ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements are set forth in
this Annual Report of Form 10-K on the following pages:
The management of CNB Financial Services, Inc. (CNB) and its
wholly-owned subsidiary has the responsibility for establishing and maintaining
an adequate internal control structure and procedures for financial reporting.
Management maintains a comprehensive system of internal control to provide
reasonable assurance of the proper authorization of transactions, the
safeguarding of assets and the reliability of the financial records. The system
of internal control provides for appropriate division of responsibility and is
documented by written policies and procedures that are communicated to
employees. CNB and its wholly-owned subsidiary maintain an internal auditing
program, under the supervision of the Audit Committee of the Board of Directors,
which independently assesses the effectiveness of the system of internal control
and recommends possible improvements.
Under the supervision and with the participation of the Corporation's
management, including its Chief Executive Officer and Chief Financial Officer,
the Corporation has evaluated the effectiveness of its internal control over
financial reporting as of December 31, 2007, using the Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based upon this evaluation, the Chief Executive
Officer and the Chief Financial Officer have concluded that the Corporation's
disclosure controls and procedures are adequate and effective to ensure that
material information relating to the Corporation and its consolidated
subsidiaries is made known to them by others within those entities. The Chief
Executive Officer and the Chief Financial Officer believe that at December 31,
2007, CNB Financial Services, Inc. and its wholly-owned subsidiary maintained an
effective system of internal control over financial reporting.
This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
The Notes to Consolidated Financial Statements are an integral part of these
statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies
of CNB Financial Services, Inc. and its subsidiary.
NATURE OF OPERATIONS:
CNB Financial Services, Inc. ("CNB" or the "Company") is a financial
services holding company incorporated under the laws of West Virginia in
March 2000. It became a bank holding company when it acquired all of the
common stock of Citizens National Bank of Berkeley Springs on August 31,
2000.
Citizens National Bank operated as a national banking association until
October 16, 2006 at which time it became a West Virginia state chartered
bank. Concurrent with the charter change, the bank began operating under
the legal name of CNB Bank, Inc.
CNB Bank, Inc. (the "Bank"), a wholly owned subsidiary of CNB, provides a
variety of banking services to individuals and businesses through its two
locations in Morgan County, West Virginia, three locations in Berkeley
County, West Virginia and one location in Washington County, Maryland. Its
primary deposit products are demand deposits and certificates of deposit,
and its primary lending products are commercial business, real estate
mortgage and installment loans.
In February 2001, CNB became a 50% member in a limited liability company,
Morgan County Title Insurance Agency, LLC which sells title insurance. In
January 2003, the other two members in the limited liability corporation
purchased a portion of CNB's membership making each member's share 33%.
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 accounting policies of the Company and its subsidiary conform to
accounting principles generally accepted in the United States of America
and to general practices within the banking industry.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of CNB Financial Services, Inc.
include the accounts of the Company and its wholly owned subsidiary, CNB
Bank, Inc. and CNB Insurance Services, Inc., a wholly owned subsidiary of
the Bank. The financial statements of Morgan County Title Insurance Agency,
LLC are not included in these consolidated financial statements. All
significant intercompany transactions and balances have been eliminated.
USE OF ESTIMATES:
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. CNB's most significant
estimates are the allowance for loan losses, depreciable lives of fixed
assets and actuarial assumptions used in determining pension expense and
liability, liability for postretirement benefits, liability for deferred
compensation and liability for current and deferred taxes.
SECURITIES AND MORTGAGE-BACKED SECURITIES:
Investments in equity securities that have readily determinable fair values
and all investments in debt securities are classified and accounted for as
follows:
41
a. Debt securities that management has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported
at amortized cost.
b. Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
c. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
shareholders' equity as accumulated other comprehensive income.
CNB classifies all investments as available for sale, except for stock in
the Federal Home Loan Bank, which are restricted investments.
Interest and dividends on securities, including amortization of premiums
and accretion of discounts, are included in interest income. Declines in
the fair value of available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized
losses. In estimating other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term prospects of
the issuer, and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Realized gains and losses from the
sales of securities are determined using the specific identification
method.
IMPAIRED LOANS:
Impaired loans are defined as those loans for which it is probable that
contractual amounts due will not be received. Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, requires that the
measurement of impaired loans is based on the present value of expected
future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. Larger groups of small-balance
loans such as residential mortgage and installment loans that are
considered to be part of homogeneous loan pools are aggregated for the
purpose of measuring impairment, and therefore, are not subject to these
statements. Management has established a dollar-value threshold for
commercial loans. The larger commercial loans are evaluated for impairment.
At December 31, 2007, there are nine loans considered to be impaired with
an unguaranteed balance of $1.2 million. See Note 4: Loans and Leases
Receivable in the Notes to Consolidated Financial Statements for additional
discussion. No loans were considered to be impaired at December 31, 2006.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions.
Allowances for loan losses and impaired loans are generally determined
based on collateral values or the present value of estimated cash flows.
The allowance is increased by a provision for loan losses, which is charged
to expense and reduced by charge-offs, net of recoveries. Changes in the
allowance are charged or credited to the provision for loan losses. Because
of uncertainties inherent in the estimation process, management's estimate
of credit losses inherent in the loan portfolio and the related allowance
may change in the near term.
LOANS HELD FOR SALE:
Mortgage loans held for sale are recorded at the lower of cost or market
value. Gains and losses realized from the sale of loans and adjustments to
market value are included in non-interest income. Mortgage loans are
sometimes sold to Taylor, Bean & Whitaker, the Federal Home Loan Mortgage
Corporation (Freddie Mac), West Virginia Housing Development Fund, other
secondary market investors and other commercial banks. Beginning in January
2007, all fixed rate residential mortgage loans were sold to secondary
market investors. At December 31, 2007, the Bank had $672,000 in loans held
for sale.
INTANGIBLE ASSETS:
Intangible assets represent the acquisition of customer lists, contracts
and records in the amount of $66,267 by CNB
42
Insurance Services, Inc. and the $780,616 premium from the purchase of core
deposit relationships as part of the Hancock branch acquisition. The CNB
Insurance Services, Inc. intangible assets were being amortized over four
years on a straight line basis and the core deposit intangible
relationships from the Hancock branch acquisition are being amortized over
seven years on a straight line basis. As of June 1, 2006, the remaining
unamortized balance of the intangible asset for CNB Insurance Services,
Inc. amounting to $9,419 was included in the sale to Maiden Financial. See
Note 16: Discontinued Operations in the Notes to Consolidated Financial
Statements for additional discussion.
LOAN SERVICING:
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. For purposes of measuring impairment, the
rights are stratified based on the predominant risk characteristics of the
underlying loans: product type, investor type, interest rate, term and
geographic location. An analysis of the risk characteristics of CNB's loan
servicing portfolio allows for all loans to be defined by one risk
category. As of December 31, 2007 and 2006, there were no mortgage
servicing assets or liabilities. See Note 5: Loan Servicing in the Notes to
Consolidated Financial Statements for additional discussion.
