form10-k2007.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
■
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended
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December
31, 2007
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or
□
TRANSITION REPORT PURSUANT
TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from
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to
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Commission
file number
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000-13222
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CITIZENS
FINANCIAL SERVICES, INC.
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(Exact
name of registrant as specified in its charter)
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Pennsylvania
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23-2265045
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State
or other jurisdiction of
incorporation
or organization
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(I.R.S.
Employer
Identification
No.)
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15
South Main Street, Mansfield, Pennsylvania
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16933
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code
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(570)
662-2121
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Securities
registered pursuant to Section 12(b) of the Act:
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None
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Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, par value $1.00 per share
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
□ Yes ■ No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
□ Yes ■ No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
■ Yes □ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
□
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting company. See
the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
Accelerated filer
£
Non-accelerated
filer o
Smaller reporting
company ■
(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 Act).
□ Yes ■ No
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
last sold, or the average bid and asked price of such common equity, as of
the
last business day of the registrant’s most recently completed second fiscal
quarter. $55,143,967 as of June 30, 2007.
Indicate
the number of shares
outstanding of each of the registrant’s classes of common stock, as of the
latest practicable date. 2,825,558as
of February 20,
2008
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information required by Part III is incorporated by reference to the
Registrant’s Definitive Proxy Statement for the 2008 Annual Meeting of
Shareholders.
Citizens
Financial Services, Inc.
Form
10-K
INDEX
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Page
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PART
I
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ITEM
1 – BUSINESS
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1
–
4
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ITEM
1A – RISK FACTORS
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5–
7
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ITEM
1B – UNRESOLVED STAFF COMMENTS
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7
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ITEM
2 – PROPERTIES
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7
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ITEM
3 – LEGAL PROCEEDINGS
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7
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ITEM
4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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7
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PART
II
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ITEM
5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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8
- 9
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ITEM
6 – SELECTED FINANCIAL DATA
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10
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ITEM
7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
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11
–
33
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ITEM
7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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34
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ITEM
8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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34
–
68
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ITEM
9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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69
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ITEM
9A(T) – CONTROLS AND PROCEDURES
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69
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ITEM
9B– OTHER INFORMATION
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69
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PART
III
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ITEM
10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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70
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ITEM
11 – EXECUTIVE COMPENSATION
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70
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ITEM
12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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70–
71
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ITEM
13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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71
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ITEM
14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES
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71
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PART
IV
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ITEM
15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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72–
73
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SIGNATURES
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74
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PART
I
ITEM
1 –
BUSINESS.
CITIZENS
FINANCIAL SERVICES, INC.
Citizens
Financial Services, Inc. (the “Company”), a Pennsylvania business corporation,
was incorporated April 30, 1984. The Company is registered with the Board of
Governors of the Federal Reserve System as a bank holding company under the
Bank
Holding Company Act of 1956, as amended. Simultaneous with
establishment of the Company in 1984, First Citizens National Bank (the “Bank”)
became a wholly-owned subsidiary of the Company through a merger transaction
in
which the shareholders of the Bank became shareholders of the
Company. The Company is subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve
System. In general, the Company is limited to owning or controlling
banks and engaging in such other activities as are properly incident
thereto.
Our
Company does not currently engage in any operating business activities, other
than the ownership and management of the Bank and its wholly-owned insurance
agency subsidiary.
FIRST
CITIZENS NATIONAL BANK
The
Bank
was created as a result of the merger of Citizens National Bank of Blossburg,
Pennsylvania with and into The First National Bank of Mansfield in
1970. Upon consummation of the merger, the Bank had 2 offices and served
Tioga
County,
Pennsylvania. In 1971, the Bank
expanded its operations into
Potter County through the acquisition of the Grange National Bank, which had
offices in Ulysses and Genesee, Pennsylvania. As previously
discussed, the Bank became the wholly-owned subsidiary of Citizens Financial
Services, Inc. in 1984. On November 16, 1990, the Company acquired
Star Savings and Loan Association, originally organized as a Pennsylvania
state-chartered mutual savings and loan association in 1899, and converted
it
into a Pennsylvania state-chartered permanent reserve fund stock savings and
loan association on March 27, 1986. On December 31, 1991, the Star Savings
and
Loan Association merged with and into the Bank. On April 20, 1996,
the Bank purchased two branch offices of Meridian Bank in Canton and Gillett,
Pennsylvania. In October 1996, the Bank opened an office in the Weis
Supermarket in Wellsboro, Pennsylvania. In August of 2000, the Bank
opened an office in the Wal-Mart Super-center in Mansfield,
Pennsylvania. On October 27, 2000, the Bank purchased six branch
offices of Sovereign Bank in Bradford County, Pennsylvania. In
February 2001, the Bank consolidated two of the six Sovereign
branches. On June 4, 2004, two branches of The Legacy Bank in
Bradford County, Pennsylvania were purchased and the Bank consolidated two
of
its existing branches to maximize efficiencies. On December 17, 2005,
the Hannibal branch of the Fulton Savings Bank in Hannibal, New York was
acquired. Simultaneous with the purchase, the branch was relocated to
Wellsville, New York (Allegany County). A temporary banking facility
was opened on December 19, 2005. A permanent banking facility was
constructed during 2006 and was opened for business on October 30,
2006.
The
Bank’s main office is located at 15 South Main Street, Mansfield, (Tioga County)
Pennsylvania. The Bank’s primary market area consists of the
Pennsylvania Counties of Bradford, Potter and Tioga in North Central
Pennsylvania. It also includes Allegany, Steuben, Chemung and Tioga
Counties in Southern New York. The economy is diversified and
includes manufacturing industries, wholesale and retail trade, service
industries, family farms and the production of natural resources of gas and
timber. In addition to the main office, the Bank has 15 other full
service branch offices in its market area.
The
Bank
is a full-service bank engaging in a broad range of banking activities and
services for individual, business, governmental and institutional
customers. These activities and services principally include
checking, savings, time and deposit accounts; real estate, commercial,
industrial, residential and consumer loans; and a variety of other specialized
financial services. The Trust and Investment division offers a full
range of client investment, estate and retirement services.
As
of December 31, 2007, the Bank
employed 154full
time employees and 30part-time
employees, resulting in
167full
time equivalent employees at our
corporate offices and other banking locations.
Our
Company's profitability does not depend upon a few customers. Losing the
business of any one customer or group of customers would not cause a material
impact on our business. The Bank’s business is not seasonal nor does
it have any risks attendant to foreign sources. We are dependent
geographically upon the economic conditions in north central Pennsylvania and
the southern tier of New York.
COMPETITION
The
banking industry in the Bank’s service area continues to be extremely
competitive, both among commercial banks and with financial service providers
such as consumer finance companies, thrifts, investment firms, mutual funds,
insurance companies, credit unions and internet banks. The increased
competition has resulted from changes in the legal and regulatory guidelines
as
well as from economic conditions. Mortgage banking firms, financial
companies, financial affiliates of industrial companies, brokerage firms,
retirement fund management firms and even government agencies provide additional
competition for loans and other financial services. The Bank is
generally competitive with all competing financial institutions in its service
area with respect to interest rates paid on time and savings deposits, service
charges on deposit accounts and interest rates charged on loans.
Additional
information related to our
business and competition is included in Part II, Item 7, “Management's
Discussion and Analysis of Financial Condition and Results of
Operations”.
SUPERVISION
AND REGULATION
GENERAL
The
Company is registered as a bank holding company and is subject to supervision
and regulation by the Board of Governors of the Federal Reserve System under
the
Bank Holding Company Act of 1956, as amended. The Company is
considered a bank holding company. Bank holding companies are
required to file periodic reports with and are subject to examination by the
Federal Reserve Board. The Federal Reserve Board has issued
regulations under the Bank Holding Company Act that require a bank holding
company to serve as a source of financial and managerial strength to its
subsidiary banks. As a result, the Federal Reserve Board, pursuant to
such regulations, may require the Company to stand ready to use its resources
to
provide adequate capital funds to its bank subsidiary during periods of
financial stress or adversity.
The
Bank
Holding Company Act prohibits the Company from acquiring direct or indirect
control of more than 5% of the outstanding shares of any class of voting stock,
or substantially all of the assets of, any bank, or from merging or
consolidating with another bank holding company, without prior approval of
the
Federal Reserve Board. Additionally, the Bank Holding Company Act
prohibits the Company from engaging in or from acquiring ownership or control
of
more than 5% of the outstanding shares of any class of voting stock of any
company engaged in a non-banking business, unless such business has been
determined by the Federal Reserve Board to be so closely related to banking
as
to be a proper incident thereto or, for financial holding companies, to be
financial in nature or incidental thereto.
The
Bank
is a national bank and a member of the Federal Reserve System, and its deposits
are insured (up to applicable limits) by the Federal Deposit Insurance
Corporation (the “FDIC”). The Bank is subject to regulation and
examination by the Office of the Comptroller of the Currency (OCC), and to
a
much lesser extent, the Federal Reserve Board and the FDIC. The Bank
is also subject to requirements and restrictions under federal and state law,
including requirements to maintain reserves against deposits, restrictions
on
the types and amounts of loans that may be granted and the interest that may
be
charged thereon, and limitations on the types of investments that may be made
and the types of services that may be offered. The Bank is subject to
extensive regulation and reporting requirements in a variety of areas, including
to help prevent money laundering, to preserve financial privacy and to properly
report late payments, defaults and denials of loan applications. The
Community Reinvestment Act requires the Bank to help meet the credit needs
of
the entire community where the Bank operates, including low and moderate income
neighborhoods. The Bank's rating under the Community Reinvestment
Act, assigned by the Comptroller of the Currency pursuant to an examination
of
the Bank, is important in determining whether the bank may receive approval
for,
or utilize certain streamlined procedures in, applications to engage in new
activities. The Bank’s present CRA rating is
“Outstanding.” Various
consumer laws and regulations also affect the operations of the
Bank. In addition to the impact of regulation, commercial banks are
affected significantly by the actions of the Federal Reserve Board as it
attempts to control the money supply and credit availability in order to
influence the economy.
CAPITAL
ADEQUACY GUIDELINES
Bank
holding companies are required to comply with the Federal Reserve Board's
risk-based capital guidelines. The required minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet activities,
such as standby letters of credit) is 8%. At least half of the total
capital is required to be “Tier 1 capital,” consisting principally of
common shareholders' equity, less certain intangible assets. The
remainder (“Tier 2 capital”) may consist of certain preferred stock, a
limited amount of subordinated debt, certain hybrid capital instruments and
other debt securities, and a limited amount of the general loan loss
allowance. The risk-based capital guidelines are required to take
adequate account of interest rate risk, concentration of credit risk, and risks
of nontraditional activities.
In
addition to the risk-based capital
guidelines, the Federal Reserve Board requires a bank holding company to
maintain a leverage ratio of a minimum level of Tier 1 capital (as
determined under the risk-based capital guidelines) equal to 3% of average
total
consolidated assets for those bank holding companies which have the highest
regulatory examination ratings and are not contemplating or experiencing
significant growth or expansion. All other bank holding companies are
required to maintain a ratio of at least 1% above the stated
minimum. The Bank is subject to almost identical capital requirements
adopted by the OCC.
PROMPT
CORRECTIVE ACTION RULES
The
federal banking agencies have regulations defining the levels at which an
insured institution would be considered “well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized.” Institutions that are classified as
undercapitalized, significantly undercapitalized or critically undercapitalized
are subject to various supervision measures based on the degree of
undercapitalization. The applicable federal bank regulator for a
depository institution could, under certain circumstances, reclassify a
“well-capitalized” institution as “adequately capitalized” or require an
“adequately capitalized” or “undercapitalized” institution to comply with
supervisory actions as if it were in the next lower category. Such a
reclassification could be made if the regulatory agency determines that the
institution is in an unsafe or unsound condition (which could include
unsatisfactory examination ratings). The Bank satisfies the criteria
to be classified as “well capitalized” within the meaning of applicable
regulations.
REGULATORY
RESTRICTIONS ON DIVIDENDS
The
Bank
may not, under the National Bank Act, declare a dividend without approval of
the
OCC, unless the dividend to be declared by the Bank's Board of Directors does
not exceed the total of: (i) the Bank's net profits for the
current year to date, plus (ii) its retained net profits for the preceding
two current years, less any required transfers to surplus. In
addition, the Bank can only pay dividends to the extent that its retained net
profits (including the portion transferred to surplus) exceed its bad
debts. The Federal Reserve Board, the OCC and the FDIC have formal
and informal policies which provide that insured banks and bank holding
companies should generally pay dividends only out of current operating earnings,
with some exceptions. The Prompt Corrective Action Rules, described
above, further limit the ability of banks to pay dividends, because banks which
are not classified as well capitalized or adequately capitalized may not pay
dividends.
Under
these policies and subject to the
restrictions applicable to the Bank, the Bank could have declared, during 2007,
without prior regulatory approval, aggregate dividends of approximately
$6.2 million, plus net profits earned to the date of such dividend
declaration.
BANK
SECRECY ACT
Under
the
Bank Secrecy Act (BSA), banks and other financial institutions are required
to
retain records to assure that the details of financial transactions can be
traced if investigators need to do so. Banks are also required to
report most cash transactions in amounts exceeding $10,000 made by or on behalf
of their customers. Failure to meet BSA requirements may expose the
Bank to statutory penalties, and a negative compliance record may affect the
willingness of regulating authorities to approve certain actions by the Bank
requiring regulatory approval, including new branches.
INSURANCE
OF DEPOSIT ACCOUNTS
The
Bank’s deposits are insured up to applicable limits by the Deposit Insurance
Fund of the FDIC. The Deposit Insurance Fund is the successor to the
Bank Insurance Fund and the Savings Association Insurance Fund, which were
merged in 2006. The FDIC amended its risk-based assessment system for
2007 to implement authority granted by the Federal Deposit Insurance Reform
Act
of 2005 (“Reform Act”). Under the revised system, insured
institutions are assigned to one of four risk categories based on supervisory
evaluations, regulatory capital levels and certain other factors. An
institution’s assessment rate depends upon the category to which it is
assigned. Risk category I, which contains the least risky depository
institutions, is
expected
to include more than 90% of all institutions. Unlike the other
categories, Risk Category I contains further risk differentiation based on
the
FDIC’s analysis of financial ratios, examination component ratings and other
information. Assessment rates are determined by the FDIC and
currently range from five to seven basis points for the healthiest institutions
(Risk Category I) to 43 basis points of assessable deposits for the riskiest
(Risk Category IV). The Federal Deposit Insurance Corporation may
adjust rates uniformly from one quarter to the next, except that no single
adjustment can exceed three basis points. No institution may pay a
dividend if in default of the FDIC assessment.
The
Reform Act also provided a one-time
credit for eligible institutions based on their assessment base as of December
31, 1996. Subject to certain limitations, credits could be used
beginning in 2007 to offset assessments until exhausted. The Bank’s
one-time credit approximated $335,000, of which $126,000 was
utilized in
2007. The Reform
Act also provided for the possibility that the FDICmay
pay dividends to insured
institutions once the Deposit Insurance fund reserve ratio equals or exceeds
1.35% of estimated insured deposits.
In
addition to the assessment for deposit insurance, institutions are required
to
make payments on bonds issued in the late 1980s by the Financing Corporation
to
recapitalize a predecessor deposit insurance fund. That payment is
established quarterly and during the calendar year ending December 31, 2007
averaged 1.18 basis points of assessable deposits.
