000 or 11.7% over the same period in 2007. Interest income for the three
months ended June 30, 2008 decreased by $4,000 or .1% compared to the same
period in 2007, while interest expense decreased by $276,000 or 14.9% during the
three months ended June 30, 2008, as compared to the same period in the prior
year.
Net interest income for the six months ended June 30, 2008 increased
by $437,000 or 9.2% over the same period in 2007. Interest income for the six
months ended June 30, 2008 increased by $117,000 or 1.4% compared to the same
period in 2007, while interest expense decreased by $320,000 or 8.7% during the
six months ended June 30, 2008, as compared to the same period in the prior
year.
Net interest income increased for the three and six month periods
ending June 30, 2008 due to average interest earning assets increased as a
faster pace then average interest bearing liabilities and the interest earned on
the average interest earning assets decreased at a slower pace then the interest
paid on average interest bearing liabilities. During the second quarter of 2008
compared to the same period in 2007, average net interest earning assets
increased $10.5 million or 4.1% whereas average net interest bearing liabilities
increased $7.1 million or 3.5% resulting in an increase in net interest income.
During the six months ended June 30, 2008 compared to the same period in 2007,
average net interest earning assets increased $10.0 million or 3.9% whereas
average net interest bearing liabilities increased $6.3 million or 3.1%
resulting in an increase in net interest income.
Although, CNB has experienced a shift in the deposit mix from lower
yielding demand and savings deposits to higher yielding time deposits, the rates
on all interest bearing liabilities are considerably lower compared to the same
periods in 2007. CNB has also experienced a significant increase in the average
balance of borrowings during these same time periods. These shifts have reduced
the full impact of the lower interest rates reflecting only a 64 basis point
decrease in rates paid on average interest bearing liabilities for the quarter
and only 41 basis point decrease in rates paid on average interest bearing
liabilities for the six month period ending June 30, 2008, both time frames
compared to the same periods in 2007. During both time frames previously
mentioned, CNB also experienced a shift in the interest earning assets from
higher yielding loans to lower yielding taxable and tax exempt securities. This
shift in part is due to the continued slowing of the Bank's loan demand. This
shift contributed to the 26 basis point decrease in rates earned on average
interest earning assets for the quarter and the 14 basis point decrease in rates
earned on average interest earning assets for the six month period ending June
30, 2008, both time frames compared to the same periods in 2007.
The 64 basis point decrease in rates, for the quarter, paid on average
interest bearing liabilities offset by the 26 basis point decreased in rates
earned on average interest earning assets contributed to the increase in the net
interest margin of 38 basis points while the ratio of net interest income to
average interest earning assets increased 27 basis points. The 41 basis point
decrease in rates, for the six month period, paid on average interest bearing
liabilities offset by a 14 basis point decrease in rates earned on average
interest earning assets contributed to the increase in the net interest margin
of 27 basis points while the ratio of net interest income to average interest
earning assets increased 21 basis points.
See Table 1 and Table 2 - Distribution of Assets, Liabilities, and
Shareholders' Equity; Interest Rates and Interest Differential.
The net interest margin is impacted by the change in the spread
between yields on earning assets and rates paid on interest bearing liabilities.
16
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
JUNE 30, 2008 JUNE 30, 2007
---------------------------- ----------------------------
QTR QTR
AVERAGE QTR YIELD/ AVERAGE QTR YIELD/
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
-------- -------- --------- -------- -------- ---------
(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold $ -- $ -- 2.09% $ 2,042 $ 28 5.16%
Securities:
Taxable 47,951 603 5.03 39,165 460 4.70
Tax-exempt (1) 15,405 130 5.11 11,093 96 5.24
Loans (net of unearned interest) (2)(5)(6) 202,789 3,394 6.69 203,318 3,544 6.97
-------- ------ ---- -------- ------ ----
Total interest earning assets (1) $266,145 $4,127 6.20% $255,618 $4,128 6.46%
-------- ------ ---- -------- ------ ----
Nonearning assets:
Cash and due from banks $ 6,636 $ 9,082
Bank premises and equipment, net 5,982 6,259
Other assets 4,766 5,076
Allowance for loan losses (2,249) (2,193)
-------- --------
Total assets $281,280 $273,842
======== ========
Interest bearing liabilities:
Savings deposits $ 24,212 $ 18 0.30% $ 25,840 $ 32 0.50%
Time deposits 126,189 1,308 4.15 120,504 1,381 4.58
NOW accounts 22,389 47 0.84 40,080 291 2.90
Money market accounts 11,743 25 0.85 13,213 74 2.24
Borrowings 27,316 174 2.55 5,148 71 5.52
-------- ------ ---- -------- ------ ----
Total interest bearing liabilities $211,849 $1,572 2.97% $204,785 $1,849 3.61%
-------- ------ ---- -------- ------ ----
Noninterest bearing liabilities:
Demand deposits $ 41,683 $ 43,905
Other liabilities 4,027 4,221
Shareholders' equity 23,721 20,931
-------- --------
Total liabilities and
shareholders' equity $281,280 $273,842
======== ========
------ ------
Net interest income (1) $2,555 $2,279
====== ======
Net interest spread (3) 3.23% 2.85%
==== ====
Net interest income to average
interest earning assets (1) 3.84% 3.57%
==== ====
|
(1) Yields are expressed on a tax equivalent basis using a 34% tax rate.