INTEREST INCOME ON LOANS:
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discontinued at the
time the loan becomes 90 days past due unless in management's judgment
collectibility of interest is assured.
NONPERFORMING/NONACCRUAL ASSETS:
Nonperforming/nonaccrual assets consist of loans on which interest is no
longer accrued, loans which have been restructured in order to allow the
borrower the ability to maintain control of the collateral, real estate
acquired by foreclosure and real estate upon which deeds in lieu of
foreclosure have been accepted. Interest previously accrued but not
collected on nonaccrual loans is reversed against current income when a
loan is placed on a nonaccrual basis. Nonaccrual loans are restored to
accrual status when all delinquent principal and interest become less than
90 days past due unless management determines the loan should remain on
nonaccrual status.
LOANS AND LEASES RECEIVABLE:
Loans and leases receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are reported at
their outstanding unpaid principal balances reduced by any charge-offs or
specific valuation accounts and net of any deferred fees or costs on
originated loans, or unamortized premiums or discounts on purchased loans.
LOAN ORIGINATION FEES AND COSTS:
Loan origination fees, net of certain direct costs of originating loans are
being deferred and recognized over the contractual life of the loan as an
adjustment of the yield on the related loan.
PREMISES AND EQUIPMENT:
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated on both straight-line and accelerated methods
over the estimated useful lives of 5 to 50 years for buildings and
improvements, 10 to 20 years for land improvements, 5 years for bank owned
automobiles and 3 to 40 years for equipment. Computer software is being
amortized over 3 years. Maintenance and repairs are charged to operating
expenses as incurred.
INCOME TAXES:
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax
expenses or credits are based on the changes in the asset or liability from
period to period.
When tax returns are filed, it is highly certain that some positions taken
would be sustained upon examination by the taxing authorities, while others
are subject to uncertainty about the merits of the position taken or the
amount of the position that would be ultimately sustained. The benefit of a
tax position is recognized in the financial statements in
43
the period during which, based on all available evidence, management
believes it is more likely than not that the position will be sustained
upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with
other positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit
that is more than 50 percent likely of being realized upon settlement with
the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described
above would be reflected as a liability for unrecognized tax benefits in
the accompanying balance sheet along with any associated interest and
penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits would be
classified as additional income taxes in the statement of income.
At December 31, 2007, there was no liability for unrecognized tax benefits.
PENSION PLAN:
Pension plan costs are funded by annual contributions as required by
applicable regulations.
CASH AND CASH EQUIVALENTS:
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents include all highly liquid debt instruments purchased with a
maturity of three months or less except for federal funds sold. Those
amounts are included in the balance sheet captions "Cash and Due From
Banks." Included in "Cash and Due From Banks" are interest bearing deposits
with FHLB in the amount of $25,282 and $3,118 at December 31, 2007 and
2006, respectively.
EARNINGS AND DIVIDENDS PER SHARE:
Basic earnings and dividends per share are computed on the basis of the
weighted average number of 457,274 shares of common stock outstanding in
2007 and 458,048 shares of common stock outstanding in 2006 and 2005.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
In the ordinary course of business, CNB has entered into off-balance sheet
financial instruments consisting of commitments to extend credit,
commercial lines of credit and letters of credit. Such financial
instruments are recorded in the financial statements when they become due
or payable.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS:
Postretirement insurance benefits are provided to selected officers and
employees. During the years that the employee renders the necessary
service, the Bank accrues the cost of providing postretirement health and
life insurance benefits to the employee.
FORECLOSED REAL ESTATE:
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried at
the lower of carrying amount or fair value less estimated cost to sell.
Revenue and expenses from operations and changes in the valuation allowance
are included in loss on foreclosed real estate. The historical average
holding period for such properties is twelve to eighteen months. At
December 31, 2007, CNB owns one property acquired through loan foreclosure
with a carrying value of $150,845.
TRUST ASSETS:
Assets held by CNB in a fiduciary or agency capacity are not included in
the consolidated financial statements since such assets are not assets of
CNB. In accordance with banking industry practice, income from fiduciary
activities is generally recognized on the cash basis which is not
significantly different from amounts that would have been recognized on the
accrual basis.
ADVERTISING COSTS:
The Company expenses advertising costs in the period in which they are
incurred. Advertising costs amounted to $205,444, $173,792 and $161,180 for
the years ended December 31, 2007, 2006 and 2005, respectively.
44
COMPREHENSIVE INCOME:
Comprehensive income is defined as the change in equity from transactions
and other events from nonowner sources. It includes all changes in equity
except those resulting from investments by shareholders and distributions
to shareholders. Comprehensive income includes net income and certain
elements of "other comprehensive income" such as foreign currency
translations; accounting for futures contracts; employers accounting for
pensions; and accounting for certain investments in debt and equity
securities.
CNB has elected to report its comprehensive income in the Consolidated
Statements of Changes in Shareholders' Equity. The elements of "other
comprehensive income" that CNB has are the unrealized gains or losses on
available for sale securities, additional minimum pension liability
adjustment and unrecognized pension costs.
The components of the change in "other comprehensive income" were as
follows:
2007 2006 2005
---------- --------- -----------
Additional pension liability adjustment
arising during the year $ 528,893 $(886,267) $ (355,276)
Unrealized holding gains (losses) arising during
the year on securities available for sale 1,037,731 124,727 (1,155,548)
Reclassification adjustment for losses
realized in net income on sale of securities 2,688 37,271 16,165
---------- --------- -----------
Net change in accumulated other comprehensive
income before taxes $1,569,312 $(724,269) $(1,494,659)
Tax effect (596,338) 275,222 567,970
---------- --------- -----------
Net change $ 972,974 $(449,047) $ (926,689)
========== ========= ===========
|
RECENTLY ISSUED ACCOUNTING STANDARDS
On March 17, 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 156, "Accounting
for Servicing of Financial Assets." The new Standard, which is an amendment
to SFAS No. 140, will simplify the accounting for servicing assets and
liabilities, such as those common with mortgage securitization activities.
Specifically, the new Standard addresses the recognition and measurement of
separately recognized servicing assets and liabilities and provides an
approach to simplify efforts to obtain hedge-like (offset) accounting.
The standard also:
1. Clarifies when an obligation to service financial assets should
be separately recognized as a servicing asset or a servicing
liability.
2. Requires that a separately recognized servicing asset or
servicing liability be initially measured at fair value, if
practicable.