The
Reform Act provided the FDIC with authority to adjust the Deposit Insurance
Fund
ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to
the
prior statutorily fixed ratio of 1.25%. The ratio, which is viewed by
the Federal Deposit Insurance Corporation as the level that the fund should
achieve, has been established by the agency at 1.25% for 2008, which was
unchanged from 2007.
The
FDIC
has authority to increase insurance assessments. A significant
increase in insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. Management
cannot predict what insurance assessment rates will be in the
future.
Insurance
of deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC or the OCC. The management of
the Bank does not know of any practice, condition or violation that might lead
to termination of deposit insurance.
EFFECT
OF GOVERNMENT
MONETARY POLICIES
The
earnings and growth of the banking industry are affected by the credit policies
of monetary authorities, including the Federal Reserve System. An
important function of the Federal Reserve System is to regulate the national
supply of bank credit in order to control recessionary and inflationary
pressures. Among the instruments of monetary policy used by the
Federal Reserve to implement these objectives are open market activities in
U.S.
Government Securities, changes in the discount rate on member bank borrowings
and changes in reserve requirements against member bank
deposits. These operations are used in varying combinations to
influence overall economic growth and indirectly, bank loans, securities, and
deposits. These variables may also affect interest rates charged on
loans or paid on deposits. The monetary policies of the Federal
Reserve authorities have had a significant effect on the operating results
of
commercial banks in the past and are expected to continue to have such an effect
in the future.
In
view of the changing conditions in
the national economy and in the money markets, as well as the effect of actions
by monetary and fiscal authorities including the Federal Reserve System, no
prediction can be made as to possible changes in interest rates, deposit levels,
loan demand or their effect on the business and earnings of the Company and
the
Bank. Additional information is included under the caption
“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” appearing in
this Annual Report on Form 10-K.
ITEM
1A – RISK
FACTORS.
Changes
in interest rates could reduce our income, cash flows and asset
values.
Our
income and cash flows and the value of our assets depend to a great extent
on
the difference between the interest rates we earn on interest-earning assets,
such as loans and investment securities, and the interest rates we pay on
interest-bearing liabilities such as deposits and borrowings. These
rates are highly sensitive to many factors which are beyond our control,
including general economic conditions and policies of various governmental
and
regulatory agencies and, in particular, the Board of Governors of the Federal
Reserve System. Changes in monetary policy, including changes in interest rates,
will influence not only the interest we receive on our loans and investment
securities and the amount of interest we pay on deposits and borrowings but
will
also affect our ability to originate loans and obtain deposits and the value
of
our investment portfolio. If the rate of interest we pay on our
deposits and other borrowings increases more than the rate of interest we earn
on our loans and other investments, our net interest income, and therefore
our
earnings, could be adversely affected. Our earnings also could be
adversely affected if the rates on our loans and other investments fall more
quickly than those on our deposits and other borrowings.
Economic
conditions either nationally
or locally in areas in which our operations are concentrated may adversely
affect our business.
Deterioration
in local, regional, national or global economic conditions could cause us to
experience a reduction in deposits and new loans, an increase in the number
of
borrowers who default on their loans and a reduction in the value of the
collateral securing their loans, all of which could adversely affect our
performance and financial condition. Unlike larger banks that are more
geographically diversified, we provide banking and financial services
locally. Therefore, we are particularly vulnerable to adverse local
economic conditions in north central Pennsylvania and southern New
York. The economy in this region is rural in nature with unemployment
rates slightly higher than the national average.
Our
financial condition and results of operations would be adversely affected if
our
allowance for loan losses is not sufficient to absorb actual losses or if we
are
required to increase our allowance.
Despite
our underwriting criteria, we may experience loan delinquencies and
losses. In order to absorb losses associated with nonperforming
loans, we maintain an allowance for loan losses based on, among other things,
historical experience, an evaluation of economic conditions, and regular reviews
of delinquencies and loan portfolio quality. Determination of the
allowance inherently involves a high degree of subjectivity and requires us
to
make significant estimates of current credit risks and future trends, all of
which may undergo material changes. At any time there are likely to
be loans in our portfolio that will result in losses but that have not been
identified as nonperforming or potential problem credits. We cannot be sure
that
we will be able to identify deteriorating credits before they become
nonperforming assets or that we will be able to limit losses on those loans
that
are identified. We may increase our allowance for loan losses based on our
regular review of delinquencies and loan portfolio quality, or for any of
several other reasons. Bank regulators, in reviewing our loan
portfolio as part of a regulatory examination, may request that we increase
our
allowance for loan losses. Changes in economic conditions affecting
borrowers, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of our
control, may require an increase in our allowance. In addition, if
charge-offs in future periods exceed our allowance for loan losses, we will
need
additional increases in our allowance for loan losses. Any increases
in our allowance for loan losses will result in a decrease in our net income
and, possibly, our capital, and may materially affect our results of operations
in the period in which the allowance is increased.
Competition
may decrease our growth or profits.
We
face
substantial competition in all phases of our operations from a variety of
different competitors, including commercial banks, savings and loan
associations, mutual savings banks, credit unions, consumer finance companies,
factoring companies, leasing companies, insurance companies and money market
mutual funds. There is very strong competition among financial
services providers in our principal service area. Our competitors may
have greater resources, higher lending limits or larger branch systems than
we
do. Accordingly, they may be able to offer a broader range of
products and services as well as better pricing for those products and services
than we can.
In
addition, some of the financial services organizations with which we compete
are
not subject to the same degree of regulation as is imposed on federally insured
financial institutions. As a result, those nonbank competitors may be
able to access funding and provide various services more easily or at less
cost
than we can, adversely affecting our ability to compete
effectively.
We
may be adversely affected by government regulation.
The
banking industry is heavily regulated. Banking regulations are primarily
intended to protect the federal deposit insurance funds and depositors, not
shareholders. Changes in the laws, regulations, and regulatory practices
affecting the
banking
industry may increase our costs of doing business or otherwise adversely
affect
us and create competitive advantages for others. Regulations affecting banks
and
financial services companies undergo continuous change, and we cannot predict
the ultimate effect of these changes, which could have a material adverse
effect
on our profitability or financial condition.
In
addition to these banking laws and
regulations, we are also subject to the Securities Exchange Act of 1934 and
the
rules and regulations under that act. Moreover, we are subject to the
provisions of the Sarbanes-Oxley Act of 2002 (SOX) and the rules and regulations
issued thereunder by the Securities and Exchange
Commission
(“SEC”). These
laws and regulations
impose, among other things, significant responsibilities on officers, auditors,
boards of directors and audit committees. Our expenses related to services
rendered by our accountants, legal counsel and consultants have increased and
may continue to increase in order to ensure compliance with these laws and
regulations.
Under
Section 404 of SOX, we were
required to conduct a comprehensive review and assessment of the adequacy of
our
existing systems and controls as of the end of 2007and our
auditors will have to attest to our
assessment beginning with the twelve months ended December 31, 2008, although the SEC has
proposed to delay
implementation of the auditor attestation requirement until fiscal years ending
on or after December 15, 2009. This resulted in additional
expenses in
2007 and will result in further expenses in succeeding years that may adversely
affect our results of operations. In a SOX 404 review, we could
uncover deficiencies or material weaknesses in existing systems and controls.
If
that is the case, we would have to take the necessary steps to correct any
deficiencies or material weaknesses, which may be costly and may strain our
management resources. We also would be required to disclose any
such material weaknesses, which could adversely affect the market price of
our
common stock.
We
rely on our management and other key personnel, and the loss of any of them
may
adversely affect our operations.
We
are
and will continue to be dependent upon the services of our executive management
team. In addition, we will continue to depend on our ability to retain and
recruit key commercial loan officers. The unexpected loss of services of any
key
management personnel or commercial loan officers could have an adverse effect
on
our business and financial condition because of their skills, knowledge of
our
market, years of industry experience and the difficulty of promptly finding
qualified replacement personnel.
Environmental
liability associated
with lending activities could result in losses.
In
the
course of our business, we may foreclose on and take title to properties
securing our loans. If hazardous substances were discovered on any of
these properties, we could be liable to governmental entities or third parties
for the costs of remediation of the hazard, as well as for personal injury
and
property damage. Many environmental laws can impose liability
regardless of whether we knew of, or were responsible for, the
contamination. In addition, if we arrange for the disposal of
hazardous or toxic substances at another site, we may be liable for the costs
of
cleaning up and removing those substances from the site even if we neither
own
nor operate the disposal site. Environmental laws may require us to
incur substantial expenses and may materially limit use of properties we acquire
through foreclosure, reduce their value or limit our ability to sell them in
the
event of a default on the loans they secure. In addition, future laws
or more stringent interpretations or enforcement policies with respect to
existing laws may increase our exposure to environmental liability.
Failure
to implement new technologies in our operations may adversely affect our growth
or profits.
The
market for financial services, including banking services and consumer finance
services, is increasingly affected by advances in technology, including
developments in telecommunications, data processing, computers, automation,
Internet-based banking and telebanking. Our ability to compete successfully
in
our markets may depend on the extent to which we are able to exploit such
technological changes. However, we can provide no assurance that we will be
able
properly or timely to anticipate or implement such technologies or properly
train our staff to use such technologies. Any failure to adapt to new
technologies could adversely affect our business, financial condition or
operating results.
An
investment in our common stock is not an insured deposit.
Our
common stock is not a bank deposit and, therefore, is not insured against loss
by the FDIC, any other deposit insurance fund or by any other public or private
entity. Investment in our common stock is subject to the same market
forces that affect the price of common stock in any company.
Our
ability to pay dividends is limited by law.
Our
ability to pay dividends to our shareholders largely depends on our receipt
of
dividends from the Bank.
The amount of dividends
that the Bank may pay to us is limited by federal
laws and regulations. We also may decide to limit the payment of dividends
even
when we have the legal ability to pay them in order to retain earnings for
use
in our business.
Federal
and state banking laws, our articles of incorporation and our by-laws may have
an anti-takeover effect.
Federal
law imposes restrictions, including regulatory approval requirements, on persons
seeking to acquire control over us. Pennsylvania law also has
provisions that may have an anti-takeover effect. These provisions
may serve to entrench management or discourage a takeover attempt that
shareholders consider to be in their best interest or in which they would
receive a substantial premium over the current market price.
ITEM
1B – UNRESOLVED
STAFF COMMENTS.
Not
applicable.
ITEM
2 –
PROPERTIES.
The
headquarters of the Company and Bank are located at 15 South Main Street,
Mansfield, Pennsylvania. The building contains the central offices of the
Company and Bank. Our bank also owns fifteen other banking facilities and leases
two other facilities. All buildings owned by the Bank are free of any liens
or
encumbrances.
The
net
book value of owned properties and leasehold improvements totaled $11,618,228
as
of December 31, 2007. The properties are adequate to meet the needs
of the employees and customers. We have equipped all of our facilities with
current technological improvements for data and word processing.
ITEM
3 - LEGAL PROCEEDINGS.
The
Company is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition or results of
operations.
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During
the quarter ended December 31, 2007, no matters were submitted to vote of
security holders through a solicitation of proxies or
otherwise.
PART
II
ITEM
5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
The
Company's stock is not listed on any stock exchange, but it is quoted on the
OTC
Bulletin Board under the trading symbol CZFS. Prices presented in the
table below are bid prices between broker-dealers published by the OTC Bulletin
Board and the Pink Sheets Electronic Quotation Service. The prices do
not include retail markups or markdowns or any commission to the
broker-dealer. The bid prices do not necessarily reflect prices in
actual transactions. Cash dividends are declared on a quarterly basis
and are summarized in the table below (also see dividend restrictions to Note
13
of the consolidated financial statements).
|
Dividends
|
|
|
Dividends
|
|
2007
|
paid
|
2006
|
paid
|
|
High
|
Low
|
per
share
|
High
|
Low
|
per
share
|
First
quarter
|
$ 22.57
|
$ 21.04
|
$ 0.220
|
$ 22.77
|
$ 20.54
|
$ 0.210
|
Second
quarter
|
23.52
|
20.94
|
0.225
|
23.76
|
21.38
|
0.215
|
Third
quarter
|
22.75
|
20.25
|
0.225
|
23.01
|
21.38
|
0.215
|
Fourth
quarter
|
21.75
|
19.35
|
0.230
|
22.80
|
21.05
|
0.220
|
The
Company has paid dividends since April 30, 1984, the effective date of our
formation as a bank holding company. The Company's Board of Directors intends
to
continue the dividend payment policy; however, future dividends necessarily
depend upon earnings, financial condition, appropriate legal restrictions and
other factors as in existence at the time the Board of Directors considers
a
dividend policy. Cash available for dividend distributions to stockholders
of
the Company comes from dividends paid to the Company by the Bank. Therefore,
restrictions on the ability of the Bank to make dividend payments are directly
applicable to the Company. See “Footnote 13 – Regulatory Matters” to
the consolidated financial statements.
Under
the Pennsylvania Business
Corporation Law of 1988, the Company may pay dividends only if, after payment,
the Company would be able to pay debts as they become due in the usual course
of
our business and total assets will be greater than the sum of total
liabilities. The Federal Reserve Board has issued a policy
statement regarding the payment of dividends by bank holding
companies. In general, the Federal Reserve Board’s policies provide
that dividends should be paid only out of current earnings and only if the
prospective rate of earnings retention by the bank holding company appears
consistent with the organization’s capital needs, asset quality, and overall
financial condition. The Federal Reserve Board’s policies also
require that a bank holding company serve as a source of financial strength
to
its subsidiary banks by standing ready to use available resources to provide
adequate capital funds to those banks during periods of financial stress or
adversity and by maintaining the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks
where
necessary. Furthermore, the Federal Reserve Board has authority to
prohibit a bank holding company from paying a capital distribution where a
subsidiary bank is undercapitalized. These regulatory policies could affect
the
ability of the Company to pay dividends or otherwise engage in capital
distributions.
The
Company distributed a 1% stock
dividend on July 27, 2007 to all shareholders of record as of July 13,
2007.
As
of February 13, 2008, the Company had
approximately 1,572 stockholders of record. The computation of
stockholders of record excludes individual participants in securities positions
listings. The Company has not sold any unregistered shares of common
stock in the past three years. The following table presents
information
regarding the Company’s
stock repurchases during
the three months ended December 31, 2007:
Period
|
Total
Number of Shares (or units Purchased)
|
Average
Price Paid per Share (or Unit)
|
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans
of Programs
|
Maximum
Number (or Approximate Dollar Value) of Shares (or Units) that May
Yet Be
Purchased Under the Plans or Programs (1)
|
|
|
|
|
|
10/1/07
to 10/31/07
|
-
|
-
|
-
|
85,918
|
11/1/07
to 11/30/07
|
4,690
|
$21.29
|
4,690
|
81,228
|
12/1/07
to 12/31/07
|
5,000
|
$21.25
|
5,000
|
76,228
|
Total
|
9,690
|
$21.27
|
9,690
|
76,228
|
On
January 7, 2006, the Company
announced that the Board of Directors authorized the Company to repurchase
up to
140,000 shares. The repurchases will be conducted through open-market
purchases or privately negotiated transactions and will be made from time to
time depending on market conditions and other factors. No time limit
was placed on the duration of the share repurchase program. Any
repurchased shares will be held as treasury stock and will be available for
general corporate purposes.