(2) For the purpose of these computations, nonaccruing loans are included in
the amounts of average loans outstanding.
(3) Net interest spread is the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(4) Yields/Rates are expressed on an annualized basis.
(5) Interest income on loans excludes fees of $50,566 in 2008 and $54,003 in
2007.
(6) Interest income on loans includes fees of $14,971 in 2008 and $20,314 in
2007 from the Business Manager Program, student loans and lease
receivables.
17
TABLE 2. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
JUNE 30, 2008 JUNE 30, 2007
---------------------------- ----------------------------
YTD YTD
AVERAGE YTD YIELD/ AVERAGE YTD YIELD/
BALANCE INTEREST RATE (4) BALANCE INTEREST RATE (4)
-------- -------- --------- -------- -------- ---------
(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold $ -- $ -- 2.63% $ 1,354 $ 36 5.16%
Securities:
Taxable 49,515 1,230 4.97 39,532 924 4.67
Tax-exempt (1) 14,000 238 5.15 11,383 196 5.22
Loans (net of unearned interest) (2)(5)(6) 203,575 6,964 6.84 204,783 7,135 6.97
-------- ------ ---- -------- ------ ----
Total interest earning assets (1) $267,090 $8,432 6.31% $257,052 $8,291 6.45%
-------- ------ ---- -------- ------ ----
Nonearning assets:
Cash and due from banks $ 6,711 $ 8,443
Bank premises and equipment, net 6,034 6,286
Other assets 4,926 5,192
Allowance for loan losses (2,220) (2,176)
-------- --------
Total assets $282,541 $274,797
======== ========
Interest bearing liabilities:
Savings deposits $ 23,689 $ 35 0.30% $ 26,332 $ 65 0.49%
Time deposits 126,108 2,701 4.28 117,702 2,636 4.48
NOW accounts 22,316 113 1.01 39,026 549 2.81
Money market accounts 11,835 71 1.20 13,166 140 2.13
Borrowings 29,437 445 3.02 10,845 295 5.44
-------- ------ ---- -------- ------ ----
Total interest bearing liabilities $213,385 $3,365 3.15% $207,071 $3,685 3.56%
-------- ------ ---- -------- ------ ----
Noninterest bearing liabilities:
Demand deposits $ 41,865 $ 42,719
Other liabilities 3,978 4,324
Shareholders' equity 23,313 20,683
-------- --------
Total liabilities and
shareholders' equity $282,541 $274,797
======== ========
------ ------
Net interest income (1) $5,067 $4,606
====== ======
Net interest spread (3) 3.16% 2.89%
==== ====
Net interest income to average
interest earning assets (1) 3.79% 3.58%
==== ====
|
(1) Yields are expressed on a tax equivalent basis using a 34% tax rate.
(2) For the purpose of these computations, nonaccruing loans are included in
the amounts of average loans outstanding.
(3) Net interest spread is the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(4) Yields/Rates are expressed on an annualized basis.
(5) Interest income on loans excludes fees of $97,121 in 2008 and $120,779 in
2007.
(6) Interest income on loans includes fees of $38,421 in 2008 and $45,016 in
2007 from the Business Manager Program, student loans and lease
receivables.
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 of management of the probable losses which
have been incurred as of a balance sheet date.
The provision for loan losses is a charge to earnings which is made to
maintain the allowance for loan losses at a sufficient level. The provision for
loan losses for the three months ended June 30, 2008 and June 30, 2007 amounted
to $120,000 and $35,500, respectively. The provision for loan losses for the six
months ended June 30, 2008 and June 30, 2007 amounted to $225,000 and $97,999,
respectively mostly due to non performing assets and past due loans increasing
from the same period in 2007. Management believes the allowance for loan losses
is adequate and is not aware of any information relating to the loan portfolio
which it expects will materially impact future operating results, liquidity or
capital resources. In addition, federal regulators may require an adjustment to
the reserves as a result of their examination of the bank. See "Nonperforming
Assets and Allowance for Loan Losses" for further discussion.