3. Permits an entity with a separately recognized servicing asset or
servicing liability to choose either of the following methods for
subsequent measurement:
a. Amortization Method
b. Fair Value Method
The new Standard was effective for all separately recognized servicing
assets and liabilities acquired or issued after the beginning of an
entity's fiscal year that begins after September 15, 2006, with early
adoption permitted. This standard has no material impact on CNB.
45
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. CNB is currently evaluating the
potential impact, if any, of the adoption of SFAS No. 157 on their
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.
CNB does not anticipate early adoption of the measurement date requirement.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting
for Uncertainty in Income Taxes." FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with SFAS No. 109, "Accounting for Income Taxes."
FIN 48 prescribes a recognition threshold and measurement attributable for
the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosures and transitions. FIN 48 was effective for
fiscal years beginning after December 15, 2006. CNB has adopted FIN 48 for
the year beginning January 1, 2007.
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 beginning after
December 15, 2007. CNB is currently evaluating the potential impact, if
any, of the adoption of EITF 06-04 on their 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
46
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 is
not expected to have a material impact on 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.
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.
NOTE 2. INVESTMENT IN LIMITED LIABILITY COMPANY
In February 2001, CNB paid $5,000 to become a 50% member in a limited
liability company, Morgan County Title Insurance Agency, LLC for the
purpose of selling title insurance. In January 2003, the other two members
in the limited liability company purchased a portion of CNB's membership
making each member's share 33%. CNB accounts for their investment in Morgan
County Title Insurance Agency, LLC as part of "Other Assets" using the
equity method of accounting.
The following represents the limited liability company's financial
information:
47
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
DECEMBER 31, 2007 AND 2006
2007 2006
------ ------
ASSETS
Cash $3,684 $3,415
------ ------
TOTAL ASSETS $3,684 $3,415
====== ======
MEMBERS' EQUITY $3,684 $3,415
------ ------
TOTAL MEMBERS' EQUITY $3,684 $3,415
====== ======
|
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF INCOME
(UNAUDITED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
2007 2006 2005
------- -------- --------
INCOME
Insurance commissions $65,653 $101,084 $122,148
------- -------- --------
TOTAL INCOME $65,653 $101,084 $122,148
------- -------- --------
EXPENSES
Management fees $26,776 $ 32,300 $ 37,500
Other expenses 2,908 6,725 874
------- -------- --------
TOTAL EXPENSES $29,684 $ 39,025 $ 38,374
------- -------- --------
NET INCOME $35,969 $ 62,059 $ 83,774
======= ======== ========
|
48
MORGAN COUNTY TITLE INSURANCE AGENCY, LLC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
2007 2006 2005
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 35,969 $ 62,059 $ 83,774
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 35,969 $ 62,059 $ 83,774
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Profit and capital distributed $(35,700) $(63,000) $(85,500)
-------- -------- --------
NET CASH (USED IN) FINANCING ACTIVITIES $(35,700) $(63,000) $(85,500)
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 269 $ (941) $ (1,726)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,415 4,356 6,082
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,684 $ 3,415 $ 4,356
======== ======== ========
|
NOTE 3. SECURITIES
The amortized cost and estimated market value of debt securities at
December 31, 2007 and 2006 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:
49
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 8,990,637 2,330 132,262 8,860,705 3.55
----------- -------- -------- -----------
$11,606,821 $ 26,985 $156,239 $11,477,567 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 $66,033,850 $295,199 $311,817 $66,017,232 4.63%
=========== ======== ======== ===========
Restricted:
Federal Home Loan Bank stock $ 2,623,600 $ -- $ -- $ 2,623,600 6.00%
=========== ======== ======== ===========
|
50
2006 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 $24,562,491 $ -- $ 634,791 $23,927,700 4.17%
After 5 but within 10 years 6,486,929 2,059 69,338 6,419,650 5.06
----------- ------- ---------- -----------
$31,049,420 $ 2,059 $ 704,129 $30,347,350 4.35%
----------- ------- ---------- -----------
States and political subdivisions
Within one year $ 840,774 $ -- $ 4,922 $ 835,852 2.78%
After 1 but within 5 years 1,850,578 3,003 34,366 1,819,215 3.24
After 5 but within 10 years 9,527,281 10 162,575 9,364,716 3.50
----------- ------- ---------- -----------
$12,218,633 $ 3,013 $ 201,863 $12,019,783 3.41%
----------- ------- ---------- -----------
Mortgage backed securities:
Government issued or guaranteed $ 7,266,442 $ -- $ 162,126 $ 7,104,316 4.86%
----------- ------- ---------- -----------
Collateralized mortgage obligations:
Government issued or guaranteed $ 283,693 $ 2,370 $ -- $ 286,063 6.14%
Privately issued 1,112,183 4,471 831 1,115,823 5.53
----------- ------- ---------- -----------
$ 1,395,876 $ 6,841 $ 831 $ 1,401,886 5.65%
----------- ------- ---------- -----------
Total securities available for sale $51,930,371 $11,913 $1,068,949 $50,873,335 4.24%
=========== ======= ========== ===========
Restricted:
Federal Home Loan Bank stock $ 1,753,000 $ -- $ -- $ 1,753,000 5.25%
=========== ======= ========== ===========
|
The carrying value of securities pledged to secure public deposits and for
other purposes as required or permitted by law totaled $19,138,493 at
December 31, 2007 and $37,066,060 at December 31, 2006.
Proceeds from sales of securities available for sale (excluding maturities
and calls) for the years ended December 31, 2007, 2006 and 2005 were
$3,796,971, $12,218,693 and $37,026,097, respectively. Gross gains and
(losses) of $5,537 and $(8,282) in 2007, $27,291 and $(65,000) in 2006, and
$145,013 and $(161,178) in 2005 were realized on the respective sales.
Gross gains of $57 during 2007 were realized on called securities.
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 December
31, 2007 and 2006, respectively.
51
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
=========== ======== =========== ======== =========== ========
|
2006
-----------------------------------------------------------------------------
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 $ -- $ -- $29,352,749 $ 704,129 $29,352,749 $ 704,129
State and political subdivisions 985,973 5,087 10,415,625 196,776 11,401,598 201,863
Mortgage backed securities:
Government issued or guaranteed 702,014 750 6,402,302 161,376 7,104,316 162,126
Collateralized mortgage obligations:
Privately issued 533,727 831 -- -- 533,727 831
---------- ------ ----------- ---------- ----------- ----------
Total temporarily impaired
securities $2,221,714 $6,668 $46,170,676 $1,062,281 $48,392,390 $1,068,949
========== ====== =========== ========== =========== ==========
|
Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market
concerns warrant such evaluation. Consideration is given to (1) the length
of time and the extent to which the fair value has been less than cost, (2)
the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the bank to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value.
52
At December 31, 2007, there were 87 available for sale securities that have
unrealized losses with aggregate depreciation of .8% from their amortized
cost basis. The unrealized losses relate principally to government
obligations. In analyzing the issuer's financial condition, management
considers whether the securities are issued by the federal government or
its agencies and whether downgrades by bond rating agencies have occurred.