ITEM
6 - SELECTED FINANCIAL DATA.
The
following table sets forth certain financial data as of and for each of the
years in the five year period ended December 31, 2007:
(in
thousands, except share data)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Interest
income
|
|
$ |
36,024 |
|
|
$ |
32,851 |
|
|
$ |
28,699 |
|
|
$ |
26,606 |
|
|
$ |
25,615 |
|
Interest
expense
|
|
|
16,922 |
|
|
|
14,953 |
|
|
|
11,000 |
|
|
|
9,235 |
|
|
|
8,826 |
|
Net
interest income
|
|
|
19,102 |
|
|
|
17,898 |
|
|
|
17,699 |
|
|
|
17,371 |
|
|
|
16,789 |
|
Provision
for loan losses
|
|
|
365 |
|
|
|
330 |
|
|
|
60 |
|
|
|
- |
|
|
|
435 |
|
Net
interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan losses
|
|
|
18,737 |
|
|
|
17,568 |
|
|
|
17,639 |
|
|
|
17,371 |
|
|
|
16,354 |
|
Non-interest
income
|
|
|
5,114 |
|
|
|
4,712 |
|
|
|
4,688 |
|
|
|
4,527 |
|
|
|
4,759 |
|
Investment
securities gains (losses), net
|
|
|
(29 |
) |
|
|
4 |
|
|
|
- |
|
|
|
(235 |
) |
|
|
553 |
|
Non-interest
expenses
|
|
|
15,314 |
|
|
|
15,027 |
|
|
|
15,387 |
|
|
|
14,922 |
|
|
|
15,501 |
|
Income
before provision for income taxes
|
|
|
8,508 |
|
|
|
7,257 |
|
|
|
6,940 |
|
|
|
6,741 |
|
|
|
6,165 |
|
Provision
for income taxes
|
|
|
1,772 |
|
|
|
1,457 |
|
|
|
1,666 |
|
|
|
1,474 |
|
|
|
1,286 |
|
Net
income
|
|
$ |
6,736 |
|
|
$ |
5,800 |
|
|
$ |
5,274 |
|
|
$ |
5,267 |
|
|
$ |
4,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on Assets (net income to average total assets)
|
|
|
1.16 |
% |
|
|
1.05 |
% |
|
|
1.04 |
% |
|
|
1.09 |
% |
|
|
1.11 |
% |
Return
on Equity (net income to average total equity)
|
|
|
14.38 |
% |
|
|
13.21 |
% |
|
|
12.63 |
% |
|
|
13.40 |
% |
|
|
13.22 |
% |
Dividend
Payout Ratio (dividends declared divided by net income)
|
|
|
37.86 |
% |
|
|
42.10 |
% |
|
|
44.28 |
% |
|
|
41.90 |
% |
|
|
43.10 |
% |
Equity
to Asset Ratio (average equity to average total assets,
|
|
|
8.10 |
% |
|
|
7.98 |
% |
|
|
8.20 |
% |
|
|
8.15 |
% |
|
|
8.43 |
% |
excluding
other comprehensive income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (1)
|
|
$ |
2.37 |
|
|
$ |
2.02 |
|
|
$ |
1.81 |
|
|
$ |
1.80 |
|
|
$ |
1.65 |
|
Cash
dividends (1)
|
|
|
0.90 |
|
|
|
0.86 |
|
|
|
0.80 |
|
|
|
0.76 |
|
|
|
0.71 |
|
Book
value (1) (2)
|
|
|
17.30 |
|
|
|
15.89 |
|
|
|
14.85 |
|
|
|
13.90 |
|
|
|
12.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
$ |
120,802 |
|
|
$ |
109,743 |
|
|
$ |
102,602 |
|
|
$ |
95,747 |
|
|
$ |
106,587 |
|
Loans,
net (3)
|
|
|
419,182 |
|
|
|
410,897 |
|
|
|
379,139 |
|
|
|
355,774 |
|
|
|
314,037 |
|
Total
assets (3)
|
|
|
591,029 |
|
|
|
572,168 |
|
|
|
529,241 |
|
|
|
499,347 |
|
|
|
463,878 |
|
Total
deposits (3)
|
|
|
456,028 |
|
|
|
446,515 |
|
|
|
429,799 |
|
|
|
419,074 |
|
|
|
385,691 |
|
Stockholders'
equity
|
|
|
48,528 |
|
|
|
43,500 |
|
|
|
41,561 |
|
|
|
40,789 |
|
|
|
38,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Amounts were adjusted to reflect stock dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Calculation excludes accumulated other comprehensive income and
unrecognized pension cost.
|
|
|
|
|
|
|
|
|
|
(3)
Amounts in 2004 reflect the acquisition of branches in the second
quarter
of 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
in 2005 reflect the branch acquisition in the fourth quarter of
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
7 – MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
CAUTIONARY
STATEMENT
Forward-looking
statements may prove inaccurate. We have made forward-looking statements in
this
document, and in documents that we incorporate by reference, that are subject
to
risks and uncertainties. Forward-looking statements include information
concerning possible or assumed future results of operations of Citizens
Financial Services, Inc., First Citizens National Bank, First Citizens Insurance
Agency, Inc. or the combined Company. When we use words such as “believes,”
“expects,” “anticipates,” or similar expressions, we are making forward-looking
statements. For a variety of reasons, actual results could differ
materially from those contained in or implied by forward-looking
statements:
|
·
|
Interest
rates could change more rapidly or more significantly than we expect.
|
|
·
|
The
economy could change significantly in an unexpected way, which would
cause
the demand for new loans and the ability of borrowers to repay outstanding
loans to change in ways that our models do not anticipate.
|
|
·
|
The
stock and bond markets could suffer a significant disruption, which
may
have a negative effect on our financial condition and that of our
borrowers, and on our ability to raise money by issuing new securities.
|
|
·
|
It
could take us longer than we anticipate implementing strategic initiatives
designed to increase revenues or manage expenses, or we may be unable
to
implement those initiatives at all.
|
|
·
|
Acquisitions
and dispositions of assets could affect us in ways that management
has not
anticipated.
|
|
·
|
We
may become subject to new legal obligations or the resolution of
litigation may have a negative effect on our financial condition.
|
|
·
|
We
may become subject to new and unanticipated accounting, tax, or regulatory
practices or requirements.
|
|
·
|
We
could experience greater loan delinquencies than anticipated, adversely
affecting our earnings and financial condition. We could also experience
greater losses than expected due to the ever increasing volume of
information theft and fraudulent scams impacting our customers and
the
banking industry.
|
|
·
|
We
could lose the services of some or all of our key personnel, which
would
negatively impact our business because of their business development
skills, financial expertise, lending experience, technical expertise
and
market area knowledge.
|
Except
as
required by applicable law and regulation, we assume no obligation to update
or
revise any forward-looking statements after the date on which they are
made.
INTRODUCTION
The
following is management’s discussion and analysis of the significant changes in
the results of operations, capital resources and liquidity presented in its
accompanying consolidated financial statements for Citizens Financial Services,
Inc., a bank holding company and its subsidiary (the “Company”). Our Company’s
consolidated financial condition and results of operations consist almost
entirely of our wholly owned subsidiary’s (First Citizens National Bank)
financial condition and results of operations. Management’s discussion and
analysis should be read in conjunction with the audited consolidated financial
statements and related notes. Except as noted, tabular information is presented
in thousands of dollars.
Our
Company currently engages in the general business of banking throughout our
service area of Potter, Tioga and Bradford counties in North Central
Pennsylvania and Allegany, Steuben, Chemung and Tioga counties in Southern
New
York. We maintain our central office in Mansfield, Pennsylvania. Presently
we
operate 16 banking facilities. In Pennsylvania, these offices are
located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre,
Canton, Gillett, Millerton, LeRaysville, Towanda, the Wellsboro Weis Market
store and the Mansfield Wal-Mart Super Center.
In
December of 2005, regulatory approval was received to purchase the Hannibal
branch of the Fulton Savings Bank in Hannibal, New York (see footnote 18 to
the
consolidated financial statements). The office was relocated to
Wellsville, New York, where a temporary banking facility was
utilized. In October, 2006, we officially opened our newly
constructed de novo branch facility in Wellsville, accomplishing one of our
primary objectives of expanding into New York State.
Risk
identification and management are essential elements for the successful
management of the Company. In the normal course of business, the
Company is subject to various types of risk, including interest rate, credit,
liquidity and regulatory risk.
Interest
rate risk is the sensitivity of net interest income and the market value of
financial instruments to the direction and frequency of changes in interest
rates. Interest rate risk results from various re-pricing frequencies
and the maturity structure of the financial instruments owned by the
Company. The Company uses its asset/liability and funds management
policies to control and manage interest rate risk.
Credit
risk represents the possibility that a customer may not perform in accordance
with contractual terms. Credit risk results from loans with customers
and the purchasing of securities. The Company’s primary credit risk
is in the loan portfolio. The Company manages credit risk by adhering
to an established credit policy and through a disciplined evaluation of the
adequacy of the allowance for loan losses. Also, the investment
policy limits the amount of credit risk that may be taken in the investment
portfolio.
Liquidity
risk represents the inability to generate or otherwise obtain funds at
reasonable rates to satisfy commitments to borrowers and obligations to
depositors. The Company has established guidelines within its
asset/liability and funds management policy to manage liquidity
risk. These guidelines include, among other things, contingent
funding alternatives.
Regulatory
risk represents the possibility that a change in law, regulations or regulatory
policy may have a material effect on the business of the Company and its
subsidiary. We can not predict what legislation might be enacted or
what regulations might be adopted, or if adopted, the effect thereof on our
operations. We can not anticipate additional requirements or
additional compliance efforts regarding the Bank Secrecy Act or USA Patriot
Act,
or regulatory burdens regarding the ever increasing information theft and
fraudulent activities impacting our customers and the banking industry in
general.
Readers
should carefully review the risk factors described in other documents our
Company files from time to time with the Securities and Exchange Commission,
including the annual reports on Form 10-K, the quarterly reports on Form 10-Q
and any current reports on Form 8-K filed by us.
We
face
strong competition in the communities that we serve from other commercial banks,
savings banks, and savings and loan associations, some of which are
substantially larger institutions than our subsidiary. In addition, insurance
companies, investment-counseling firms, and other business firms and individuals
offer personal and corporate trust services. We also compete with credit unions,
issuers of money market funds, securities brokerage firms, consumer finance
companies, mortgage brokers and insurance companies. These entities are strong
competitors for virtually all types of financial services. The
financial services industry continues to experience tremendous change to
competitive barriers between bank and non-bank institutions. We must compete
not
only with traditional financial institutions, but in addition, with other
business corporations that have begun to deliver competing financial services,
and banking services that are easily accessible through the internet.
Competition for banking services is based on price, nature of product, quality
of service, and in the case of certain activities, convenience of
location.
TRUST
AND INVESTMENT
SERVICES
Our
Investment and Trust Services Division is committed to helping our customers
meet their financial goals. The Trust Division offers professional
trust administration, investment management services, estate planning and
administration, custody of securities and individual retirement
accounts. Assets held
by the Bank in a fiduciary or agency capacity for its customers are not included
in the consolidated financial statements since such items are not assets of
the
Bank. As of
December 31, 2007, non-deposit investment products under management totaled
$40.4 million. Additionally, as summarized in the table below, the
Trust Department had assets under management as of December 31, 2007 and 2006
of
$94.4 million and $82.6 million, respectively:
(market
values - in thousands)
|
|
2007
|
|
|
2006
|
|
INVESTMENTS:
|
|
|
|
|
|
|
Bonds
|
|
$ |
21,081 |
|
|
$ |
17,543 |
|
Stock
|
|
|
23,014 |
|
|
|
21,013 |
|
Savings
and Money Market Funds
|
|
|
9,907 |
|
|
|
9,163 |
|
Mutual
Funds
|
|
|
38,177 |
|
|
|
32,678 |
|
Mortgages
|
|
|
1,098 |
|
|
|
951 |
|
Real
Estate
|
|
|
978 |
|
|
|
1,263 |
|
Miscellaneous
|
|
|
12 |
|
|
|
16 |
|
Cash
|
|
|
106 |
|
|
|
10 |
|
TOTAL
|
|
$ |
94,373 |
|
|
$ |
82,637 |
|
ACCOUNTS:
|
|
|
|
|
|
|
|
|
Trusts
|
|
|
30,306 |
|
|
|
26,333 |
|
Guardianships
|
|
|
682 |
|
|
|
144 |
|
Employee
Benefits
|
|
|
34,944 |
|
|
|
30,253 |
|
Investment
Management
|
|
|
27,791 |
|
|
|
24,742 |
|
Custodial
|
|
|
650 |
|
|
|
1,165 |
|
TOTAL
|
|
$ |
94,373 |
|
|
$ |
82,637 |
|
Our
Financial Consultants offer full service brokerage services throughout the
Bank’s market area. Appointments can be made at any First Citizens
National Bank branch. The Financial Consultants provide financial
planning and help our customers achieve their financial goals with their choice
of mutual funds, annuities, health and life insurance. These products
are made available through our insurance subsidiary, First Citizens Insurance
Agency, Inc.
RESULTS
OF
OPERATIONS
Net
income for the twelve months ended December 31, 2007 was $6,736,000, which
represents an increase of $936,000, or 16.1%, when compared to the 2006 related
period. Net income for the twelve months ended December 31, 2006
totaled $5,800,000, an increase of $526,000 from the 2005 related
period. Earnings per
share were $2.37,
$2.02
and $1.81
for the years ended 2007,
2006
and 2005,
respectively. The
reasons for these changes are discussed on the following pages.
The
following table sets forth certain performance ratios of our Company for the
periods indicated:
|
2007
|
2006
|
2005
|
Return
on Assets (net income to average total assets)
|
1.16%
|
1.05%
|
1.04%
|
Return
on Equity (net income to average total equity)
|
14.38%
|
13.21%
|
12.63%
|
Dividend
Payout Ratio (dividends declared divided by net income)
|
37.86%
|
42.10%
|
44.28%
|
Equity
to Asset Ratio (average equity to average total assets, excluding
other
comprehensive income)
|
8.10%
|
7.98%
|
8.20%
|
Net
income is influenced by five key components: net interest income, non-interest
income, non-interest expenses, provision for loan losses and the provision
for
income taxes. A discussion of these components follows.
Net
Interest Income
The
most
significant source of revenue is net interest income; the amount of interest
earned on interest-earning assets exceeding interest incurred on
interest-bearing liabilities. Factors that influence net interest
income are changes in volume of interest-earning assets and interest-bearing
liabilities as well as changes in the associated interest rates.