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 2008 decreased
$60,000 or 9.2% to $589,000 from $649,000. Noninterest income for the six months
ended June 30, 2008 increased $80,000 or 6.7% to $1.3 million from $1.2 million
during the first six months of 2007. The decrease in noninterest income for the
three months ended June 30, 2008 is a result of a decrease from the sale of
stock in 2007 realizing a $59,000 gain. In 2000, the Bank received shares of
stock from the demutualization of an insurance company and sold the stock. The
Bank was unaware of 1,644 shares which had been erroneously issued in the name
of a bank director. Immediately upon knowledge of the existence of the stock,
the bank took possession of the stock and sold it in 2007. The decrease in gain
on sale of loans also contributed to the decrease in noninterest income for the
three months ended June 30, 2008. These decreases were offset by increases in
overdraft account fees, debit card fees and trust fee income. The increase in
fees related to overdrafts and debit cards have a direct correlation to the
increased deposit base of the bank. Trust fees increased due to a reallocation
of trust assets into accounts earning higher management fees offset by the
average assets under management decreasing to $39.5 million, a 7.7% decrease
over the same period last year.
For the six months ended June 30, 2008, the contributing factors to
the increase in noninterest income are the same as listed above for the second
quarter 2008. Another factor contributing to the increase in noninterest income
was a significant increase in the gain on sales and calls of securities which
totaled $94,000 for the six months ended June 30, 2008 compared to a loss of
$2,000 for the same time period in 2007. These increases were offset by a
decrease in noninterest income from the sale of stock in the second quarter of
2007 and the decrease in gain on sale of loans in 2008.
NONINTEREST EXPENSES
Noninterest expenses for the three months ended June 30, 2008,
decreased $32,000 or 1.6% and for the six months ended June 30, 2008, increased
$14,000 or .4%. Salaries decreased in the second quarter and for the six months
ended June 30, 2008 due to a decrease of nine full time equivalent employees
from the same time period last year. One of these employees was an executive
officer and the other employees who left the Bank's employment were replaced at
a lower salary base. Offsetting this decrease was an increase in salaries due to
normal merit increases and a portion of the accrual for the expected 2008 year
end bonuses to be paid to all employees. Employee benefits increased during
these same time periods due to an increase in the post retirement expense
resulting from increased medical costs and 401(k) expense offset by a decrease
in the group insurance expense. Although there was an increase in the monthly
premiums on the group health insurance, this increase was offset by a decrease
in the number of employees enrolled in the plan.
The decrease of $11,000 in other occupancy expense for the three
months ended June 30, 2008 is a result of painting at one of the branch
locations being performed in the second quarter of 2007. The decrease of $21,000
in other occupancy expense for the six months ended June 30, 2008 is a result of
building equipment repairs and minor remodeling at the main branch being
performed in the first quarter of 2007. Furniture and equipment expense
decreased $9,000 for the three months ended June 30, 2008 and decreased $12,000
for the six months ended June 30, 2008. These decreases are a result of the
reduction in the depreciation expense due to some computer hardware becoming
fully depreciated during this time period. Equipment expense has also shown a
decrease during these time periods. These decreases were offset by increases in
software amortization expense and furniture and equipment maintenance contracts.
Other operating expenses for the three months ended June 30, 2008
decreased $29,000 and for the six months ended June 30, 2008 increased by
$2,000. The most significant decreases during the second quarter pertained to
the rate reduction adjustment in the franchise tax expense relating to the 2007
tax return and a decrease in professional service fees relating to expenses to
become compliant with Sarbanes-Oxley Act of 2002. These expenses have shifted
from professional service fees to audit fees for testing of the bank's internal
controls in connection with Sarbanes-Oxley Act of 2002. Another significant
factor leading to the decrease during
19
the second quarter was in late 2007 the Bank began image processing through
Check21 which enabled the Bank to eliminate the cost of their courier services.
The changes in other operating expenses during the three and six month
periods were also due to increases in marketing expense, audit expense, debit
card expense and bad check and other losses offset by decreases in stationery,
supplies and printing, data processing expense, other outside service fees and
deferred compensation expense. Marketing expense has increased due to additional
exposure in area newspapers for specific loan and deposit specials. Audit fees
increased due to increased costs associated with the bank's ongoing audit
functions and the additional costs of testing the bank's internal controls in
connection with complying with the Sarbanes-Oxley Act of 2002. The monthly fees
for debit cards continue to increase due to increased costs and volume of usage.
Bad check and other losses continued to increase in the second quarter 2008 due
to numerous fraudulent items the Bank has experienced. The decrease in
stationery, supplies and printing and data processing expense is in part due the
proof of deposit encoding supplies were not needed after June 2007 as the Bank
began image processing through Check21. The deferred compensation expense
decreased due to the semi-annual adjustment of the asset and liability accounts
in line with the actual cash surrender value of the insurance policies and the
future liability on the Bank's books.