Since the securities are primarily government bonds or agency issues and
management has the ability to hold the securities until maturity or until
such a time that the market value has recovered the unrealized losses,
management determined that no declines are deemed to be
other-than-temporary.
NOTE 4. LOANS AND LEASES RECEIVABLE
Major classifications of loans at December 31, 2007 and 2006 were as
follows:
2007 2006
------------ ------------
Loans:
Real estate $143,012,227 $143,766,546
Commercial real estate 37,587,676 36,966,855
Consumer 15,544,183 15,933,470
Commercial 8,179,019 9,172,160
Overdrafts 104,240 163,469
------------ ------------
$204,427,345 $206,002,500
Leases 112,838 123,733
------------ ------------
$204,540,183 $206,126,233
Net deferred loan fees, costs,
premiums and discounts 273,123 324,283
Allowance for loan losses (2,144,461) (2,131,523)
------------ ------------
$202,668,845 $204,318,993
============ ============
|
At December 31, 2007, approximately $84,163,000 or 46.6% of the real estate
loans had fixed rates of interest and $96,437,000 or 53.4% had adjustable
rates of interest.
An analysis of the allowance for loan losses was as follows:
2007 2006 2005
---------- ---------- ----------
Balance, beginning $2,131,523 $2,022,130 $1,807,449
Provision charged to operations 168,999 275,500 352,000
Recoveries 183,281 151,513 168,413
Loans charged off (339,342) (317,620) (305,732)
---------- ---------- ----------
Balance, ending $2,144,461 $2,131,523 $2,022,130
========== ========== ==========
|
The following is a summary of information pertaining to impaired loans:
53
December 31,
-----------------
2007 2006
---------- ----
(in thousands)
Impaired loans without a valuation allowance $ -- $--
Impaired loans with a valuation allowance (1) 1,410,100 --
---------- ---
Total impaired loans $1,410,100 $--
========== ===
Valuation allowance related to impaired loans $ 239,896 $--
|
(1) Some of these loans have government agency guarantees reducing the bank's
exposure by $261,592.
Years Ended
December 31,
-----------------
2007 2006
---------- ----
(in thousands)
Average investment in impaired loans $705,050 $--
======== ===
Interest income recognized on impaired loans $ 85,185 $--
======== ===
Interest income recognized on a cash basis on
impaired loans $ 85,185 $--
======== ===
|
Loans are placed on nonaccrual status at the time the loan becomes 90 days
past due, unless in management's judgment collectibility is assured. A
summary of nonperforming loans and foreclosed assets is as follows:
DECEMBER 31,
---------------------
2007 2006
---------- --------
Foreclosed real estate (other real estate owned) $ 150,845 $ --
Impaired loans, not on nonaccrual 847,852 --
Nonaccrual loans, impaired (1) 562,248 --
Nonaccrual loans, not impaired 551,904 402,014
Loans past due 90 days or more still accruing interest -- 4,942
---------- --------
Total non-performing assets $2,112,849 $406,956
========== ========
|
(1) Some of these loans have government agency guarantees reducing the bank's
exposure by $261,592.
The contractual amount of interest that would have been recorded on
nonaccrual and impaired loans during 2007 and 2006 was $73,023 and $19,455,
respectively. The amount of interest income that was recorded on nonaccrual
and impaired loans during 2007 and 2006 was $116,070 and $19,549,
respectively.
The Bank is not committed to lend additional funds to debtors whose loans
are nonperforming.
NOTE 5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
financial statements. The unpaid principal balances of mortgage loans
serviced for others were $3,587,661 and $3,610,043 at December 31, 2007 and
2006, respectively.
54
Custodial balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were $121,553 and $16,080 at
December 31, 2007 and 2006, respectively.
The Bank did not capitalize or have any amortization of mortgage servicing
rights in 2007, 2006 or 2005. There were no assets or liabilities for
mortgage servicing rights at December 31, 2007 or 2006.
NOTE 6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 were as
follows:
2007 2006
---------- ----------
Land and land improvements $2,077,658 $2,072,388
Banking house - Main 1,516,466 1,504,751
Banking house - Valley Road branch 547,936 547,936
Banking house - Hedgesville branch 770,643 770,643
Banking house - Martinsburg branch 697,006 697,006
Banking house - Hancock branch 230,999 230,999
Banking house - Spring Mills branch 885,697 885,697
Bank owned automobiles 41,657 41,657
Furniture, fixtures and equipment 3,096,484 2,889,032
---------- ----------
$9,864,546 $9,640,109
Less accumulated depreciation 3,753,273 3,312,815
---------- ----------
$6,111,273 $6,327,294
========== ==========
|
Depreciation expense amounted to $514,141, $505,421 and $462,198 in 2007,
2006 and 2005, respectively.
Computer software, net of accumulated amortization, included in the
statement of financial condition caption "Other Assets" amounted to
$145,274 and $101,733 at December 31, 2007 and 2006, respectively.
Amortization expense on computer software amounted to $65,620, $89,887 and
$253,744 in 2007, 2006 and 2005, respectively.
NOTE 7. INTANGIBLE ASSETS
Amortized intangible assets representing customer lists, contracts and
records acquired by CNB Insurance Services, Inc. had a carrying amount of
$66,267 and accumulated amortization of $54,370 at December 31, 2005. On
June 1, 2006, CNB Insurance Services, Inc. was sold along with its customer
lists which had a remaining unamortized cost of $9,419. See Note 16:
Discontinued Operations in the Notes to Consolidated Financial Statements
for further discussion on the sale. These intangibles were being amortized
on a straight line basis.
Amortized intangible asset representing the $780,616 premium from the
purchase of core deposit relationships as part of the Hancock branch
acquisition has accumulated amortization of $394,955 and $283,438 at
December 31, 2007 and 2006 respectively. This core deposit intangible asset
from the Hancock branch acquisition is being amortized over seven years on
a straight line basis.
Amortization expense on intangible assets amounted to $111,516, $113,995
and $117,465 in 2007, 2006 and 2005, respectively.