The
following table sets forth our Company’s average balances of, and the interest
earned or incurred on, each principal category of assets, liabilities and
stockholders’ equity, the related rates, net interest income and rate “spread”
created (dollars in thousands):
|
|
|
Analysis
of Average Balances and Interest Rates (1)
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Average
|
|
Average
|
Average
|
|
Average
|
Average
|
|
Average
|
|
Balance
(1)
|
Interest
|
Rate
|
Balance
(1)
|
Interest
|
Rate
|
Balance
(1)
|
Interest
|
Rate
|
|
$
|
$
|
%
|
$
|
$
|
%
|
$
|
$
|
%
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits at banks
|
102
|
5
|
5.10
|
4
|
0
|
5.14
|
114
|
3
|
2.63
|
Total
short-term investments
|
102
|
5
|
5.10
|
4
|
0
|
5.14
|
114
|
3
|
2.63
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
95,417
|
4,702
|
4.93
|
86,198
|
3,892
|
4.52
|
83,787
|
3,236
|
3.86
|
Tax-exempt
(3)
|
24,173
|
1,451
|
6.00
|
22,952
|
1,368
|
5.96
|
14,705
|
903
|
6.14
|
Total
investment securities
|
119,590
|
6,153
|
5.14
|
109,150
|
5,260
|
4.82
|
98,492
|
4,139
|
4.20
|
Loans:
|
|
|
|
|
|
|
|
|
|
Residential
mortgage loans
|
211,171
|
15,640
|
7.41
|
209,305
|
14,842
|
7.09
|
201,265
|
13,814
|
6.86
|
Commercial
& agricultural loans
|
147,921
|
11,740
|
7.94
|
134,813
|
10,353
|
7.68
|
118,524
|
8,434
|
7.12
|
Loans
to state & political subdivisions
|
45,259
|
2,751
|
6.08
|
43,642
|
2,604
|
5.97
|
38,766
|
2,308
|
5.95
|
Other
loans
|
12,426
|
1,150
|
9.25
|
12,747
|
1,141
|
8.95
|
12,592
|
1,106
|
8.78
|
Loans,
net of discount (2)(3)(4)
|
416,777
|
31,281
|
7.51
|
400,507
|
28,940
|
7.23
|
371,147
|
25,662
|
6.91
|
Total
interest-earning assets
|
536,469
|
37,439
|
6.98
|
509,661
|
34,200
|
6.71
|
469,753
|
29,804
|
6.34
|
Cash
and due from banks
|
9,299
|
|
|
9,093
|
|
|
8,764
|
|
|
Bank
premises and equipment
|
12,773
|
|
|
12,415
|
|
|
12,142
|
|
|
Other
assets
|
18,832
|
|
|
18,610
|
|
|
18,714
|
|
|
Total
non-interest earning assets
|
40,904
|
|
|
40,118
|
|
|
39,620
|
|
|
Total
assets
|
577,373
|
|
|
549,779
|
|
|
509,373
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
NOW
accounts
|
95,098
|
2,026
|
2.13
|
85,481
|
1,638
|
1.92
|
71,257
|
665
|
0.93
|
Savings
accounts
|
38,443
|
137
|
0.36
|
39,170
|
130
|
0.33
|
39,939
|
113
|
0.28
|
Money
market accounts
|
50,189
|
1,787
|
3.56
|
45,717
|
1,464
|
3.20
|
49,482
|
999
|
2.02
|
Certificates
of deposit
|
225,590
|
9,413
|
4.17
|
218,019
|
8,453
|
3.88
|
213,109
|
7,596
|
3.56
|
Total
interest-bearing deposits
|
409,320
|
13,363
|
3.26
|
388,387
|
11,685
|
3.01
|
373,787
|
9,373
|
2.51
|
Other
borrowed funds
|
66,525
|
3,559
|
5.35
|
63,635
|
3,268
|
5.14
|
41,893
|
1,627
|
3.88
|
Total
interest-bearing liabilities
|
475,845
|
16,922
|
3.56
|
452,022
|
14,953
|
3.31
|
415,680
|
11,000
|
2.65
|
Demand
deposits
|
48,981
|
|
|
49,324
|
|
|
46,890
|
|
|
Other
liabilities
|
6,783
|
|
|
4,757
|
|
|
5,033
|
|
|
Total
non-interest-bearing liabilities
|
55,764
|
|
|
54,081
|
|
|
51,923
|
|
|
Stockholders'
equity
|
45,764
|
|
|
43,676
|
|
|
41,770
|
|
|
Total
liabilities & stockholders' equity
|
577,373
|
|
|
549,779
|
|
|
509,373
|
|
|
Net
interest income
|
|
20,517
|
|
|
19,247
|
|
|
18,804
|
|
Net
interest spread (5)
|
|
|
3.42%
|
|
|
3.40%
|
|
|
3.69%
|
Net
interest income as a percentage
|
|
|
|
|
|
|
|
|
|
of
average interest-earning assets
|
|
|
3.82%
|
|
|
3.78%
|
|
|
4.00%
|
Ratio
of interest-earning assets
|
|
|
|
|
|
|
|
|
|
to
interest-bearing liabilities
|
|
|
1.13
|
|
|
1.13
|
|
|
1.13
|
|
|
|
|
|
|
|
|
|
|
(1)
Averages are based on daily averages.
|
|
|
|
|
|
|
|
|
|
(2)
Includes loan origination and commitment fees.
|
|
|
|
|
|
|
|
|
(3)
Tax exempt interest revenue is shown on a tax equivalent basis for
proper
comparison using
|
|
|
|
|
a
statutory federal income tax rate of 34%.
|
|
|
|
|
|
|
|
|
(4)
Income on non-accrual loans is accounted for on a cash basis, and
the loan
balances are included in interest-earning assets.
|
|
(5)
Interest rate spread represents the difference between the average
rate
earned on interest-earning assets
|
|
|
|
and
the average rate paid on interest-bearing liabilities.
|
|
|
|
|
|
|
|
|
Tax
exempt interest revenue is shown on
a tax-equivalent basis for proper comparison using a statutory, federal income
tax rate of 34%. For purposes of the comparison,
as well
as the discussion that follows, this presentation facilitates performance
comparisons between taxable and tax-free assets by increasing the tax-free
income by an amount equivalent to the Federal income taxes that would have
been
paid if this income were taxable at the Company’s 34% Federal statutory
rate. Accordingly, tax
equivalent adjustments for investments and loans
have been made
accordingly to the previous table for the years ended December 31,
2007,
2006 and
2005,
respectively:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
from
investment securities (non-tax adjusted)
|
|
$ |
5,626 |
|
|
$ |
4,750 |
|
|
$ |
3,788 |
|
Tax
equivalent adjustment
|
|
|
532 |
|
|
|
510 |
|
|
|
354 |
|
Interest
and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
from
investment securities (tax equivalent basis)
|
|
$ |
6,158 |
|
|
$ |
5,260 |
|
|
$ |
4,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Interest
and fees on loans (non-tax adjusted)
|
|
$ |
30,398 |
|
|
$ |
28,101 |
|
|
$ |
24,911 |
|
Tax
equivalent adjustment
|
|
|
883 |
|
|
|
839 |
|
|
|
751 |
|
Interest
and fees on loans (tax equivalent basis)
|
|
$ |
31,281 |
|
|
$ |
28,940 |
|
|
$ |
25,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Total
interest income
|
|
$ |
36,024 |
|
|
$ |
32,851 |
|
|
$ |
28,699 |
|
Total
interest expense
|
|
|
16,922 |
|
|
|
14,953 |
|
|
|
11,000 |
|
Net
interest income
|
|
|
19,102 |
|
|
|
17,898 |
|
|
|
17,699 |
|
Total
tax equivalent adjustment
|
|
|
1,415 |
|
|
|
1,349 |
|
|
|
1,105 |
|
Net
interest income (tax equivalent basis)
|
|
$ |
20,517 |
|
|
$ |
19,247 |
|
|
$ |
18,804 |
|
The
following table shows the
tax-equivalent effect of changes in volume and rates on interest income and
expense (in thousands):
Analysis
of Changes in Net Interest Income on a Tax-Equivalent Basis (1)
|
2007
vs. 2006 (1)
|
2006
vs. 2005 (1)
|
|
Change
in
|
Change
|
Total
|
Change
in
|
Change
|
Total
|
|
Volume
|
in
Rate
|
Change
|
Volume
|
in
Rate
|
Change
|
Interest
Income:
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
Interest-bearing
deposits at banks
|
$ 5
|
$ -
|
$ 5
|
$ (5)
|
$ 2
|
$ (3)
|
Investment
securities:
|
|
|
|
|
|
|
Taxable
|
436
|
374
|
810
|
90
|
566
|
656
|
Tax-exempt
|
73
|
10
|
83
|
493
|
(28)
|
465
|
Total
investment securities
|
509
|
384
|
893
|
583
|
538
|
1,121
|
Loans:
|
|
|
|
|
|
|
Residential
mortgage loans
|
133
|
665
|
798
|
658
|
370
|
1,028
|
Commercial
& agricultural loans
|
1,031
|
356
|
1,387
|
1,376
|
543
|
1,919
|
Loans
to state & political subdivisions
|
97
|
50
|
147
|
291
|
5
|
296
|
Other
loans
|
(26)
|
35
|
9
|
14
|
21
|
35
|
Total
loans, net of discount
|
1,235
|
1,106
|
2,341
|
2,339
|
939
|
3,278
|
Total
Interest Income
|
1,749
|
1,490
|
3,239
|
2,917
|
1,479
|
4,396
|
Interest
Expense:
|
|
|
|
|
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
NOW
accounts
|
195
|
193
|
388
|
100
|
873
|
973
|
Savings
accounts
|
(3)
|
10
|
7
|
(3)
|
20
|
17
|
Money
Market accounts
|
150
|
173
|
323
|
(81)
|
546
|
465
|
Certificates
of deposit
|
301
|
659
|
960
|
170
|
687
|
857
|
Total
interest-bearing deposits
|
643
|
1,035
|
1,678
|
186
|
2,126
|
2,312
|
Other
borrowed funds
|
152
|
139
|
291
|
1,562
|
79
|
1,641
|
Total
interest expense
|
795
|
1,174
|
1,969
|
1,748
|
2,205
|
3,953
|
Net
interest income
|
$ 954
|
$ 316
|
$ 1,270
|
$ 1,169
|
$ (726)
|
$ 443
|
(1)
The portion of total change
attributable to both volume and rate changes, which cannot be separated,
has been
allocated proportionally to the change due to volume and the change due to
rate
prior to
allocation.
2007
vs. 2006
As
shown in the preceding tables, tax
equivalent net interest income for 2007 was $20,517,000 compared with
$19,247,000 for 2006, an increase of $1,270,000 or 6.6%. The
increased volume of interest earning assets of $26.8 million generated an
increase in interest income of $1,749,000. The average rate on
interest earning assets increased from 6.71% in 2006 to 6.98% in 2007, which
had
the effect of increasing interest income by $1,490,000.
Total
tax equivalent interest income
from investment securities increased $893,000 in 2007 from
2006. Income from taxable investment securities increased
$810,000. The average balance of investment securities increased
$10.4 million, which had an effect of increasing interest income by $509,000
due
to volume. The average tax-effected yield on our investment portfolio
increased from 4.82% in 2006 to 5.14% in 2007. This had the effect of
increasing interest income by $384,000 due to rate. The Company’s
strategy in 2007 was to increase the size and duration of our investment
portfolio, given the opportunity that general market conditions provided, which
resulted in an increase in the overall yield on our
investments.
Loan
income increased $2,341,000 in 2007
from 2006. Our commitment and focus on originating good quality,
commercial loans was the primary driver as income from these loans increased
$1,387,000 over 2006. The average balance of commercial loans
increased $13.1 million or 9.7%, while at the same time the average rate
increased from 7.68% to 7.94%.
Residential
mortgage loan income
increased $798,000. The increase due to volume was $133,000, as the
average balance increased $1.9 million. During 2007, overall rates
increased on 1 to 4 family residential mortgages due to various economic
conditions, including well publicized credit issues facing the banking
industry. Although we were not directly impacted by sub-prime credit
concerns facing other institutions, the average rate earned on our residential
mortgage loan portfolio increased from 7.09% to 7.41%. This had the
effect of increasing interest income by $665,000. The Company
continues to strive on being the top mortgage lender within our service area
by
providing competitive products and exemplary service to our
customers.
Total
interest expense increased
$1,969,000 in 2007 compared to 2006. This is attributable to an
increase in the average balance of interest bearing liabilities, which increased
$23.8 million. This had the effect of increasing interest expense by
$795,000. The average rate paid on interest bearing liabilities
increased from 3.31% to 3.56%. This is primarily due to increased
average balances in state and political deposits which are more sensitive to
market changes in interest rates. The overall increase in the average
rate had the effect of increasing interest expense by
$1,174,000.
During
the second half of 2007, the
Federal Reserve decreased the federal funds rate 100 basis
points. This had
an impact
on the rates paid on short term
deposits, top tier money market and NOW accounts, and on short term borrowing
rates particularly from the Federal Home Loan Bank. The
Company’s liabilities, including
borrowings and deposits, are shorter in nature and are more sensitive to
short-term changes in interest rates. Many of the Company’s
interest-earning assets are priced, or re-price, along the five year point
of
the curve, where interest rates have not significantly changed during this
same
period. Our ability to decrease rates on short term liabilities
faster than the average rate on interest earning assets has resulted in a slight
increase in our net interest spread. Our net interest spread for 2007
was 3.42% compared to 3.40% in 2006. Should short-term interest rates
continue to decrease (the Federal Reserve decreased the federal funds rate
125
basis points in January, 2008) and longer term rates remain steady or increase,
the result would be a more
normal yield curve. As such, it is
anticipated that the Company’s net
interest spread should continue to improve. Should
short-term
and/or long-term interest
rates move in such a way that results in a flattened or
inverted
yield curve, we would anticipate
pressure
on our
margin.
2006
vs. 2005
Tax
equivalent net interest income
increased from
$18,804,000
in 2005to
$19,247,000
in 2006, which is an increase
of
$443,000 or
2.4%. The
increased volume of interest-earning assets of $39.9 million generated
an increase in interest income
of $2,917,000
while increased volume of
interest-bearing liabilities of $36.3 million produced
an additional $1,748,000
of interest expense. The change in
volume resulted in a net increase of $1,169,000in
net interest income. The net change
in rate was a negative $726,000
resulting in a total positive net
change of $443,000
when combined with the change in
volume.
Total
tax equivalent interest income
from investment securities increased $1,121,000 in 2006 from
2005. Income from taxable investment securities increased
$656,000. The average rate earned went from 3.86% to 4.52%, which had
the effect of increasing income by $566,000. Interest income from
tax-exempt investment securities increased $465,000 in 2006 primarily due to
volume as the average balance increased from $14.7 million in 2005 to $23.0
million in 2006.
The
amount of increase related to loan
volume was $2,339,000 while the increase related to rate was
$939,000. The average balance of loans increased $29.4 million from
2005 to 2006.
Interest
expense on interest bearing
deposits increased $2,312,000. The amount attributable to the change
in average rate was $2,126,000, while the increase due to volume was
$186,000. Interest expense on borrowed funds increased $1,641,000
compared with 2005. The increase due to volume totaled $1,562,000,
while the increase due to rate was $79,000. The average rate paid on
interest-bearing liabilities increased from 2.65% in 2005 to 3.31% in
2006.
2006’s
net interest income compared to
2005 shows the effects of the Federal Reserve’s increasing
short-term interest rates
during 2005 and
a
flattened to
inverted yield curvethat
persisted for most of the
year. As such, the net interest spread decreased from 3.69% in 2005
to 3.40%.