INCOME TAXES
The Bank's provision for income taxes increased $47,000 or 14.1% to
$379,000 for the three months ended June 30, 2008. For the six months ended June
30, 2008, income taxes increased $109,000 or 16.7%. The effective tax rates for
the second quarter of 2008 and 2007 were 33.0% and 33.6%, respectively and for
the six months ended June 30, 2008 and 2007 were 33.1% and 33.8%, respectively.
The Bank's income tax expense differs from the amount computed at statutory
rates primarily due to the tax-exempt earnings from certain investment
securities and loans, and non-deductible expenses, such as life insurance
premiums.
FINANCIAL CONDITION
The Bank's total assets as of June 30, 2008 decreased $7.7 million or
2.6% to $282.7 million from December 31, 2007 due primarily to a $4.0 million
decrease in investment securities and a $3.8 million decrease in loans. The
Bank's total liabilities decreased $7.9 million or 3.0% to $259.7 million from
December 31, 2007 due to a $7.3 million decrease in borrowings and a $926,000
decrease in deposits offset by a $444,000 increase in accrued expenses and other
liabilities. Shareholders' equity increased $259,000 to $23.1 million at June
30, 2008, due to net income of $1.5 million offset by the semi-annual cash
dividend of $239,000, stock repurchases of $257,000 and a $794,000 decrease in
accumulated other comprehensive income. The $794,000 decrease in accumulated
other comprehensive income is a direct result of the decrease in market value of
available for sale securities. The components of accumulated other comprehensive
income at June 30, 2008 and December 31, 2007, were unrealized gains and losses
on available for sale securities, net of deferred income taxes and unrecognized
pension costs, net of deferred income taxes. The unrealized gains and losses are
primarily a function of available market interest rates relative to the yield
being generated on the available for sale portfolio. No earnings impact results
unless the securities are actually sold. During the third quarter 2007, the Bank
instituted a stock repurchase program to repurchase issued shares of common
stock of CNB Financial Services, Inc. Through this program as of June 30, 2008,
the Bank has repurchased 6,999 shares of CNB Financial Services, Inc. common
stock reducing shareholders' equity by $464,508.
LOAN PORTFOLIO
At June 30, 2008, total loans decreased $3.8 million or 1.9% to $198.8
million from $202.7 million at December 31, 2007. Beginning in January 2007, the
Bank began selling all fixed rate mortgage loans to secondary market investors.
During the second quarter of 2008, CNB originated and sold $983,000 of loans to
secondary market investors and for the six months ended June 30, 2008, CNB
originated and sold $3.2 million of loans to secondary market investors. The
bank continues to experience a slow down in the loan demand due to the slowdown
in the housing market, even though lending officers continue to be proactive in
their marketing effort in the bank's lending area.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of nonaccrual loans, loans which are past
due 90 days or more and still accruing interest, impaired loans and foreclosed
real estate. The following table summarized the Bank's nonperforming assets as
of the periods shown:
20
JUNE 30,
--------------------- DECEMBER 31,
2008 2007 2007
---------- -------- -----------
Impaired loans, not on nonaccrual 297,088 -- 847,852
Nonaccrual loans, impaired (1) 570,820 -- 562,248
Nonaccrual loans, not impaired 680,119 658,768 551,904
Loans past due 90 days or more still accruing interest -- -- --
---------- -------- ----------
Total non-performing loans $1,548,027 $658,768 $1,962,004
---------- -------- ----------
Foreclosed real estate (other real estate owned) $ 238,553 $ -- $ 150,845
---------- -------- ----------
Total nonperforming assets $1,786,580 $658,768 $2,112,849
========== ======== ==========
Nonperforming loans/Total loans 0.78% 0.33% 0.97%
Nonperforming assets/Total assets 0.63% 0.24% 0.73%
Allowance for loan losses/Total loans 1.14% 1.06% 1.05%
|
(1) Some of these loans have government agency guarantees reducing the bank's
exposure by $71,191 at June 30, 2008 and $261,592 at December 31, 2007.
As of June 30, 2008, there are nine loans considered to be impaired
with a balance of $868,000 (net of government agency guarantees) and a specific
allowance of $83,000. As of June 30, 2008, management is aware of twenty
borrowers who have exhibited weaknesses. Their loans have aggregate uninsured
balances of $3.1 million. A specific allowance of $255,000 related to these
loans has been established as part of the allowance for loan losses. The loans
are collateralized and management anticipates any additional potential loss
would be minimal. The Bank has recently experienced some foreclosure activity in
their mortgage loan portfolio. Although the Bank's mortgage loan portfolio is
well secured, if the Bank needs to go to foreclosure on a property, the value of
the property may possibly be less than the current appraised value considering
the current real estate market. In turn, the Bank may begin to see future write
downs on foreclosed properties.