The estimated amortization expense for the next four succeeding years will
be:
55
2008 $111,516
2009 $111,516
2010 $111,516
2011 $ 51,114
|
NOTE 8. TIME DEPOSITS
At December 31, 2007, the scheduled maturities of time deposits are as
follows:
TIME DEPOSITS ALL TIME
$100,000 AND OVER DEPOSITS
----------------- ------------
2008 $30,245,757 79,883,644
2009 4,508,704 12,306,065
2010 6,798,750 21,445,813
2011 1,331,867 6,066,156
2012 1,608,901 5,510,962
----------- ------------
$44,493,978 $125,212,641
=========== ============
|
NOTE 9. FEDERAL HOME LOAN BANK BORROWINGS
DECEMBER 31,
-------------------------
2007 2006
----------- -----------
Federal Home Loan Bank advances $37,500,000 $18,500,000
|
CNB Bank, Inc. is a member of the Federal Home Loan Bank of Pittsburgh
("FHLB") and, as such, can take advantage of the FHLB program for overnight
and term advances at published daily rates. At December 31, 2007, the Bank
has short term and long term advances with FHLB. FHLB short term advances
mature within one year and carry an interest rate of 3.8% at December 31,
2007. The Bank has a two year convertible select long term loan with a one
year lock out period carrying an interest rate of 3.77% at December 31,
2007. Under the terms of a blanket collateral agreement, term advances from
the FHLB are collateralized by qualifying mortgages and U.S. 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.
56
2007 2006
----------- -----------
Maximum balance outstanding
at any month-end during the year $37,500,000 $27,500,000
Average balance for the year 18,212,781 18,730,712
Weighted average rate for the year 4.97% 5.13%
Weighted average rate at year-end 3.80% 5.40%
|
NOTE 10. UNUSED LINES OF CREDIT
The Bank entered into an open-ended unsecured line of credit with PNC for
$5,000,000 for federal fund purchases. Funds issued under this agreement
are at the PNC federal funds rate effective at the time of borrowing. The
line matures November 28, 2008. The Bank had not drawn on these funds at
December 31, 2007. The Bank entered into a line of credit with SunTrust
Bank for $4,500,000 for federal fund purchases. Funds issued under this
agreement are at the SunTrust Bank federal funds rate effective at the time
of borrowing. The Bank had not drawn on these funds at December 31, 2007.
NOTE 11. PENSION PLAN
The Bank is a member of The Allegheny Group Retirement Plan (formerly The
West Virginia Bankers Association Retirement Plan), a multi-employer,
defined benefit pension plan. All employees participate in the plan after
completing one year of service and attaining the age of 21. The benefits
are based on years of service and the highest average earnings during any
five consecutive calendar years. Plan assets are invested primarily in
corporate bonds, common stocks and U.S. Government and Agency Securities.
The following table sets forth information about the Bank's plan as of
October 31:
57
2007 2006 2005
---------- ----------- -----------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at
beginning of year $4,859,682 $ 4,186,024 $ 3,423,734
Adjustment for plan changes -- -- 106,789
Service cost 247,821 232,392 162,067
Interest cost 267,244 248,471 229,400
Actuarial (gain) loss (181,949) 346,984 428,791
Benefits paid (177,895) (154,189) (164,757)
---------- ----------- -----------
Benefit obligation at end of year $5,014,903 $ 4,859,682 $ 4,186,024
---------- ----------- -----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $3,365,278 $ 2,760,085 $ 2,427,640
Actual return on plan assets 522,339 346,212 212,052
Employer contribution 387,767 413,170 285,150
Benefits paid (177,895) (154,189) (164,757)
---------- ----------- -----------
Fair value of plan assets at end of year $4,097,489 $ 3,365,278 $ 2,760,085
---------- ----------- -----------
Funded status $ (917,414) $(1,494,404) $(1,425,939)
Unrecognized net actuarial (gain) loss 1,061,955 1,578,504 1,464,092
Unrecognized prior service cost 127,566 139,910 98,574
---------- ----------- -----------
Prepaid (accrued) benefit cost $ 272,107 $ 224,010 $ 136,727
========== =========== ===========
ADDITIONAL INFORMATION
Increase (decrease) in minimum liability included
in other comprehensive income (prior to adjustment
to implement SFAS No. 158) $ -- $ (122,863) $ 355,276
|
The accumulated benefit obligation for the defined benefit pension plan was
$4,174,568 and $3,990,462 at October 31, 2007 and October 31, 2006,
respectively.
COMPONENTS OF NET PERIODIC COST:
Service cost $ 247,821 $ 232,392 $ 162,067
Interest cost 267,244 248,471 229,400
Expected return on plan assets (267,153) (248,419) (230,617)
Amortization of prior service costs 12,344 12,344 8,215
Recognized net actuarial loss 79,414 81,099 37,472
---------- ----------- ---------
Net periodic plan cost $ 339,670 $ 325,887 $ 206,537
========== =========== =========
|
58
WEIGHTED AVERAGE ASSUMPTIONS USED TO
DETERMINE BENEFIT OBLIGATIONS AS OF OCTOBER 31:
Discount rate 6.0% 5.75% 5.75%
Expected return on plan assets 8.0% 8.0% 8.5%
Rate of compensation increase 3.5% 3.5% 3.0%
WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE
NET PERIODIC BENEFIT COST FOR YEARS ENDED OCTOBER 31:
Discount rate 5.75% 5.75% 6.5%
Expected return on plan assets 8.0% 8.5% 8.5%
Rate of compensation increase 3.5% 3.0% 3.5%
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit cost $ (917,414) $(1,494,404) $(793,994)
Intangible assets -- -- 98,574
Accumulated other comprehensive income 1,189,521 1,718,414 832,147
---------- ----------- ---------
Net amount recognized $ 272,107 $ 224,010 $ 136,727
========== =========== =========
|
PLAN ASSETS
PERCENTAGE OF PLAN
TARGET ALLOWABLE ASSETS AT OCTOBER 31,
ALLOCATION ALLOCATION ---------------------
2007 RANGE 2007 2006
---------- ---------- ---- ----
Plan assets
Equity securities 70% 40 - 80% 68% 74%
Debt securities 25% 20 - 40% 27% 20%
Real estate 0% 0% 0% 0%
Other 5% 3 - 10% 6% 6%
--- ---
Total 100% 100%
=== ===
|
INVESTMENT POLICY AND STRATEGY
The investments are pooled with the pension assets of other members of the
plan and are allocated based on a formula established by the pension
committee.
The policy, as established by the Pension Committee, is to invest in assets
per the target allocations stated above. The assets will be reallocated
periodically to meet the above target allocations. The investment policy
will be reviewed periodically, under the advisement of a certified
investment advisor, to determine if the policy should be changed.
The overall investment return goal is to achieve a return greater than a
blended mix of stated indices tailored to the same asset mix of the plan
assets by 0.5% after fees over a rolling 5-year moving average basis.
Allowable assets include cash equivalents, fixed income securities, equity
securities, exchange traded index funds and GICs. Prohibited investments
include, but are not limited to, commodities and future contracts, private
placements, options, limited partnerships, venture capital investments,
real estate and IO, PO, and residual tranche CMOs. Unless
59
a specific derivative security is allowed per the plan document, permission
must be sought from the Pension Committee to include such investments.