Non-interest
Income
The
following table reflects non-interest income by major category for the periods
ended December 31 (dollars in thousands):
|
2007
|
2006
|
2005
|
|
Service
charges
|
$ 3,210
|
$ 3,140
|
$ 2,965
|
|
Trust
|
520
|
487
|
474
|
|
Brokerage
and Insurance
|
132
|
260
|
443
|
|
Gains
on loans sold
|
134
|
68
|
70
|
|
Investment
securities (losses) gains, net
|
(29)
|
4
|
-
|
|
Earnings
on bank owned life insurance
|
331
|
304
|
294
|
|
Gains
on sales of foreclosed properties
|
396
|
80
|
23
|
|
Other
|
391
|
373
|
419
|
|
Total
|
$ 5,085
|
$ 4,716
|
$ 4,688
|
|
|
|
|
|
|
|
2007/2006
|
2006/2005
|
|
Change
|
Change
|
|
Amount
|
%
|
Amount
|
%
|
Service
charges
|
$ 70
|
2.2
|
$ 175
|
5.9
|
Trust
|
33
|
6.8
|
13
|
2.7
|
Brokerage
and Insurance
|
(128)
|
(49.2)
|
(183)
|
(41.3)
|
Gains
on loans sold
|
66
|
97.1
|
(2)
|
(2.9)
|
Investment
securities (losses) gains, net
|
(33)
|
-
|
4
|
-
|
Earnings
on bank owned life insurance
|
27
|
8.9
|
10
|
3.4
|
Gains
on sales of foreclosed properties
|
316
|
395.0
|
57
|
247.8
|
Other
|
18
|
4.8
|
(46)
|
(11.0)
|
Total
|
$ 369
|
7.8
|
$ 28
|
0.6
|
2007
vs. 2006
Non-interest
income increased $369,000 in 2007 from 2006, or 7.8%. Service charge
income increased by $70,000 in 2007 compared to 2006. ATM and related
check card fee income increased $90,000 from last year. The Company
continues to promote efforts to increase usage of debit cards by retail
customers. Additionally, service charge fees charged to customers for
non-sufficient funds increased by $15,000. Offsetting these increases
was a $40,000 decrease in statement fees, primarily due to the competitive
environment for attracting and retaining commercial deposit customers and
increased earnings credits with our account analysis product on commercial
deposits.
Trust
revenues increased by 6.8% to 520,000 during 2007, which reflects our efforts to continue
growing
trust assets under management. This increase was offset by a decrease in
brokerage and insurance revenue of $128,000. During 2006, the Company changed
our
broker dealer relationship. This transition continued to impact
revenues into 2007; however, improvement was experienced during the latter
half
of 2007. The Company continues to expect the new relationship to
increase customer service and increase revenues by enhancing our ability to
meet
the needs of our customers.
Gains
on
sales of foreclosed properties increased by $316,000 in 2007 compared to 2006
primarily due to a pre-tax gain of
$381,000 recognized on a large commercial property that was sold in the second
quarter of 2007.
Gains
on loans sold increased by $66,000
due to the increased volume of Freddie Mac and Fannie Mae loans sold on the
secondary market. Investment securities losses of $29,000 were
realized this year due to restructuring the investment portfolio in order to
improve future yields.
2006
vs. 2005
Non-interest
income increased $28,000 in 2006 compared with 2005, or .6%. Service
charge income increased by $175,000 in 2006 compared to 2005. Service
charge fees charged to customers for non-sufficient funds increased by
$134,000. The opening of over 3,000 new checking accounts contributed
to this increase. ATM and check card related fee income also
increased by $67,000 due to increased retail customers’ usage of their debit
cards. Offsetting these was a $34,000 decrease in statement
fees.
Trust
revenues increased $13,000 from
2005 while brokerage and insurance revenues decreased
$183,000. This decrease was primarily due to the Company’s decision
to change our broker dealer
relationship as well as several large annuity transactions recognized in
2005.
Non-interest
Expenses
The
following tables reflect the breakdown of non-interest expense and professional
fees for the periods ended December 31 (dollars in thousands):
|
2007
|
2006
|
2005
|
|
Salaries
and employee benefits
|
$ 8,386
|
$ 8,026
|
$ 7,645
|
|
Occupancy
|
1,151
|
1,123
|
1,142
|
|
Furniture
and equipment
|
539
|
593
|
658
|
|
Professional
fees
|
645
|
551
|
536
|
|
Amortization
of intangibles
|
144
|
252
|
578
|
|
Other
|
4,449
|
4,482
|
4,828
|
|
Total
|
$ 15,314
|
$ 15,027
|
$ 15,387
|
|
|
|
|
|
|
|
2007/2006
|
2006/2005
|
|
Change
|
Change
|
|
Amount
|
%
|
Amount
|
%
|
Salaries
and employee benefits
|
$ 360
|
4.5
|
$ 381
|
5.0
|
Occupancy
|
28
|
2.5
|
(19)
|
(1.7)
|
Furniture
and equipment
|
(54)
|
(9.1)
|
(65)
|
(9.9)
|
Professional
fees
|
94
|
17.1
|
15
|
2.8
|
Amortization
of intangibles
|
(108)
|
(42.9)
|
(326)
|
(56.4)
|
Other
|
(33)
|
(0.7)
|
(346)
|
(7.2)
|
Total
|
$ 287
|
1.9
|
$ (360)
|
(2.3)
|
|
2007
|
2006
|
2005
|
|
Other
professional fees
|
$ 367
|
$ 296
|
$ 286
|
|
Legal
fees
|
111
|
115
|
116
|
|
Examinations
and audits
|
167
|
140
|
134
|
|
Total
|
$ 645
|
$ 551
|
$ 536
|
|
|
|
|
|
|
|
2007/2006
|
2006/2005
|
|
Change
|
Change
|
|
Amount
|
%
|
Amount
|
%
|
Other
professional fees
|
$ 71
|
24.0
|
$ 10
|
3.5
|
Legal
fees
|
(4)
|
(3.5)
|
(1)
|
(0.9)
|
Examinations
and audits
|
27
|
19.3
|
6
|
4.5
|
Total
|
$ 94
|
17.1
|
$ 15
|
2.8
|
2007
vs. 2006
Non-interest
expenses for 2007 totaled $15,314,000 which represents and increase of $287,000,
or 1.9%, compared with 2006 costs of $15,027,000. Much of the
increase is attributable to salary and benefit costs increasing $360,000. Base
salaries increased $111,000, or 1.8%, primarily due to merit
increases. The year to date full time equivalent staffing was 170 for
2007 compared to 172 for 2006. Incentive costs for employees
increased by $236,000 due primarily to the attainment of certain corporate
goals
and objectives.
Professional
fees increased by $94,000 due to
various consulting arrangements including an evaluation of our employee pension
and incentive plans as well as increased internal control testing requirements
related to Sarbanes-Oxley regulations.
We
experienced decreases in furniture and equipment expenses and amortization
of
intangibles. Amortization expense decreased
$108,000
due to a core deposit intangible from a previous acquisition that became fully
amortized in March 2006. Furniture and equipment expense
decreased by $54,000 mainly due to depreciation expense from assets becoming
fully depreciated. Also, during the second quarter of
2007 we
recorded a $100,000 write-down of one of our bank
properties.
2006
vs. 2005
Non-interest
expenses decreased $360,000, or 2.3% over 2005. Amortization expense
decreased by $326,000 in 2006 compared to 2005 due to the core deposit
intangible related to a past acquisition in 2000 becoming fully amortized in
March 2006.
Furniture
and equipment expense decreased by $65,000 compared to 2005 mainly due to
depreciation expense from assets becoming fully depreciated. Other
expenses decreased $346,000 in 2006. Of this decrease, $240,000 was
attributable to a decrease in merger and acquisition costs related to the Fulton
acquisition in 2005 (see Footnote 18 to the consolidated financial statements
for additional information).
Offsetting
these decreases, salary and benefit costs increased $381,000. Base
salaries increased $90,000, or 1.5%, primarily due to merit
increases. Full time equivalent staffing was 172, unchanged from
2005. Employee health insurance costs increased $86,000 while pension
expenses increased $72,000. Incentive costs increased $128,000
compared with 2005.
Additionally,
operating expenses
related to our de novo office in Wellsville, New York added significant costs
during 2006. This includes approximately $259,000 of expenses related
to personnel, furniture and equipment, occupancy and other
expenses.
Provision
For Income Taxes
The
provision for income taxes was $1,772,000 during 2007, $1,457,000 during 2006
and $1,666,000 for the 2005 related periods. The effective tax
rates for 2007, 2006 and 2005 were 20.8%, 20.1% and 24.1%,
respectively.
Income
before the provision for income taxes increased by $1,251,000 in 2007 compared
to 2006. Due to the level of income, the provision for income taxes
has increased by $315,000 when compared to 2006. We have successfully
maintained our effective tax rate of 20.8% by remaining invested in tax-exempt
municipal loans and bonds. Management will continue to monitor our
effective tax rate as net income increases.
Despite
an increase in income, the provision for income taxes for 2006 decreased by
$209,000 due to the aforementioned increase in tax-free income attained by
municipal loans and bonds. By increasing our tax-exempt income, we
were able to reduce our effective tax rate for 2006 and 2007, as compared to
2005.
We
are
also involved in three limited partnership agreements that established
low-income housing projects in our market area. For tax purposes, we have recognized
$662,000
out of a total $913,000
in
tax credits from one project and
$231,000
out of a total $385,000
in tax credits on
the second
project. In
2005, we entered into a third limited partnership for a low-income housing
project for senior citizens in our Sayre market area, which was completed
at the end of
2006. Beginning
in 2007, we have recognized
$57,000
out of a total of $574,000 tax
credits. $922,000
tax credits remain and will be
taken over the next nine years.
FINANCIAL
CONDITION
The
following table presents ending balances (dollars in millions), growth and
the
percentage change during the past two years:
|
2007
|
|
%
|
2006
|
|
%
|
2005
|
|
Balance
|
Increase
|
Change
|
Balance
|
Increase
|
Change
|
Balance
|
Total
assets
|
$ 591.0
|
$ 18.8
|
3.3
|
$ 572.2
|
$ 43.0
|
8.1
|
$ 529.2
|
Total
loans, net
|
419.2
|
8.3
|
2.0
|
410.9
|
31.8
|
8.4
|
379.1
|
Total
investments
|
120.8
|
11.1
|
10.1
|
109.7
|
7.1
|
6.9
|
102.6
|
Total
deposits
|
456.0
|
9.5
|
2.1
|
446.5
|
16.7
|
3.9
|
429.8
|
Total
stockholders' equity
|
48.5
|
5.0
|
11.5
|
43.5
|
1.9
|
4.6
|
41.6
|
Cash
and Cash Equivalents
Cash
and
cash equivalents totaled $10.4 million at December 31, 2007 compared with $10.0
million at December 31, 2006. We believe the Company’s liquidity
needs are satisfied by the current balance of cash and cash equivalents, readily
available access to traditional funding sources, Federal Home Loan Bank
financing, brokered certificates of deposit and the portion of the investment
and loan portfolios that mature within one year. These sources of
funds should permit us to meet cash obligations and off-balance sheet
commitments as they come due.
Investments
2007
The
Company’s investment portfolio has
increased by $11,059,000, or 10.1% during the past year. During 2007,
we purchased approximately $21.2 million of mortgage-backed securities, $12.4
million of U.S. agency obligations, and $8.4 million of municipal
bonds. Offsetting the purchases were $18.9 million in sales, $11.2
million of principal repayments and $2.2 million in maturities that occurred
during 2007. We increased the balance in our investment portfolio
during 2007 primarily due to market opportunities related to fluctuations in
the
Treasury curve and the resulting impact on bond yields. In doing so,
the effective yield on our portfolio for 2007 improved to 5.14% compared to
4.82% a year ago on a tax equivalent basis. The market value of our
investment portfolio has increased approximately $1.4 million in
2007.
2006
During
2006, our investment portfolio increased by $7.1 million, or 6.9%. The increase
was primarily attributable
to
an increase in US Agency
securities and mortgage-backed securities of $3.9 million and $4.0 million,
respectively. This was offset by a decrease of $.6 million in
corporate bonds. During 2006, we had maturities of $7.9 million and
principal repayments of our mortgage-backed securities of $10.8
million. In an effort to improve the overall yield of the portfolio,
we also sold $10.4 million of our securities and reinvested at higher current
market yields. Included was the sale of 15,800 shares of Freddie Mac
Preferred stock in order to utilize capital gains recognized in prior tax
years. Our investment portfolio yielded 4.82% in 2006 compared to
4.20% in 2005, on a tax-equivalent basis.
The
following table shows the year-end composition of the investment portfolio
for
the five years ended December 31 (dollars in thousands):
|
2007
|
%
of
|
2006
|
%
of
|
2005
|
%
of
|
2004
|
%
of
|
2003
|
%
of
|
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
U.
S. Agency securities
|
$ 17,236
|
14.3
|
$ 16,651
|
15.2
|
$ 12,754
|
12.5
|
$ 5,812
|
6.1
|
$ 1,033
|
1.0
|
Obligations
of state & political
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
30,844
|
25.4
|
22,562
|
20.5
|
22,612
|
22.0
|
7,452
|
7.8
|
8,303
|
7.8
|
Corporate
obligations
|
7,813
|
6.5
|
7,997
|
7.3
|
8,627
|
8.4
|
8,935
|
9.3
|
14,674
|
13.8
|
Mortgage-backed
securities
|
62,642
|
51.9
|
59,875
|
54.6
|
55,852
|
54.4
|
70,449
|
73.6
|
78,376
|
73.5
|
Equity
securities
|
2,267
|
1.9
|
2,658
|
2.4
|
2,757
|
2.7
|
3,099
|
3.2
|
4,201
|
3.9
|
Total
|
$ 120,802
|
100.0
|
$
109,743
|
100.0
|
$
102,602
|
100.0
|
$ 95,747
|
100.0
|
$
106,587
|
100.0
|
The
expected principal repayments (amortized cost) and average weighted yields
for
the investment portfolio as of December 31, 2007, are shown below (dollars
in
thousands). Expected principal repayments, which include prepayment speed
assumptions for mortgage-backed securities, are significantly different than
the
contractual maturities detailed in Footnote 3 of the consolidated financial
statements. Yields on tax-exempt securities are presented on a fully taxable
equivalent basis, assuming a 34% tax rate.
|
|
|
After
One Year
|
After
Five Years
|
|
|
|
|
|
One
Year or Less
|
to
Five years
|
to
Ten Years
|
After
Ten Years
|
Total
|
|
Amortized
|
Yield
|
Amortized
|
Yield
|
Amortized
|
Yield
|
Amortized
|
Yield
|
Amortized
|
Yield
|
|
Cost
|
%
|
Cost
|
%
|
Cost
|
%
|
Cost
|
%
|
Cost
|
%
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agency securities
|
$ 1,000
|
4.8
|
$ 12,237
|
5.5
|
$ 3,389
|
5.4
|
$ -
|
-
|
$ 16,626
|
5.4
|
Obligations
of state & political
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
5,355
|
5.9
|
11,657
|
5.9
|
13,631
|
6.4
|
-
|
-
|
30,643
|
6.1
|
Corporate
obligations
|
-
|
-
|
-
|
-
|
7,983
|
5.5
|
-
|
-
|
7,983
|
5.5
|
Mortgage-backed
securities
|
369
|
5.3
|
38,534
|
4.7
|
23,494
|
5.6
|
-
|
-
|
62,397
|
5.0
|
Total
available-for-sale
|
$ 6,724
|
5.7
|
$ 62,428
|
5.1
|
$ 48,497
|
5.8
|
$ -
|
-
|
$ 117,649
|
5.4
|
Loans
Historically,
our loan customers have been located in North Central Pennsylvania and the
Southern Tier of New York. We originate loans primarily through direct loans
to
our existing customer base, with new customers generated by referrals from
real
estate brokers, building contractors, attorneys, accountants and existing
customers.