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 the Bank monitors for potential credit problems and pools of loans within
the portfolio. Management bases the allocated portion of the allowance for loans
principally on current loan risk ratings, historical loan loss rates adjusted to
reflect current conditions, as well as analyses of other factors that may have
affected the collectibility of loans in the portfolio. The Bank analyzes all
commercial loans it is monitoring as potential credit problems to determine
whether those loans are impaired, with impairment measured by reference to the
borrowers' collateral values and cash flows.
The unallocated portion of the allowance for loan losses represents
the results of analyses that measure probable losses inherent in the portfolio
that are not adequately captured in the allocated allowance analyses. These
analyses include consideration of unidentified losses inherent in the portfolio
resulting from changing underwriting criteria, changes in the types and mix of
loans originated, industry concentrations and evaluations, allowance levels
relative to selected overall credit criteria and other economic indicators used
to estimate probable incurred losses. During the first quarter, the Bank
considered the general economic conditions in its market area and the
significant slowdown in the residential housing market. At June 30, 2008, the
Bank had outstanding loans for the development of residential property including
loans for spec homes and subdivisions totaling $11.7 million with an additional
undisbursed commitment of $2.8 million. At June 30, 2008 and December 31, 2007,
the allowance for loan losses totaled $2.3 million and $2.1 million,
respectively. The allowance for loan losses as a percentage of loans was 1.1% as
of June 30, 2008 and December 31, 2007.
An analysis of the allowance for loan losses is summarized below:
21
JUNE 30, DECEMBER 31,
2008 2007
---------------------- ----------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
In thousands AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------- ------ -------------
Commercial, financial
and agriculture $ 977 23% $ 886 22%
Real estate - residential
mortgage 504 69 479 69
Installment and other 344 8 244 8
Impaired loans 229 -- 255 1
Unallocated 219 N/A 280 N/A
------ --- ------ ---
Total $2,273 100% $2,144 100%
====== === ====== ===
|
DEPOSITS
The Bank's deposits decreased $926,000 during the six months ended
June 30, 2008. This decrease was reflected in demand, interest bearing demand
and certificates of deposit under $100,000. All other deposit accounts showed
increases for the six months ending June 30, 2008. In early 2007, the Bank began
offering the Ultimate Invest checking account which carries a rate, determined
by the balance in the account, of 100 to 200 basis points below the current
federal funds rate. The activity in this account type increased in the fall of
2007 due to the lower interest rates offered on savings and Certificates of
Deposit accounts at that time. Due to the activity restrictions on this type of
account along with the rates falling in early 2008, the Bank experienced a
shifting of deposits from the Ultimate Invest account to more easily accessible
savings accounts. The shift between Certificates of Deposit and Certificates of
Deposit over $100,000 is a direct result of the large volume of maturities of
the Bank's 14 month nonrenewable Certificate of Deposit which was featured in
early 2007 that carried a competitive rate along with the maturities of other
short-term certificates of deposit. The Bank's customers are shifting their
money from these matured certificates of deposit into preexisting 36-month
Ultimate Certificate of Deposit. The Bank's 36-month Ultimate Certificate of
Deposit allows the customer to withdraw all or a portion of the CD on the first
or second year anniversary date without penalty and deposits may be made to this
CD at any time.
CAPITAL RESOURCES
Shareholders' equity increased $259,000 or 1.1% during the first six
months of 2008 due to $1.5 million in net income offset by the semi-annual cash
dividend of $239,000, stock repurchases of $257,000 and a $794,000 decrease in
accumulated other comprehensive income. During the third quarter 2007, the Bank
instituted a stock repurchase program to repurchase issued shares of common
stock of CNB Financial Services, Inc. Through this program as of June 30, 2008,
the Bank has repurchased 6,999 shares of CNB Financial Services, Inc. common
stock reducing shareholders' equity by $464,508. The Bank is subject to various
regulatory capital requirements administered by the banking regulatory agencies.
Under each measure, the Bank was substantially in excess of the minimum
regulatory requirements, and, by definition was "well capitalized" at June 30,
2008. The following table summarizes, as of June 30, 2008, the Bank's capital
ratios.
Components Actual Required
of Capital Ratio Ratio
---------- ------ --------
Tier 1 Capital $23,927 8.5% 4.0%
Total Risk Based Capital $26,101 15.0% 8.0%
|
FAIR VALUE MEASUREMENTS
SFAS No. 157, Fair Value Measurements, defines fair value, establishes
a framework for measuring fair value, establishes a three-level valuation
hierarchy for disclosure of fair value measurement and enhances disclosure
requirements for fair value measurements. The valuation hierarchy is based upon
the transparency of inputs to the valuation of an asset or liability as of the
measurement date. The three levels are defined as follow:
- Level 1 inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active markets.