In order to achieve a prudent level of portfolio diversification, the
securities of any one company should not exceed more than 10% of the total
plan assets, and no more than the 25% of total plan assets should be
invested in any one industry (other than securities of U.S. Government or
agencies). Additionally, no more than 20% of the plan assets shall be
invested in foreign securities (both equity and fixed).
DETERMINATION OF EXPECTED LONG-TERM RATE OF RETURN
The expected long-term rate of return for the plan's total assets is based
on the expected return of each of the above categories, weighted based on
the median of the target allocation for each class.
CASH FLOWS
Expected contributions for fiscal year ending
December 31, 2008
Expected employer contributions $ 453,740
Expected employee contributions $ --
Estimated future benefit payments reflecting expected
future service for the fiscal year(s) ending
12/31/2008 $ 191,642
12/31/2009 $ 204,346
12/31/2010 $ 209,253
12/31/2011 $ 213,830
12/31/2012 $ 234,520
12/31/2013 - 12/31/2017 $1,278,323
|
NOTE 12. 401(K) PROFIT SHARING PLAN
All employees are eligible to participate in the Bank's 401(k) Profit
Sharing Plan after completing one year of service. Employees may defer up
to 15% of their salary in 2007, 2006 and 2005. The Bank may, at the
discretion of the Board of Directors, match all or part of the employee
deferrals. For 2007, the Bank matched 40% of employee deferrals up to 5% of
salary. For 2006 and 2005, the Bank matched 75% of employee deferrals up to
5% of salary. The percentage of match varies based on the Bank's profit
level. The assets of the 401(k) Profit Sharing Plan are managed by the
Bank's trust department.
The Bank's contribution charged to income during 2007, 2006 and 2005 was
$40,938, $64,750 and $63,789, respectively.
NOTE 13. DEFERRED COMPENSATION PLAN
The Bank has a plan pursuant to which a director may elect to waive receipt
of all or a portion of his fees for Board of Directors' meetings or
committee meetings in exchange for a retirement benefit to be received
during a ten-year period after attaining a certain age. The Bank has
acquired life insurance on the lives of participating directors to fund its
obligation under the plan. The cash surrender value of these life insurance
policies has been recorded as an asset. The present value of payments to be
paid to directors or their beneficiaries for services rendered to date has
been recorded as a liability. The net expense for these benefits was
$49,517, $21,641 and $17,948 for 2007, 2006 and 2005, respectively.
60
NOTE 14. INCOME TAXES
CNB and its subsidiary, the Bank, file income tax returns in the U.S.
federal jurisdiction and the State of West Virginia. The Bank also files an
income tax return in the State of Maryland. With few exceptions, CNB is no
longer subject to U.S. federal, state or local income tax examinations by
tax authorities for years before 2004.
CNB adopted the provisions of FASB Interpretations No. 48, "Accounting for
Uncertainty in Income Taxes", on January 1, 2007 with no impact on the
financial statements.
Included in the balance sheet at December 31, 2007 are tax positions
related to loan charge offs for which the ultimate deductibility is highly
certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax accounting, other than
interest and penalties, the disallowance of the shorter deductibility
period would not affect the annual effective tax rate but would accelerate
the payment of cash to the taxing authority to an earlier period.
Income taxes reflected in the statements of income are as follows:
YEARS ENDED DECEMBER 31,
------------------------------------
2007 2006 2005
---------- ---------- ----------
Federal:
Current $1,114,801 $1,194,270 $1,154,256
Deferred (35,201) (39,537) (68,049)
State:
Current 118,005 161,659 163,560
Deferred (6,814) (7,813) (11,351)
---------- ---------- ----------
Provision for income taxes $1,190,791 $1,308,579 $1,238,416
========== ========== ==========
|
Deferred income taxes reflect the impact of "temporary differences" between
the amount of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws and regulations.
The following is a reconciliation of the statutory federal income tax rate
applied to pre-tax accounting income, with the income tax provisions in the
statements of income.
61
YEARS ENDED DECEMBER 31,
------------------------------------
2007 2006 2005
---------- ---------- ----------
Income tax expense at the
statutory rate (34%) $1,256,316 $1,284,262 $1,252,558
Increases (decreases) resulting
from:
Nontaxable interest income,
net of non-deductible interest
expense (116,607) (120,442) (164,735)
State income taxes, net of
federal income tax benefit 102,085 104,293 91,908
Other (51,003) 40,466 58,685
---------- ---------- ----------
Provision for income taxes $1,190,791 $1,308,579 $1,238,416
========== ========== ==========
|
Federal and state income taxes receivable included in the balance sheet as
other assets was $141,108 and $242,662 at December 31, 2007 and 2006,
respectively.
The components of deferred taxes included in the statement of financial
condition as of December 31 are as follows:
2007 2006
---------- ----------
Deferred tax assets:
Provision for loan losses $ 707,644 $ 702,985
Deferred compensation plan 343,363 307,424
Postretirement benefits 69,329 67,522
Intangible asset 75,831 54,420
Unrecognized pension costs 452,018 652,997
Severence package -- 2,592
Net unrealized loss on securities
available for sale 6,315 401,674
---------- ----------
$1,654,500 $2,189,614
---------- ----------
Deferred tax liabilities:
CSV life insurance $ (298,220) $ (278,904)
Defined benefit plan (97,959) (80,643)
Depreciation (330,478) (347,901)
---------- ----------
$ (726,657) $ (707,448)
---------- ----------
Net deferred tax asset (liability) $ 927,843 $1,482,166
========== ==========
|
Generally accepted accounting principles require a valuation allowance
against deferred tax assets if, based on the weight of available evidence,
it is more likely than not that some or all of the deferred tax assets will
not be realized. The Bank believes that the deferred tax assets will be
realized and therefore no valuation allowance was established.
NOTE 15. OTHER OPERATING EXPENSES
62
YEARS ENDED DECEMBER 31,
------------------------------------
2007 2006 2005
---------- ---------- ----------
Stationery, supplies and printing $ 194,794 $ 245,038 $ 206,124
Data processing 118,212 116,177 132,595
Director's fees and deferred compensation 261,667 226,766 196,323
Postage 130,305 124,099 132,363
Telephone 105,471 102,854 104,249
Professional fees 408,285 267,380 288,353
Regulatory assessment fees 45,550 110,291 103,895
Outside service fees 29,354 14,584 22,231
ATM and debit card fees 250,814 215,218 222,539
Advertising 205,444 173,792 161,180
Amortization of intangible 111,516 111,516 117,465
Amortization of software 65,620 89,887 253,744
Other 391,204 316,674 118,019
---------- ---------- ----------
Total other operating expenses $2,318,236 $2,114,276 $2,059,080
========== ========== ==========
|
NOTE 16. DISCONTINUED OPERATIONS
On April 27, 2006, CNB Insurance Services, Inc., a wholly-owned subsidiary
of CNB Bank, Inc., which is a wholly-owned subsidiary of CNB Financial
Services, Inc., entered into an agreement with Maiden Financial Inc. Under
the terms of the agreement, 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 on June 1, 2006
resulting in a gain on sale of $143,913.