All
lending is governed by a lending policy that is developed and maintained by
us
and approved by the Board of Directors. Our Company’s real estate loan lending
policy generally permits the Bank to lend up to 85% of the appraised value
or
purchase price (whichever is lower) on owner-occupied residential property,
when
secured by the first mortgage on the property. Home equity lines of credit
or
second mortgage loans are generally originated subject to maximum mortgage
liens
against the property of 85% of the current appraised value. The maximum term
for
mortgage loans is 30 years for one-to-four family residential property and
20
years for commercial and vacation property.
2007
As
evidenced in the table below, total loans grew $8.6 million, or 2.1% in 2007
from a balance of $414.8 million at the end of 2006 to $423.4 million at the
end
of 2007. Total loan growth of 2.1% in 2007 compared with an 8.4% loan
growth rate in 2006. Even though the local economy remained relatively
stable
in 2007,
with the local average unemployment
rate remaining stable with
last year at approximately
5.9%,
we experienced a decrease in overall
loan demand. The national crisis related to the sub prime loan market
that impacted various banks during 2007 did not have a direct impact on our
Company’s loan portfolio. However, the indirect impact on the
national economy and various other economic factors did contribute to slower
loan demand during 2007.
Commercial
real estate loans increased
$6.3 million in 2007 or 6.6% while construction real estate loans increased
$4.3
million, or 61.2%. While not compromising credit quality, we are
cautiously optimistic that our strong team of seasoned business development
officers will enable the Company to grow our high quality, commercial loan
portfolio and achieve improved organic loan growth. However, loan
demand and organic growth is subject to significant competitive pressures,
the
yield curve and the strength of the overall local, regional and national
economy.
Residential
real estate loans decreased $4.2 million primarily due to the lack of loan
demand in the residential real estate market. Mortgage lending
continues to be one of our primary focuses, as residential real estate loans
totaled $201.9 million and comprised 47.7% of the loan portfolio as of the
end
of the year. One of our
primary
goals
is to continue being
the premier mortgage lender in our
market area, with a variety
of mortgage products available for our customers. In
2007,
$6.7
million in conforming mortgage loans
were originated and sold in the secondary market through Freddie Mac and Fannie
Mae, providing nearly $83,000
of income in origination fees and
premiums on loans sold.
2006
Total
loans grew $32.0 million, or 8.4% in 2006 from a balance of $382.8 million
at
the end of 2005 to $414.8 million at the end of 2006. The primary
increases were in residential real estate, commercial real estate, agricultural
real estate, and other commercial loans which increased $10.4, $12.0, $4.1,
and
$3.5 million, respectively. The loan growth in 2006 of 8.4% compares
to the 6.4% loan growth in 2005.
Residential
real estate loans increased $10.4 million primarily due to the continued,
favorable interest rate environment for home mortgages from a historical
perspective that existed during 2006. Due to the prolonged flat yield
curve, long-term rates including mortgages and home equity loans, remained
relatively flat despite the sharp increase in short-term interest
rates. Residential real estate loans totaled $206.1 million and
comprised 49.7% of the loan portfolio as of the end of the year. In
2006, $3.3 million in conforming mortgage loans were originated and sold in
the
secondary market through Freddie Mac and Fannie Mae, providing nearly $44,000
of
income in origination fees and premiums on loans sold.
Commercial
loans increased $12.0 million in 2006. As started in 2005, the
Company began to expand its portfolio of agricultural loans, as $4.1 million
of
agricultural loans were added in 2006. This represents a 31.3 %
increase and is reflective of our goal to better serve agricultural customers
within our service area. Other commercial loans also increased $3.5
million, or 12.0% in 2006.
Five
Year
Breakdown of Loans by Type as of December 31,
|
2007
|
2006
|
2005
|
2004
|
2003
|
(dollars
in thousands)
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
Residential
|
$ 201,861
|
47.7
|
$ 206,059
|
49.7
|
$ 195,628
|
51.1
|
$ 189,803
|
52.8
|
$ 180,333
|
56.8
|
Commercial
|
100,380
|
23.7
|
94,122
|
22.7
|
82,128
|
21.5
|
75,228
|
20.9
|
57,370
|
18.1
|
Agricultural
|
16,891
|
4.0
|
17,054
|
4.1
|
12,991
|
3.4
|
11,564
|
3.2
|
7,594
|
2.4
|
Construction
|
11,330
|
2.7
|
7,027
|
1.7
|
7,245
|
1.9
|
7,282
|
2.0
|
5,784
|
1.8
|
Loans
to individuals
|
|
|
|
|
|
|
|
|
|
|
for
household,
|
|
|
|
|
|
|
|
|
|
|
family
and other purchases
|
13,082
|
3.1
|
12,482
|
3.0
|
13,017
|
3.4
|
12,657
|
3.5
|
13,145
|
4.1
|
Commercial
and other loans
|
34,664
|
8.2
|
32,766
|
7.9
|
29,260
|
7.6
|
28,069
|
7.8
|
16,219
|
5.1
|
State
& political subdivision loans
|
45,171
|
10.6
|
45,263
|
10.9
|
42,534
|
11.1
|
35,090
|
9.8
|
37,212
|
11.7
|
Total
loans
|
423,379
|
100.0
|
414,773
|
100.0
|
382,803
|
100.0
|
359,693
|
100.0
|
317,657
|
100.0
|
Less
allowance for loan losses
|
4,197
|
|
3,876
|
|
3,664
|
|
3,919
|
|
3,620
|
|
Net
loans
|
$ 419,182
|
|
$ 410,897
|
|
$ 379,139
|
|
$ 355,774
|
|
$ 314,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007/2006 |
2006/2005 |
|
Change |
Change |
|
Amount |
% |
Amount |
% |
Real
estate: |
|
|
|
|
Residential |
$ (4,198) |
(2.0) |
$ 10,431 |
5.3 |
Commerical |
6,258 |
6.6 |
11,994 |
14.6 |
Agricultural |
(163) |
(1.0) |
4,063 |
31.3 |
Construction |
4,303 |
61.2 |
(218) |
(3.0) |
Loans
to
individuals for household, |
|
|
|
|
family
and other purchases |
600 |
4.8 |
(535) |
(4.1) |
Commercial
and
other loans |
1,898 |
5.8 |
3,506 |
12.0 |
State
&
political subdivision loans |
(92) |
(0.2)
|
2,729 |
6.4 |
Total
loans |
$
8,606 |
2.1 |
$
31,970 |
8.4 |
The
following table shows the maturity of state and political subdivision loans,
commercial and agricultural loans and commercial loans secured by real estate
as
of December 31, 2007, classified according to the sensitivity to changes in
interest rates
within
various time intervals (in thousands). The table does
not include any estimate of prepayments
which significantly shorten the average life of all loans and may cause our
actual repayment experience to differ from that shown below. Demand
loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less. The amounts shown below exclude
net deferred loan costs or fees.
|
Commercial,
|
|
|
|
municipal,
|
Real
estate
|
|
|
agricultural
|
construction
|
Total
|
Maturity
of loans:
|
|
|
|
One
year or less
|
$ 10,696
|
$ -
|
$ 10,696
|
Over
one year through five years
|
27,139
|
-
|
27,139
|
Over
five years
|
159,271
|
11,330
|
170,601
|
Total
|
$ 197,106
|
$ 11,330
|
$ 208,436
|
Sensitivity
of loans to changes in interest
|
|
|
|
rates
- loans due after December 31, 2008:
|
|
|
|
Predetermined
interest rate
|
$ 41,056
|
$ 1,846
|
$ 42,902
|
Floating
or adjustable interest rate
|
145,354
|
9,484
|
154,838
|
Total
|
$ 186,410
|
$ 11,330
|
$ 197,740
|
Loan
Quality and Provision For Loan Losses
As
discussed previously, the loan portfolio contains a large portion of real estate
secured loans (generally residential home mortgages, mortgages on small business
properties, etc.), consumer installment loans and other commercial
loans. Footnote 4 of the consolidated financial statements provides
further details on the composition of the loan portfolio.
The
following table indicates the level of non-performing assets over the past
five
years ended December 31 (dollars in thousands). We did not have any
troubled debt restructurings at the dates presented.
|
2007
|
2006
|
2005
|
2004
|
2003
|
Non-performing
loans:
|
|
|
|
|
|
Non-accruing
loans, exclusive of impaired loans
|
$ 827
|
$ 478
|
$ 867
|
$ 722
|
$ 578
|
Impaired
loans
|
1,088
|
1,190
|
1,031
|
1,061
|
1,926
|
Accrual
loans - 90 days or
|
|
|
|
|
|
more
past due
|
275
|
1,690
|
337
|
437
|
185
|
Total
non-performing loans
|
2,190
|
3,358
|
2,235
|
2,220
|
2,689
|
Foreclosed
assets held for sale
|
203
|
758
|
619
|
712
|
305
|
Total
non-performing assets
|
$ 2,393
|
$ 4,116
|
$ 2,854
|
$ 2,932
|
$ 2,994
|
Non-performing
loans as a percent of loans
|
|
|
|
|
|
net
of unearned income
|
0.52%
|
0.81%
|
0.58%
|
0.62%
|
0.85%
|
Non-performing
assets as a percent of loans
|
|
|
|
|
|
net
of unearned income
|
0.57%
|
0.99%
|
0.75%
|
0.82%
|
0.94%
|
The
following table presents an analysis of the allowance for loan losses for the
five years ending December 31 (dollars in thousands):
Summary
of Loan Loss Experience
|
2007
|
2006
|
2005
|
2004
|
2003
|
Balance
|
|
|
|
|
|
at
beginning of period
|
$ 3,876
|
$ 3,664
|
$ 3,919
|
$ 3,620
|
$ 3,621
|
Charge-offs:
|
|
|
|
|
|
Real
estate-mortgage
|
70
|
37
|
43
|
110
|
68
|
Loans
to individuals for household,
|
|
|
|
|
|
family
and other purchases
|
111
|
118
|
168
|
70
|
140
|
Commercial
and other loans
|
5
|
135
|
161
|
135
|
344
|
Total
loans charged-off
|
186
|
290
|
372
|
315
|
552
|
Recoveries:
|
|
|
|
|
|
Real
estate-mortgage
|
81
|
6
|
2
|
-
|
33
|
Loans
to individuals for household,
|
|
|
|
|
|
family
and other purchases
|
57
|
44
|
12
|
25
|
63
|
Commercial
and other loans
|
4
|
122
|
43
|
299
|
20
|
Total
loans recovered
|
142
|
172
|
57
|
324
|
116
|
|
|
|
|
|
|
Net
loans charged-off (recovered)
|
44
|
118
|
315
|
(9)
|
436
|
Provision
charged to expense
|
365
|
330
|
60
|
-
|
435
|
Increase
related to acquisition
|
-
|
-
|
-
|
290
|
-
|
Balance
at end of year
|
$ 4,197
|
$ 3,876
|
$ 3,664
|
$ 3,919
|
$ 3,620
|
|
|
|
|
|
|
Loans
outstanding at end of year
|
$ 423,379
|
$ 414,773
|
$ 382,803
|
$ 359,693
|
$ 317,657
|
Average
loans outstanding, net
|
$ 411,927
|
$ 400,507
|
$ 371,147
|
$ 338,836
|
$ 306,776
|
Net
charge-offs to average loans
|
0.01%
|
0.03%
|
0.08%
|
0.00%
|
0.14%
|
Year-end
allowance to total loans
|
0.99%
|
0.93%
|
0.96%
|
1.09%
|
1.14%
|
Year-end
allowance to total
|
|
|
|
|
|
non-performing
loans
|
191.64%
|
115.43%
|
163.94%
|
176.53%
|
134.62%
|
As
detailed in the preceding table, total non-performing loans returned to normal
levels in all categories during 2007. The decrease in accrual
loans – 90 days or more past due from 2006 to 2007 is primarily due to a
temporary delay in payment from one large commercial loan customer totaling
$1.1
million in 2006. Early in 2007 the loan became current as
expected.
The
percent of non-performing loans to total loans decreased from .81% to .52%
as of
the end of December, 2007. Foreclosed assets held for sale decreased
by $555,000 mainly due to the sale of a large commercial
property. Total loans charged-off in 2007 totaled $186,000, a
decrease of $104,000 compared to last year. Total loans recovered
were $142,000, resulting in a net charge-off for the year of $44,000 compared
to
$118,000 in 2006. $365,000 was charged to the provision in 2007
compared to $330,000 in 2006. During 2006, there were $290,000 of
loans charged-off while $172,000 of loans were recovered, resulting in a net
charge-off of $118,000.
Other
than those disclosed above, we do not believe there are any loans classified for
regulatory purposes as loss, doubtful, substandard, special mention or
otherwise, which will result in losses or have a material impact on future
operations, liquidity or capital reserves. We are not aware of any other
information that causes us to have serious doubts as to the ability of borrowers
in general to comply with repayment terms.
Allowance
For Loan Losses
The
allowance is maintained at a level, which in management’s judgment is adequate
to absorb probable future loan losses inherent in the loan
portfolio. The amount of the allowance is determined by a formal
analysis of delinquencies, large problem credits, non-accrual loans, local
economic conditions, trends in the loan portfolio and historic and projected
losses. As part of this evaluation, the loan portfolio is divided
into several categories in order to appropriately measure the risks within
the
portfolio. These categories are loans classified on the Watch List,
residential mortgages, commercial loans and consumer loans.
Historical
loss factors are calculated for consumer, residential mortgage, and commercial
loans for the past seven years. The five year average historical loss
factor for each category is applied to the performing portion of the loan
category. For Watch List loans, the losses are calculated using
regulatory guidelines and are based on historical losses. These
historical factors, for both the Watch List and homogeneous loan pools, are
adjusted based on the five following qualitative factors:
|
·
|
Level
of Delinquencies and Non-Accruals
|
|
·
|
Trends
in Volume and Terms of Loans
|
|
·
|
Experience,
Ability and Depth of Management
|
|
·
|
National
and Local Economic Trends and Conditions
|
|
·
|
Concentration
of Credit
|
While
we
evaluate all of this information quarterly, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. In addition, various regulatory
agencies, as an integral part of their examination process, review our Company’s
allowance for loan losses. These agencies may require us to recognize changes
to
the allowance based on their evaluation of information available to them. We
believe that the current allowance is adequate to offset any exposure that
may
exist for loans that are under secured or loans that might not be
collectible.
The
accrual of interest income on loans is discontinued when, in the opinion of
management, there exists doubt as to the ability to collect
interest. Payments received on nonaccrual loans are applied to the
outstanding principal balance or recorded as interest income, depending upon
our
assessment of our ability to collect principal and interest. Loans
are returned to the accrual status when factors indicating doubtful
collectibility cease to exist.
Allocation
of the Allowance for Loan Losses
The
allocation of the allowance for loan losses is our determination of the amounts
necessary for concentrations and changes in mix and volume of the loan
portfolio. The unallocated portion of the allowance is based upon our
assessment of general and specific economic conditions within our market. This
allocation is more uncertain and considers risk factors that may not be
reflected in our historical loss factors.