- Level 2 inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are
observable for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
22
- Level 3 inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
Following is a description of the valuation methodologies used for
instruments measured at fair value, as well as the general classification of
such instruments pursuant to the valuation hierarchy:
Securities
Where quoted prices are available in an active market, securities are
classified within level 1 of the valuation hierarchy. Level 1 securities would
include highly liquid government bonds, mortgage products and exchange traded
equities. If quoted market prices are not available, then fair values are
estimated by using pricing models, quoted prices of securities with similar
characteristics, or discounted cash flow. Level 2 securities would include U.S.
agency securities, mortgage-backed agency securities, obligations of states and
political subdivisions and certain corporate, asset backed and other securities.
In certain cases where there is limited activity or less transparency around
inputs to the valuation, securities are classified within Level 3 of the
valuation hierarchy. At June 30, 2008, all of CNB's securities are considered to
be Level 2 securities.
Loans held for sale
Loans held for sale which is required to be measured in a lower of
cost or fair value. Under SFAS No. 157, market value is to represent fair value.
Management obtains quotes or bids on all or part of these loans directly from
the purchasing financial institutions. Premiums received or to be received on
the quotes or bids are indicative of the fact that cost is lower than fair
value. At June 30, 2008, CNB did not have any loans held for sale.
Impaired loans
SFAS No. 157 applies to loans measured for impairment using the
practical expedients permitted by SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, including impaired loans measured at an observable market
price (if available), or at the fair value of the loan's collateral (if the loan
is collateral dependent). Fair value of the loan's collateral, when the loan is
dependent on collateral, is determined by appraisals or independent valuation
which is then adjusted for the cost related to liquidation of the collateral.
CNB had no fair value measurement adjustments to impaired loans as of June 30,
2008.
Other Real Estate Owned
Certain assets such as other real estate owned (OREO) are measured at
fair value less cost to sell. We believe that the fair value component in its
valuation follows the provisions of SFAS No. 157.
23
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements", which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
SFAS No. 157 applies to other accounting pronouncements that require or permit
fair value measurements. The new guidance is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years. The adoption of SFAS No. 157 did not have a
material impact on CNB's consolidated financial position, results of operations
and cash flows.
On September 29, 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans", which
amends SFAS No. 87 and SFAS No. 106 to require recognition of the over funded or
under funded status of pension and other postretirement benefit plans on the
balance sheet. Under SFAS No. 158, gains and losses, prior service costs and
credits, and any remaining transition amounts under SFAS No. 87 and SFAS No. 106
that have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. Under SFAS No. 158, the
measurement date - the date at which the benefit obligation and plan assets is
measured - is required to be the company's fiscal year end. The recognition
requirements of SFAS No. 158 are effective for publicly held companies for
fiscal years ending after December 15, 2006. CNB has implemented SFAS No. 158
effective December 31, 2006 with the exception of the measurement date
requirement. This requirement is effective for fiscal years ending after
December 15, 2008.
In September 2006, the Emerging Issues Task Force of the FASB (EITF)
issued EITF 06-04. This pronouncement affects the recording of post retirement
costs of insurance of bank owned life insurance policies in instances where the
Company has promised a continuation of life insurance coverage to persons post
retirement. EITF 06-04 requires that a liability equal to the present value of
the cost of post retirement insurance be recorded during the insured employees'
term of service. The terms of this pronouncement require the initial recording
of this liability with a corresponding adjustment to retained earnings to
reflect the implementation of the pronouncement. This EITF becomes effective for
fiscal years ending after December 15, 2007. The adoption of EITF 06-04 did not
impact CNB's consolidated financial condition, results of operations and cash
flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities." The fair value option
established by this SFAS permits all entities to choose to measure eligible
items at fair value at specified election dates. A business entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. This SFAS is effective
for fiscal years beginning after November 15, 2007. Early adoption is permitted
as of the fiscal year that begins before November 15, 2007 provided the entity
also elects to apply the provisions of SFAS No. 157, "Fair Value Measurements."
CNB elected not to early adopt SFAS No. 159 or 157. CNB has no current plans to
exercise the fair value option for any eligible items under SFAS No. 159.
In November 2007, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 109, "Written Loan Commitments Recorded at Fair Value
Through Earnings." SAB 109 expresses the views of the staff regarding written
loan commitments that are accounted for at fair value through earnings under
generally accepted accounting principles. This SAB supersedes SAB 105 and
expresses the current view of the staff that, consistent with the guidance in
SFAS No. 156, Accounting for Servicing of Financial Assets, and SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities, the
expected net future cash flows related to the associated servicing of the loan
should be included in the measurement of all written loan commitments that are
accounted for at fair value through earnings. SAB 105 also indicted that the
staff believed that internally-developed intangible assets (such as customer
relationship intangible assets) should not be recorded as part of the fair value
of a derivative loan commitment. This SAB retains that staff view and broadens
its application to all written loan commitments that are accounted for at fair
value through earnings.