The following table summarizes the net results of the discontinued
operations of CNB Insurance Services, Inc.:
2006
----------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR ENDED
QUARTER QUARTER QUARTER QUARTER DECEMBER 31
------- -------- ------- ------- -----------
Net income (loss) from operations
of CNB Insurance Services, Inc. $2,354 $(22,404) $(58) $ 352 $(19,756)
Gain on sale of CNB Insurance
Services, Inc. -- 143,913 -- -- 143,913
------ -------- ---- ------- --------
Net Income before taxes $2,354 $121,509 $(58) $ 352 $124,157
Taxes 902 42,595 -- 1,956 45,453
------ -------- ---- ------- --------
Net income (loss) $1,452 $ 78,914 $(58) $(1,604) $ 78,704
====== ======== ==== ======= ========
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63
NOTE 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
CNB is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk which are not reflected in the
statements of financial condition. The contractual amounts of those
instruments reflect the extent of involvement CNB has in particular classes
of financial instruments.
CNB's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount
of those instruments. CNB uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend funds as long as there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses.
Commercial line of credit arrangements usually require payment of a fee.
CNB evaluates each customer's creditworthiness and related collateral on a
case-by-case basis. The amount of collateral obtained if deemed necessary
by CNB upon extension of credit is based on management's credit evaluation
of the customer. Collateral held varies but may include accounts
receivable, inventory, real estate, equipment and income-producing
commercial properties.
Standby letters of credit written are conditional commitments issued by CNB
to guarantee the performance of a customer to a third party. Those
guarantees are issued to support public and private borrowing arrangements,
bond financing and similar transactions. The credit risk involved in
issuing a letter of credit is essentially the same as that involved in
extending loan facilities to customers.
A summary of off-balance sheet instruments as of December 31 is as follows:
2007 2006
----------- -----------
Commitments to originate:
Fixed rate loans:
Residential real estate loans to be sold $ 639,500 $ 640,623
Other residential real estate 134,000 462,630
Adjustable rate loans:
Other commerical real estate and construction 1,295,000 625,000
Other residential real estate 1,162,100 444,100
Commerical and other 460,000 550,000
Letters of credit 914,353 1,022,059
Undisbursed portion of construction
loans 1,419,345 3,288,286
Available credit granted on commercial
loans 8,174,480 10,479,484
Available credit on personal lines
of credit 293,791 280,198
Undisbursed portion of home equity loans 4,950,486 4,270,602
Commitments to sell real estate loans 672,100 --
----------- -----------
$20,115,155 $22,062,982
=========== ===========
|
64
NOTE 18. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
CNB's primary business is mortgage loans, which consists of originating
residential, construction, multi-family and commercial real estate loans
and consumer and commercial loans. CNB's primary lending area is Morgan and
Berkeley Counties, West Virginia and Washington County, Maryland. Loans are
occasionally made in surrounding counties in West Virginia, Maryland,
Virginia and Pennsylvania.
CNB also invested in mortgage backed securities and collateralized mortgage
obligations. See Note 3: Securities.
CNB evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by CNB upon the extension
of credit is based on management's credit evaluation of the customer.
Collateral held varies but generally includes vehicles, equipment and real
estate.
The Company maintains substantial balances of cash on hand, federal funds
sold and investments held in safekeeping at corresponding banks. The
balances held at the correspondent banks are in excess of the Federal
Deposit Insurance Corporation insurance limit. Management considers this to
be a normal business risk.
NOTE 19. LEGAL CONTINGENCIES
Various legal claims arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect
on the bank's consolidated financial statements.
NOTE 20. REGULATORY MATTERS
The primary source of funds for the dividends paid by CNB Financial
Services, Inc. is dividends received from its banking subsidiary. The
payment of dividends by banking subsidiaries is subject to various banking
regulations. The most restrictive provision requires regulatory approval if
dividends declared in any calendar year exceed the total net profits, as
defined, of that year plus the retained net profits, as defined, of the
preceding two years. At January 1, 2008, CNB has $6,054,000 available for
dividends.
The Bank is subject to various regulatory capital requirements administered
by the banking regulatory agencies. Pursuant to capital adequacy
guidelines, the Bank must meet specific capital guidelines that involve
various quantitative measures of the banks' assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of
December 31, 2007, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 2007 and 2006, the most recent notification from the
banking regulatory agencies categorized the Bank as well-capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios. There are no conditions or events
since that notification that management believes have changed the
institution's category.
65
The Bank's actual capital amounts and ratios are presented in the table.
RATIO
----------------------------------------
ACTUAL TO BE WELL
AMOUNT FOR CAPITAL CAPITALIZED UNDER
IN ADEQUACY PROMPT CORRECTIVE
THOUSANDS ACTUAL PURPOSES ACTION PROVISIONS
--------- ------ ----------- -----------------
As of December 31, 2007:
Total Capital
(to Risk Weighted
Assets) $24,195 14.14% 8.0% 10.0%
Tier I Capital
(to Risk Weighted
Assets) $22,056 12.89% 4.0% 6.0%
Tier I Capital
(to Average Assets) $22,056 7.70% 4.0% 5.0%
As of December 31, 2006:
Total Capital
(to Risk Weighted
Assets) $22,295 13.29% 8.0% 10.0%
Tier I Capital
(to Risk Weighted
Assets) $20,198 12.04% 4.0% 6.0%
Tier I Capital
(to Average Assets) $20,198 7.34% 4.0% 5.0%
|
NOTE 21. REGULATORY RESTRICTIONS
Included in Cash and Due From Banks are average daily reserve balances the
Bank is required to maintain with the Federal Reserve Bank. The amount of
these required reserves, calculated based on percentages of certain deposit
balances was $3.8 million at December 31, 2007.
Certain regulations prohibit the transfer of funds from the Bank to
affiliates in the form of loans or advances exceeding 10% of its capital
stock and surplus. In addition, all loans or advances to nonbank affiliates
must be secured by specific collateral. Based on this limitation, there was
approximately $2.4 million available for loans or advances to affiliates of
the Bank as of December 31, 2007, at which time there were no material
loans or advances outstanding.
NOTE 22. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the asset or
obligation could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Fair value estimates
are made at a specific point in time based on relevant market information
and information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at
one time the entire holdings of a particular financial instrument. Because
no market value exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics
of various financial instruments, and other factors. These estimates are
subjective in
66
nature, involve uncertainties and matters of judgment and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated
future business, and the value of assets and liabilities that are not
considered financial instruments. Additionally, tax consequences related to
the realization of the unrealized gains and losses can have a potential
effect on fair value estimates and have not been considered in many of the
estimates.