The
following table shows the distribution of the allowance for loan losses and
the
percentage of loans compared to total loans by loan category (dollars in
thousands):
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
Residential
|
$ 599
|
47.7
|
$ 614
|
49.7
|
$ 493
|
51.1
|
$ 392
|
52.8
|
$ 368
|
56.8
|
Commercial,
agricultural
|
2,128
|
27.7
|
1,676
|
26.8
|
1,551
|
24.9
|
1,591
|
24.1
|
1,742
|
20.5
|
Construction
|
-
|
2.7
|
-
|
1.7
|
-
|
1.9
|
-
|
2.0
|
-
|
1.8
|
Loans
to individuals
|
|
|
|
|
|
|
|
|
|
|
for
household,
|
|
|
|
|
|
|
|
|
|
|
family
and other purchases
|
424
|
3.1
|
734
|
3.0
|
542
|
3.4
|
463
|
3.5
|
492
|
4.1
|
Commercial
and other loans
|
736
|
8.2
|
582
|
7.9
|
484
|
7.6
|
515
|
7.8
|
445
|
5.1
|
State
& political subdivision loans
|
22
|
10.6
|
22
|
10.9
|
21
|
11.1
|
18
|
9.8
|
15
|
11.7
|
Unallocated
|
288
|
N/A
|
248
|
N/A
|
573
|
N/A
|
940
|
N/A
|
558
|
N/A
|
Total
allowance for loan losses
|
$ 4,197
|
100.0
|
$ 3,876
|
100.0
|
$ 3,664
|
100.0
|
$ 3,919
|
100.0
|
$ 3,620
|
100.0
|
Bank
Owned Life Insurance
In
2003
the Company purchased $7.0 million of bank owned life insurance to offset future
employee benefit costs. The Bank is the sole beneficiary on the
policies, and will provide the Bank with an asset that will generate earnings
to
partially offset the current costs of benefits, and eventually (at the death
of
the insured’s) provide partial recovery of cash outflows associated with the
benefits. As of December 31, 2007 and 2006, the cash surrender value
of the life insurance was $8.4 and $8.0 million, respectively. The change in cash surrender
value is recognized in the results of operations. The amounts
recorded as non-interest income totaled $331,000, $304,000 and $294,000 in
2007,
2006 and 2005, respectively.
The
Company evaluates annually the risks
associated with the life insurance policies, including limits on the amount
of
coverage and an evaluation of the various carriers’ credit
ratings.
Deposits
2007
As
can be
seen in the tables below, total deposits increased $9.5 million in 2007, or
2.1%. Non-interest bearing deposits increased $2.4 million, or
5.0%. As a percent to total, non-interest bearing deposits totaled
11.2% as of the end of 2007, which compares to 10.9% at the end of
2006. In order to manage our overall cost of funds, the Company
continues to focus on adding low cost deposits by having a free checking product
available for retail customers and being one of the few banks within our market
to pay interest on a senior checking product. Additionally, our
business development officers and branch personnel are focused on providing
outstanding customer service and developing larger deposit relationships with
our commercial customers.
NOW
accounts increased by $13.8 million, or 16.0% since the end of
2006. Most of the increase in NOW accounts is due to state and local
governmental agencies. Similarly, money market deposit accounts also
increased by $5.3 million in 2007, an increase of 11.6%, due to state and local
governmental agencies.
Certificates
of deposit decreased $12.4 million, or 5.4% from 2006 primarily due to the
maturity of $10.3 million of brokered certificates of deposit as of December
31,
2007. As the Federal Reserve decreased short-term interest rates
during the latter half of 2007, alternative funding mostly from the Federal
Home
Loan Bank resulted in less expensive borrowing costs.
2006
Total
deposits increased $16.7 million in 2006, or 3.9%. Non-interest
bearing deposits decreased $2.1 million. As a percent to total,
non-interest bearing deposits totaled 10.9% as of the end of 2006, which
compared to 11.8% at the end of 2005. NOW accounts increased by $12.5
million, or 17.0% since the end of 2005. Most of the increase in NOW
accounts was due to local governmental agencies moving their accounts from
money
market accounts to NOW accounts. As a consequence, money market
deposit accounts decreased by $6.6 million in 2006, a decrease of
12.5%.
Certificates
of deposit increased $13.5 million, or 6.3% from 2005 primarily due to $13.9
million of brokered certificates of deposit as of December 31,
2006. Due to the flattened yield curve that prevailed during 2006,
the maturities of brokered deposits were kept between six and eighteen
months.
The
following table shows the breakdown of deposits by deposit type (dollars in
thousands):
|
2007
|
2006
|
2005
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Non-interest-bearing
deposits
|
$ 50,944
|
11.2
|
$ 48,509
|
10.9
|
$ 50,600
|
11.8
|
NOW
accounts
|
99,862
|
21.9
|
86,067
|
19.3
|
73,548
|
17.1
|
Savings
deposits
|
37,996
|
8.3
|
37,637
|
8.4
|
38,303
|
8.9
|
Money
market deposit accounts
|
51,398
|
11.3
|
46,066
|
10.3
|
52,632
|
12.2
|
Certificates
of deposit
|
215,828
|
47.3
|
228,236
|
51.1
|
214,716
|
50.0
|
Total
|
$ 456,028
|
100.0
|
$ 446,515
|
100.0
|
$ 429,799
|
100.0
|
|
|
|
|
|
|
|
|
2007/2006
|
2006/2005
|
|
|
|
Change
|
Change
|
|
|
|
Amount
|
%
|
Amount
|
%
|
|
|
Non-interest-bearing
deposits
|
$ 2,435
|
5.0
|
$ (2,091)
|
(4.1)
|
|
|
NOW
accounts
|
13,795
|
16.0
|
12,519
|
17.0
|
|
|
Savings
deposits
|
359
|
1.0
|
(666)
|
(1.7)
|
|
|
Money
market deposit accounts
|
5,332
|
11.6
|
(6,566)
|
(12.5)
|
|
|
Certificates
of deposit
|
(12,408)
|
(5.4)
|
13,520
|
6.3
|
|
|
Total
|
$ 9,513
|
2.1
|
$ 16,716
|
3.9
|
|
|
Remaining
maturities of certificates of deposit of $100,000 or more are as follows
(dollars in thousands):
|
2007
|
2006
|
2005
|
3
months or less
|
$ 9,489
|
$ 8,714
|
$ 8,743
|
Over
3 months through 6 months
|
9,628
|
14,697
|
7,017
|
Over
6 months through 12 months
|
11,226
|
16,604
|
9,275
|
Over
12 months
|
27,794
|
27,897
|
30,859
|
Total
|
$ 58,137
|
$ 67,912
|
$ 55,894
|
As
a percent of total
|
|
|
|
certificates
of deposit
|
26.94%
|
29.76%
|
26.03%
|
Deposits
by type of depositor are as follows (dollars in thousands):
|
2007
|
2006
|
2005
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Individual,
partnerships
|
|
|
|
|
|
|
&
corporations
|
$ 382,968
|
84.0
|
$ 386,314
|
86.5
|
$ 371,057
|
86.3
|
United
States government
|
752
|
0.1
|
1,591
|
0.4
|
1,555
|
0.4
|
State
& political subdivisions
|
72,308
|
15.9
|
58,610
|
13.1
|
57,187
|
13.3
|
Total
|
$ 456,028
|
100.0
|
$ 446,515
|
100.0
|
$ 429,799
|
100.0
|
Borrowed
Funds
2007
Borrowed
funds increased $4.6 million during 2007, an increase of 6.0%. This
increase is primarily due to an increase in term loans from the Federal Home
Loan Bank (see Footnote 9 of the consolidated financial statements for
additional information). This increase, along with the $9.5 million
increase in deposits was used to fund growth in loans and investment securities
of $8.6 million and $11.1 million, respectively.
2006
Borrowed
funds increased $23.1 million
during 2006, an increase of 43.9%. This increase is primarily due to
an increase in short-term borrowings from the Federal Home Loan Bank (see
Footnote 9 of the consolidated financial statements for additional
information). This increase, along with the $16.7 million increase in
deposits was used to fund growth in loans and investment securities of $31.8
million and $7.1 million,
respectively. .
Stockholders’
Equity
We
evaluate stockholders’ equity in relation to total assets and the risk
associated with those assets. The greater the capital resources, the more likely
a corporation is to meet its cash obligations and absorb unforeseen losses.
For
these reasons, capital adequacy has been, and will continue to be, of paramount
importance.
Our
Board
of Directors determines our dividend rate after considering our capital
requirements, current and projected net income, and other factors. In 2007
and
2006, the Company paid out 37.9% and 42.1% of net income in dividends,
respectively.
For
the
year ended December 31, 2007, the total number of common shares outstanding
was
2,825,655. For comparative purposes, outstanding shares for prior periods were
adjusted for the July, 2007 stock dividend in computing earnings and cash
dividends per share as detailed in Footnote 1 of the consolidated financial
statements. During 2007, we also purchased 25,818 shares of treasury
stock at a weighted average cost of $21.91 per share.
There
are
currently three federal regulatory measures of capital adequacy. The Company’s
ratios meet the regulatory standards for well capitalized for 2007 and 2006,
as
detailed in Footnote 13 of the consolidated financial statements.
2007
Stockholders’
equity increased 11.6% in 2007 to $48.5 million. Excluding
accumulated other comprehensive income, which is essentially the after-tax
effect of unrealized holding gains and losses on available-for-sale securities,
and additional pension obligation, stockholders’ equity increased $3.6 million,
or 8.0%. This increase is due to net income of $6,736,000, offset by
cash dividends of $2,550,000 and purchase of treasury stock of
$567,000. Total equity was approximately 8.2% of total assets as of
December 31, 2007, compared to 7.6% of total assets as of December 31,
2006.
2006
Stockholders’
equity increased by 4.7% in 2006 to $43.5 million. Excluding
accumulated other comprehensive income, stockholders’ equity increased $2.1
million, or 5.0%. This increase was due to net income of $5,800,000
offset by cash dividends of $2,442,000 and purchase of treasury stock of
$1,222,000.
LIQUIDITY
Liquidity
is a measure of the Company’s ability to efficiently meet normal cash flow
requirements of both borrowers and depositors. Liquidity is needed to meet
depositors’ withdrawal demands, extend credit to meet borrowers’ needs, provide
funds for normal operating expenses and cash dividends, and fund future capital
expenditures.
To
maintain proper liquidity, we use funds management policies along with our
investment policies to assure we can meet our financial obligations to
depositors, credit customers and stockholders. Management monitors
liquidity by reviewing loan demand, investment opportunities, deposit pricing
and the cost and availability of borrowing funds. The Company’s
historical activity in this area can be seen in the Consolidated Statement
of
Cash Flows from investing and financing activities.
Cash
generated by operating activities, investing activities and financing activities
influences liquidity management. The most important source of funds is the
deposits that are primarily core deposits (deposits from customers with other
relationships). Short-term debt from the Federal Home Loan Bank supplements
the
Company’s availability of funds as well as lines of credit arrangements with
corresponding banks totaling $15.0 million. Other sources of
short-term funds include brokered CDs and the sale of loans, if
needed.
The
Company’s use of funds is shown in the investing activity section of the
Consolidated Statement of Cash Flows, where the net loan activity is detailed.
Other significant uses of funds are capital expenditures, purchase of loans
and
acquisition premiums. Surplus funds are then invested in investment
securities.
Capital
expenditures in 2007 totaled
$529,000, which included:
§
|
Various
building improvements
totaling
$243,000.
|
§
|
Upgrades
to data processing and
security equipment totaling
$154,300.
|
§
|
New
software for
Trust
services and other software
purchases for
new product
implementation totaling approximately
$67,000.
|
§
|
Bank
vehicle purchases totaling
$65,000.
|
Capital
expenditures were $1,335,000 in 2006, which included:
§
|
The
construction of a de novo banking facility in Wellsville, New York
totaling approximately $1.1
million.
|
§
|
The
construction of a new and enlarged parking lot for our Sayre Lockhart
facility totaling approximately
$150,000.
|
§
|
Upgrades
to data processing equipment totaling
$45,000.
|
These
expenditures will allow us to support our growth over the next decade, create
greater operating efficiency and provide the customer with higher quality
banking services.
The
Company achieves additional liquidity primarily from temporary or short-term
investments in the Federal Home Loan Bank of Pittsburgh, PA, investments that
mature in less than one year and expected principal repayments from mortgage
backed securities. The Company also has a maximum borrowing capacity
at the Federal Home Loan Bank of
approximately $239
million, inclusive of any outstanding
amounts,
as an additional source
of
liquidity.
Apart
from those matters described above, management does not currently believe that
there are any current trends, events or uncertainties that would have a material
impact on capital.
INTEREST
RATE AND
MARKET RISK MANAGEMENT
The
objective of interest rate sensitivity management is to maintain an appropriate
balance between the stable growth of income and the risks associated with
maximizing income through interest sensitivity imbalances and the market value
risk of assets and liabilities.
Because
of the nature of our operations, we are not subject to foreign currency exchange
or commodity price risk and, since the Company has no trading portfolio, it
is
not subject to trading risk.
The
primary factors that make assets interest-sensitive include adjustable-rate
features on loans and investments, loan repayments and investment maturities.
The primary components of interest-sensitive liabilities include maturing
certificates of deposit, IRA certificates of deposit, repurchase agreements
and
short-term borrowings. Savings deposits, NOW accounts and money market investor
accounts are considered core deposits and are not short-term interest sensitive
(except for the top-tier money market investor and NOW accounts which are paid
current market interest rates).