The staff expects registrants to apply the views in Question 1 of SAB
109 on a prospective basis to derivative loan commitments issued or modified in
fiscal quarters beginning after December 15, 2007. The adoption of SAB 109 is
not expected to have a material impact on CNB's financial statements.
In December 2007, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 110, "Share Based Payment." SAB 110 expresses the
views of the staff regarding the use of a "simplified" method, as discussed in
SAB 107, in developing an estimate of expected term of "plain vanilla" share
options in accordance with SFAS No. 123 (revised 2004), "Share-Based Payment."
SAB 110 is effective January 1, 2008. The adoption of SAB 110 did not impact
CNB's financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations." This statement replaces SFAS No. 141, "Business Combinations."
This statement retains the fundamental requirements in SFAS 141 that the
acquisition method of accounting be used for all business combinations and for
an acquirer to be identified for each business combination. This SFAS applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The effective date of this Statement is the same as that of
the related Statement No. 160. An entity may not apply it before that date. CNB
is currently evaluating the potential impact, if any, of the adoption of SFAS
No. 141(R) on their consolidated financial position, results of operations and
cash flows.
24
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements." This statement amends ARB 51 to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. This SFAS is effective
for fiscal years beginning after December 15, 2008. The effective date of this
Statement is the same as that of the related statement 141(R). This Statement
shall be applied prospectively as of the beginning of the fiscal year in which
this Statement is initially applied, except for the presentation and disclosure
requirements. The presentation and disclosure requirements shall be applied
retrospectively for all periods presented. Earlier adoption is prohibited. CNB
is currently evaluating the potential impact, if any, of the adoption of SFAS
No. 160 on their consolidated financial position, results of operations and cash
flows.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities." This statement amends SFAS No.
133 and is intended to enhance the current disclosure framework in SFAS No. 133.
This statement changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures
about how these instruments affect an entity's financial position, financial
performance and cash flows. This SFAS is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. CNB is currently evaluating the potential
impact, if any, of the adoption of SFAS No. 161 on their consolidated financial
position, results of operations and cash flows.
In June 2008, the FASB issued SFAS No. 162, "The Hierarchy of
Generally Accepted Accounting Principles." This statement identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles in the
United States. This Statement is effective 60 days following the SEC's approval
of the Public Company Accounting Oversight Board amendments to AU Section 411,
"The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles." CNB is currently evaluating the potential impact, if any, of the
adoption of SFAS No. 162 on their consolidated financial position, results of
operations and cash flows.
In June 2008, the FASB issued SFAS No. 163, "Accounting for Financial
Guarantee Insurance Contracts." This statement requires that an insurance
enterprise recognize a claim liability prior to an event of default when there
is evidence that credit deterioration has occurred in an insured financial
obligation. This Statement also clarified how SFAS No. 60, "Accounting and
Reporting by Insurance Enterprises" applied to financial guarantee insurance
contracts, including the recognition and measurement to be used to account for
premium revenue and claim liabilities. This Statement also requires expanded
disclosures about financial guarantee insurance contracts. This Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years, except for
some disclosures about the insurance enterprise's risk-management activities.
CNB does not expect the adoption of SFAS No. 162 to have any impact on their
consolidated financial position, results of operations and cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to economic loss that arises from changes
in the values of certain financial instruments. The types of market risk
exposures generally faced by banking entities include interest rate risk, bond
market price risk, real estate market risk, foreign currency risk and commodity
price risk. Due to the nature of its operations, only bond market price risk,
interest rate risk and real estate market risk are significant to the Bank.
The objective of the Bank's liquidity management program is to ensure
the continuous availability of funds to meet the withdrawal demands of
depositors and the credit needs of borrowers. The basis of the Bank's liquidity
comes from the stability of its core deposits. Liquidity is also available
through the available for sale securities portfolio and short-term funds such as
federal funds sold which totaled $62.0 million, or 21.9% of total assets at June
30, 2008. In addition, liquidity may be generated through loan repayments, FHLB
borrowings and over $9.5 million of available borrowing arrangements with
correspondent banks. At June 30, 2008, management considered the Bank's ability
to satisfy its anticipated liquidity needs over the next twelve months.
Management believes that the Bank is well positioned and has ample liquidity to
satisfy these needs. The Bank generated $2.5 million of cash from operations in
the first six months of 2008, which compares to $2.1 million during the same
time period in 2007. Additional cash of $6.3 million was provided by net
investing activities through June 30, 2008, which compares to $2.1 million cash
used in net investing activities for the first six months of 2007. Net cash used
in financing activities totaled $8.7 million during the first six months of
2008, which compares to $1.3 million cash provided by financing activities
during the same time period in 2007. Details on both the sources and uses of
cash are presented in the Consolidated Statements of Cash Flows contained in the
financial statements.