The following methods and assumptions were used to estimate the fair value
of significant financial instruments:
Financial Assets:
The carrying amounts of cash, due from Banks and federal funds sold
are considered to approximate fair value. The fair value of investment
securities, including available for sale, are generally based on
quoted market prices. The fair value of loans is estimated using a
combination of techniques, including discounting estimated future cash
flows and quoted market prices of similar instruments where available.
Financial Liabilities:
The carrying amounts of deposit liabilities payable on demand are
considered to approximate fair value. For fixed maturity (time)
deposits, fair value is estimated by discounting estimated future cash
flows using currently offered rates for deposits of similar remaining
maturities.
Off-Balance-Sheet-Financial Instruments:
The fair value of commitments to extend credit and standby letters of
credit is estimated using the fees currently charged to enter into
similar agreements.
The estimated fair value of financial instruments at December 31, is
summarized as follows:
2007 2006
--------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Financial Assets:
Cash, due from banks and
federal funds sold $ 7,791,093 $ 7,791,093 $ 7,367,773 $ 7,367,773
Securities available for
sale 66,017,231 66,017,231 50,873,335 50,873,335
Loans 202,668,845 204,293,376 204,318,993 203,467,447
Accrued interest receivable 1,406,804 1,406,804 1,354,041 1,354,041
Financial Liabilities:
Demand deposits $101,432,074 $101,432,074 $122,849,877 $122,849,877
Time deposits 125,212,640 131,298,172 110,232,863 113,762,131
Accrued interest payable 1,281,166 1,281,166 1,071,990 1,071,990
FHLB borrowings 37,500,000 37,500,000 18,500,000 18,500,000
Off-Balance Sheet
Financial Instruments:
Letters of credit $ -- $ 7,392 $ -- $ 6,087
|
67
NOTE 23. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to executive
officers, directors, and their affiliates amounting to $2,204,308 and
$2,363,763 at December 31, 2007 and 2006, respectively. During 2007,
$77,264 of new loans were made, or became reportable, and repayments and
other decreases totaled $236,719. Deposits from related parties held by the
Bank at December 31, 2007 and 2006 amounted to $5,664,037 and $5,167,964,
respectively.
NOTE 24. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following represents parent company only financial information:
68
STATEMENTS OF FINANCIAL CONDITION (PARENT ONLY)
DECEMBER 31, 2007 AND 2006
2007 2006
----------- -----------
ASSETS
Cash $ 345,226 $ 248,947
Investment in CNB Bank, Inc. 22,432,322 20,040,017
Investment in Morgan County Title Insurance Agency, LLC 1,243 1,120
Other assets 67,845 30,961
----------- -----------
TOTAL ASSETS $22,846,636 $20,321,045
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities $ 25,191 $ (1,217)
----------- -----------
TOTAL LIABILITIES $ 25,191 $ (1,217)
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, $1 par value; 5,000,000 shares
authorized; 458,048 shares issued at December 31, 2007
and December 31, 2006 and 454,949 and 458,048
outstanding at December 31, 2007 and December 31, 2006 $ 458,048 $ 458,048
Capital surplus 4,163,592 4,163,592
Retained earnings 19,155,244 17,421,402
Accumulated other comprehensive income (loss) (747,806) (1,720,780)
----------- -----------
$23,029,078 $20,322,262
Less treasury stock, at cost, 3,099 shares in 2007 (207,633) --
----------- -----------
TOTAL SHAREHOLDERS' EQUITY $22,821,445 $20,322,262
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $22,846,636 $20,321,045
=========== ===========
|
STATEMENTS OF INCOME (PARENT ONLY)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
2007 2006 2005
---------- ---------- ----------
Dividend income $1,154,024 $ 855,394 $ 659,589
Income from title company 12,023 20,668 27,924
Noninterest expense (118,006) (66,610) (44,744)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF CNB BANK, INC. $1,048,041 $ 809,452 $ 642,769
Income tax (expense) benefit 36,884 12,922 6,844
---------- ---------- ----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
CNB BANK, INC. $1,084,925 $ 822,374 $ 649,613
Equity in undistributed earnings of CNB Bank, Inc. 1,419,331 1,646,288 1,795,966
---------- ---------- ----------
NET INCOME $2,504,256 $2,468,662 $2,445,579
========== ========== ==========
|
69
STATEMENTS OF CASH FLOWS (PARENT ONLY)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
2007 2006 2005
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,504,256 $ 2,468,662 $ 2,445,579
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes -- -- 602
(Increase) in other assets (36,884) (19,166) (11,201)
Increase (decrease) in accrued expenses and other
liabilities 26,408 764 (2,061)
Equity in undistributed earnings of CNB Bank, Inc. (1,419,331) (1,496,288) (1,795,966)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,074,449 $ 953,972 $ 636,953
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in title company $ (123) $ 332 $ 575
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIE $ (123) $ 332 $ 575
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid $ (770,414) $ (705,394) $ (659,589)
Purchase of treasury stock, cost (207,633) -- --
----------- ----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES $ (978,047) $ (705,394) $ (659,589)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 96,279 $ 248,910 $ (22,061)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 248,947 $ 37 $ 22,098
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 345,226 $ 248,947 $ 37
=========== =========== ===========
|
70
NOTE 25. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2007
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
In thousands
Interest income $4,230 $4,182 $4,348 $4,441
Interest expense 1,836 1,849 2,006 2,034
------ ------ ------ ------
Net interest income 2,394 2,333 2,342 2,407
Provision for loan losses 63 35 31 40
Noninterest income 534 647 601 621
Noninterest expense 1,916 1,957 1,936 2,206
------ ------ ------ ------
Income before income taxes 949 988 976 782
Provision for income taxes 323 332 314 222
------ ------ ------ ------
Net income $ 626 $ 656 $ 662 $ 560
====== ====== ====== ======
Basic earnings per share $ 1.37 $ 1.43 $ 1.44 $ 1.24
====== ====== ====== ======
|
2006
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
In thousands
Interest income $3,685 $3,900 $4,153 $4,251
Interest expense 1,282 1,462 1,726 1,799
------ ------ ------ ------
Net interest income 2,403 2,438 2,427 2,452
Provision for loan losses 112 74 44 46
Noninterest income 499 511 506 472
Noninterest expense 2,020 1,910 1,873 1,976
------ ------ ------ ------
Income before income taxes 770 965 1,016 902
Provision for income taxes 238 318 386 321
------ ------ ------ ------
Net results from
discontinued operations 1 79 - (1)
Net income $ 533 $ 726 $ 630 $ 580
====== ====== ====== ======
Basic earnings per share $ 1.16 $ 1.59 $ 1.37 $ 1.27
====== ====== ====== ======
|
71