The objective of the Bank's interest rate sensitivity management
program, also known as asset/liability management, is to maximize net interest
income while minimizing the risk of adverse effects from changing interest
rates. This is done by controlling the mix and maturities of interest sensitive
assets and liabilities. The Bank has established an asset/liability committee
for this purpose. Daily management of the Bank's sensitivity of earnings to
changes in interest rates within the Bank's policy guidelines are monitored by
using a combination of off-balance sheet and on-balance sheet financial
instruments. The Bank's Chief Executive
25
Officer, Senior Lending Officer, Chief Financial Officer and the Chief
Operations Officer monitor day to day deposit flows, lending requirements and
the competitive environment. Rate changes occur within policy guidelines if
necessary to minimize adverse effects. Also, the Bank's policy is intended to
ensure the Bank measures a range of rate scenarios and patterns of rate
movements that are reasonably possible. The Bank measures the impact that 200
basis point changes in rates would have on earnings over the next twelve months.
In analyzing interest rate sensitivity for policy measurement, the
Bank compares its forecasted earnings in both a "high rate" and "low rate"
scenario to a base-line scenario. The Bank's base-line scenario is its estimated
most likely path for future short-term interest rates over the next 12 months.
The "high rate" and "low rate" scenarios assumes 100 and 200 basis point
increases or decreases in the prime rate from the beginning point of the
base-line scenario over the most current 12-month period. The Bank's policy
limit for the maximum negative impact on earnings resulting from "high rate" or
"low rate" scenarios is 10 percent. The policy measurement period is 12 months
in length, beginning with the first month of the forecast.
The Bank's base-line scenario holds the prime rate constant at 5.00
percent through June 2009. Based on the July 2008 outlook, if interest rates
increased or decreased by 200 basis points, the model indicates that net
interest income during the policy measurement period would be affected by less
than 10 percent, in both an increasing or decreasing interest rate scenario.
CONTRACTUAL OBLIGATIONS
During the quarter ended June 30, 2008, the Bank entered into a
contract with a core processing firm related to the outsourcing of the Bank's
processing system. This eight year contract totals approximately $3.9 million.
There were no other material changes outside the normal course of business to
the quantitative and qualitative disclosures about contractual obligations
previously reported on Form 10-K for the year ended December 31, 2007. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Contractual Obligations" in the Form 10-K for December 31, 2007 for
a detailed discussion.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer,
based on their evaluation as of the end of the reporting period of this
quarterly report of the Company's disclosure controls and procedures (as defined
in Rule 13 (a) - 14 (c) of the Securities Exchange Act of 1934), have concluded
that the Company's disclosure controls and procedures are adequate and effective
for purposes of Rule 13 (a) - 14 (c) and timely, alerting them to material
information relating to the Company required to be included in the Company's
filings with the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
There have been no changes in the Company's internal controls over
financial reporting in the fiscal quarter ended June 30, 2008, that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
26
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which CNB or its subsidiary
is a party, or to which any of their property is subject. However, CNB
is involved in various legal proceedings occurring in the ordinary
course of business.
Item 1a. Risk Factors
There have been no material changes to CNB's risk factors since these
factors were previously disclosed in CNB's annual report on Form 10K
for the period ended December 31, 2007.
Item 4. Submission of Matters to a Vote of Security Holders
a.) The 2007 annual meeting of stockholders of CNB Financial
Services, Inc. was held April 2, 2008.
b.) Proxies for the annual meeting were solicited pursuant to
Regulation 14A under the Securities and Exchange Act of 1934.
There was no solicitation in opposition to management's nominees
as listed in the proxy statement, and all such nominees were
reelected.
c.) (1) Election of Directors
Elected to serve as directors until the 2008 annual meeting of
stockholders to be held in 2009:
Without
For Authority
------- ---------
Kenneth W. Apple 273,418 19,129
J. Robert Ayers 273,418 19,129
John E. Barker 273,418 19,129
Margaret S. Bartles 273,418 19,129
Jay E. Dick 273,418 19,129
Herbert L. Eppinger 273,418 19,129
Robert L. Hawvermale 273,418 19,129
J. Philip Kesecker 273,418 19,129
Jerald McGraw 273,418 19,129
Martha H. Quarantillo 273,418 19,129
Thomas F. Rokisky 273,418 19,129
Charles S. Trump, IV 273,418 19,129
Arlie R. Yost 273,418 19,129
|
Item 6. Exhibits
31.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
27
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CNB Financial Services, Inc.
(Registrant)
Date August 14, 2008 /s/ Thomas F. Rokisky
----------------------------------------
Date August 14, 2008 /s/ Rebecca S. Stotler
----------------------------------------
|
28
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