The
following table shows the cumulative static gap (at amortized cost) for various
time intervals (dollars in thousands):
Maturity
or Repricing of Company Assets and Liabilities as of December 31,
2007
|
|
|
|
|
|
|
|
|
|
Within
|
Four
to
|
One
to
|
Two
to
|
Three
to
|
Over
|
|
|
Three
|
Twelve
|
Two
|
Three
|
Five
|
Five
|
|
|
Months
|
Months
|
Years
|
Years
|
Years
|
Years
|
Total
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Interest-bearing
deposits at banks
|
$ 15
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 15
|
Investment
securities
|
20,804
|
5,200
|
11,195
|
22,919
|
27,879
|
32,437
|
120,434
|
Residential
mortgage loans
|
26,744
|
54,230
|
48,726
|
33,614
|
36,776
|
13,101
|
213,191
|
Commercial
and farm loans
|
34,714
|
28,664
|
22,781
|
25,511
|
29,890
|
10,375
|
151,935
|
Loans
to state & political subdivisions
|
3,488
|
8,453
|
4,518
|
9,996
|
11,709
|
7,007
|
45,171
|
Other
loans
|
3,379
|
3,250
|
2,665
|
1,656
|
1,304
|
828
|
13,082
|
Total
interest-earning assets
|
$ 89,144
|
$ 99,797
|
$ 89,885
|
$ 93,696
|
$
107,558
|
$ 63,748
|
$
543,828
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
NOW
accounts
|
$ 54,004
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 45,858
|
$ 99,862
|
Savings
accounts
|
-
|
-
|
-
|
-
|
-
|
37,996
|
37,996
|
Money
Market accounts
|
51,398
|
-
|
-
|
-
|
-
|
-
|
51,398
|
Certificates
of deposit
|
30,668
|
78,510
|
42,239
|
33,780
|
28,543
|
2,088
|
215,828
|
Short-term
borrowing
|
39,255
|
-
|
-
|
-
|
-
|
-
|
39,255
|
Long-term
borrowing
|
16,014
|
8,977
|
15,437
|
644
|
21
|
-
|
41,093
|
Total
interest-bearing liabilities
|
$ 191,339
|
$ 87,487
|
$ 57,676
|
$ 34,424
|
$ 28,564
|
$ 85,942
|
$
485,432
|
Excess
interest-earning
|
|
|
|
|
|
|
|
assets
(liabilities)
|
$
(102,195)
|
$ 12,310
|
$ 32,209
|
$ 59,272
|
$ 78,994
|
$
(22,194)
|
|
Cumulative
interest-earning assets
|
$ 89,144
|
$ 188,941
|
$
278,826
|
$
372,522
|
$
480,080
|
$
543,828
|
|
Cumulative
interest-bearing liabilities
|
191,339
|
278,826
|
336,502
|
370,926
|
399,490
|
485,432
|
|
Cumulative
gap
|
$
(102,195)
|
$ (89,885)
|
$
(57,676)
|
$ 1,596
|
$ 80,590
|
$ 58,396
|
|
Cumulative
interest rate
|
|
|
|
|
|
|
|
sensitivity
ratio (1)
|
0.47
|
0.68
|
0.83
|
1.00
|
1.20
|
1.12
|
|
|
|
|
|
|
|
|
|
(1)
Cumulative interest-earning assets divided by interest-bearing
liabilities.
|
|
|
|
|
The
previous table and the simulation models discussed below are presented assuming
money market investment accounts and NOW accounts in the top interest rate
tier
are repriced within the first three months. The loan amounts reflect the
principal balances expected to be re-priced as a result of contractual
amortization and anticipated early payoffs.
Gap
analysis, one of the methods used by us to analyze interest rate risk, does
not
necessarily show the precise impact of specific interest rate movements on
the
Company’s net interest income because the re-pricing of certain assets and
liabilities is discretionary and is subject to competition and other pressures.
In addition, assets and liabilities within the same period may, in fact, be
repaid at different times and at different rate levels.
The
Company currently uses a computer simulation model to better measure the impact
of interest rate changes on net interest income. We use the model as part of
our
risk management process that will effectively identify, measure, and monitor
the
Company’s risk exposure. In this analysis, the Company examines the
results of 100 and 200 basis point changes in market rates and the effect on
tax
equivalent net interest income. It is assumed that the change in
interest rates is instantaneous and that all rates move in a parallel
manner. Assumptions are also made concerning prepayment speeds on
mortgage loans and mortgage securities. The following is a rate shock
analysis for the period indicated (dollars in thousands):
|
|
|
|
Change
In
|
%
Change In
|
|
|
Prospective
One-Year
|
|
Prospective
|
Prospective
|
Changes
in Rates
|
|
Net
Interest Income
|
|
Net
Interest Income
|
Net
Interest Income
|
|
|
|
|
|
|
-200
|
$
|
21,486
|
$
|
703
|
4.01
|
-100
|
|
21,263
|
|
480
|
2.74
|
Base
|
|
20,783
|
|
-
|
-
|
+100
|
|
19,464
|
|
(1,319)
|
(7.53)
|
+200
|
|
18,165
|
|
(2,618)
|
(14.94)
|
The
model
makes estimates, at each level of interest rate change, regarding cash flows
from principal repayments on loans and mortgage backed securities, call activity
of other investment securities, and deposit selection, re-pricing and maturity
structure. Because of these assumptions, actual results could differ
significantly from these estimates which would result in significant differences
in the calculated projected change on net interest
income. Additionally, the changes above do not necessarily represent
the level of change under which management would undertake specific measures
to
realign its portfolio in order to reduce the projected level of
change.
GENERAL
The
majority of assets and liabilities of a financial institution are monetary
in
nature and, therefore, differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
However, inflation does have an important impact on the growth of total assets
and on non-interest expenses, which tend to rise during periods of general
inflation. The actions of the Federal Reserve in managing short-term interest
rates have a significant impact on our Company’s interest rate
risk. Depending upon short-term rates and the overall yield curve,
the Company will vary its asset liability strategy in order to manage interest
rate margins. The action of the Federal Reserve during the second
half of 2007 to decrease short-term interest rates was in response to various
economic data including a slowing economy.
In
2006,
legislation was passed regarding changes to FDIC deposit
insurance. This legislation increased coverage for retirement
accounts from $100,000 to $250,000, merged the two existing deposit insurance
funds and indexed the insurance level for inflation. The resulting
premiums, although estimated, could result in significantly higher premiums
than
in the past, and/or could result in more volatility of the level of premiums
charged to the Company.
Normal
examinations of our Company are performed by the OCC. The last Community
Reinvestment Act performance evaluation by the same agency resulted in a rating
of “Outstanding Record of Meeting
Community Credit Needs.”
Aside
from those matters described in this annual report, we do not believe that
there
are any trends, events or uncertainties that would have a material adverse
impact on future operating results, liquidity or capital resources. We are
not
aware of any current recommendations by the regulatory authorities which, if
they were to be implemented, would have such an effect, although the general
cost of compliance with numerous and multiple federal and state laws and
regulations does have, and in the future may have, a negative impact on the
Company’s results of operations.
CRITICAL
ACCOUNTING
POLICIES
The Company’s accounting policies are integral to understanding the results
reported. The accounting policies are described in detail in Note 1
of the consolidated financial statements. Our most complex accounting
policies
require
management’s judgment to ascertain the valuation of assets, liabilities,
commitments and contingencies. We have established detailed policies
and control procedures that are intended to ensure valuation methods are
well
controlled and applied consistently from period to period. In
addition, the policies and procedures are intended to ensure that the process
for changing methodologies occurs in an appropriate manner. The
following is a brief description of our current accounting policies involving
significant management valuation judgments.
Other
Than Temporary Impairment of Equity Securities
Equity
securities are evaluated periodically to determine whether a decline in their
value is other than temporary and is a matter of judgment. Management
uses criteria such as the magnitude and duration of the decline, in addition
to
the reasons underlying the decline, to determine whether the loss in value
is
other than temporary. The term “other than temporary” is not intended
to indicate that the decline is permanent. It indicates that the
prospects for a near term recovery of value are not necessarily favorable,
or
that there is a lack of evidence to support fair values equal to, or greater
than, the carrying value of the investment. Once a decline in value
is determined to be other than temporary, the value of the security is reduced
and a corresponding charge to earnings is recognized.
Allowance
for Loan Losses
Arriving
at an appropriate level of allowance for loan losses involves a high degree
of
judgment. The Company’s allowance for loan losses provides for
probable losses based upon evaluations of known and inherent risks in the loan
portfolio.
Management
uses historical information to assess the adequacy of the allowance for loan
losses as well as the prevailing business environment; as it is affected by
changing economic conditions and various external factors, which may impact
the
portfolio in ways currently unforeseen. This evaluation is inherently
subjective as it requires significant estimates that may be susceptible to
significant change, subjecting the Bank to volatility of
earnings. The allowance is increased by provisions for loan losses
and by recoveries of loans previously charged-off and reduced by loans
charged-off. For a full discussion of the Company’s methodology of
assessing the adequacy of the reserve for loan losses, refer to Note 1 of the
consolidated financial statements.
Goodwill
and Other Intangible Assets
As
discussed in Note 1 of the consolidated financial statements, the Company must
assess goodwill and other intangible assets each year for
impairment. This assessment involves estimating cash flows for future
periods. If the future cash flows were less than the recorded
goodwill and other intangible assets balances, we would be required to take
a
charge against earnings to write down the assets to the lower
value.
Deferred
Tax Assets
We
use an estimate of future earnings to support our position that the benefit
of
our deferred tax assets will be realized. If future income should prove
non-existent or less than the amount of the deferred tax assets within the
tax
years to which they may be applied, the asset may not be realized and our net
income will be reduced. Management also evaluates deferred tax assets to
determine if it is more likely than not that the deferred tax benefit will
be
utilized in future periods. If not, a valuation allowance is
recorded. Our deferred tax assets are described further in Note 11 of
the consolidated financial statements.
ITEM
7A – QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
This
information is included under Item
7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”, appearing in
this Annual Report on Form 10-K.
ITEM
8 - FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.
Citizens
Financial Services, Inc.
|
Consolidated
Balance Sheet
|
|
|
December
31,
|
(in
thousands, except share data)
|
2007
|
2006
|
ASSETS:
|
|
|
Cash
and cash equivalents:
|
|
|
|
Noninterest-bearing
|
$ 10,374
|
$ 10,007
|
|
Interest-bearing
|
15
|
8
|
Total
cash and cash equivalents
|
10,389
|
10,015
|
Available-for-sale
securities
|
120,802
|
109,743
|
Loans
(net of allowance for loan losses:
|
|
|
|
2007,
$4,197; 2006, $3,876)
|
419,182
|
410,897
|
Premises
and equipment
|
12,538
|
12,892
|
Accrued
interest receivable
|
2,522
|
2,458
|
Goodwill
|
8,605
|
8,605
|
Bank
owned life insurance
|
8,378
|
8,047
|
Other
assets
|
8,613
|
9,511
|
TOTAL
ASSETS
|
$ 591,029
|
$ 572,168
|
LIABILITIES:
|
|
|
Deposits:
|
|
|
|
Noninterest-bearing
|
$ 50,944
|
$ 48,509
|
|
Interest-bearing
|
405,084
|
398,006
|
Total
deposits
|
456,028
|
446,515
|
Borrowed
funds
|
80,348
|
75,775
|
Accrued
interest payable
|
2,199
|
2,287
|
Other
liabilities
|
3,926
|
4,091
|
TOTAL
LIABILITIES
|
542,501
|
528,668
|
STOCKHOLDERS'
EQUITY:
|
|
|
Common
Stock
|
|
|
|
$1.00
par value; authorized 10,000,000 shares;
|
|
|
|
issued
3,020,538 and 2,992,896 shares
|
|
|
|
in
2007 and 2006, respectively
|
3,020
|
2,993
|
Additional
paid-in capital
|
12,511
|
11,933
|
Retained
earnings
|
37,590
|
34,007
|
Accumulated
other comprehensive loss
|
(348)
|
(1,737)
|
Unearned
restricted stock, at cost:
|
|
|
|
3,149
and 0 shares for 2007 and 2006, respectively
|
(72)
|
-
|
Treasury
stock, at cost:
|
|
|
|
194,883
and 172,954 shares for 2007 and 2006, respectively
|
(4,173)
|
(3,696)
|
TOTAL
STOCKHOLDERS' EQUITY
|
48,528
|
43,500
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ 591,029
|
$ 572,168
|
See
accompanying notes to consolidated financial statements.
|
|
|
Citizens
Financial Services, Inc.
|
Consolidated
Statement of Income
|
|
|
Year
Ended December 31,
|
(in
thousands, except per share data)
|
2007
|
2006
|
2005
|
INTEREST
AND DIVIDEND INCOME:
|
|
|
|
Interest
and fees on loans
|
$ 30,398
|
$ 28,101
|
$ 24,911
|
Interest-bearing
deposits with banks
|
5
|
-
|
3
|
Investment
securities:
|
|
|
|
|
Taxable
|
4,316
|
3,526
|
2,979
|
|
Nontaxable
|
958
|
903
|
596
|
|
Dividends
|
347
|
321
|
210
|
TOTAL
INTEREST AND DIVIDEND INCOME
|
36,024
|
32,851
|
28,699
|
INTEREST
EXPENSE:
|
|
|
|
Deposits
|
13,363
|
11,685
|
9,373
|
Borrowed
funds
|
3,559
|
3,268
|
1,627
|
TOTAL
INTEREST EXPENSE
|
16,922
|
14,953
|
11,000
|
NET
INTEREST INCOME
|
19,102
|
17,898
|
17,699
|
Provision
for loan losses
|
365
|
330
|
60
|
NET
INTEREST INCOME AFTER PROVISION FOR
|
|
|
|
|
LOAN
LOSSES
|
18,737
|
17,568
|
17,639
|
NON-INTEREST
INCOME:
|
|
|
|
Service
charges
|
3,210
|
3,140
|
2,965
|
Trust
|
520
|
487
|
474
|
Brokerage
and Insurance
|
132
|
260
|
443
|
Investment
securities gains (losses), net
|
(29)
|
4
|
-
|
Gains
on sales of foreclosed properties
|
396
|
80
|
23
|
Earnings
on bank owned life insurance
|
331
|
304
|
294
|
Other
|
525
|
441
|
489
|
TOTAL
NON-INTEREST INCOME
|
5,085
|
4,716
|
4,688
|
NON-INTEREST
EXPENSES:
|
|
|
|
Salaries
and employee benefits
|
8,386
|
8,026
|
7,645
|
Occupancy
|
1,151
|
1,123
|
1,142
|
Furniture
and equipment
|
539
|
593
|
658
|
Professional
fees
|
645
|
551
|
536
|
Amortization
of intangibles
|
144
|
252
|
578
|
Other
|
4,449
|
4,482
|
4,828
|
TOTAL
NON-INTEREST EXPENSES
|
15,314
|
15,027
|
15,387
|
Income
before provision for income taxes
|
8,508
|
7,257
|
6,940
|
Provision
for income taxes
|
1,772
|
1,457
|
1,666
|
NET
INCOME
|
$ 6,736
|
$ 5,800
|
$ 5,274
|
NET
INCOME - EARNINGS PER SHARE
|
$ 2.37
|
$ 2.02
|
$ 1.81
|
CASH
DIVIDENDS PER SHARE
|
$ 0.90
|
$ 0.86
|
$ 0.82
|
See
accompanying notes to consolidated financial statements.
|
|
|
Citizens
Financial Services, Inc.
|
Consolidated
Statement of Changes in Stockholders' Equity
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Additional
|
|
Other
|
Unearned
|
|
|
|
Common
Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Restricted
|
Treasury
|
|
(in
thousands, except share data)
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Stock
|
Total
|
Balance,
December 31, 2004
|
2,937,519
|
$ 2,938
|
$ 10,804
|
$ 28,894
|
$ 164
|
$ -
|
$ (2,011)
|
$ 40,789
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
5,274
|
|
|
|
5,274
|
Change
in unrecognized pension costs, net
|
|
|
|
|
|
|
|
|
of
tax benefit of $121
|
|
|
|
|
(234)
|
|
|
(234)
|
Change
in net unrealized loss on securities
|
|
|
|
|
|
|
|
|
available-for-sale,
net of tax benefit of $758
|
|
|
|
|
(1,470)
|
|
|
(1,470)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
3,570
|
Stock
dividend
|
27,738
|
27
|
555
|
(582)
|
|
|
|
|
Purchase
of treasury stock (21,453 shares)
|
|
|
|
|
|
|
(463)
|
(463)
|
Cash
dividends, $.82 per share
|
|
|
|
(2,335)
|
|
|
|
(2,335)
|
Balance,
December 31, 2005
|
2,965,257
|
2,965
|
11,359
|
31,251
|
(1,540)
|
-
|
(2,474)
|
41,561
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
5,800
|
|
|
|
5,800
|
Change
in unrecognized pension costs, net
|
|
|
|
|
|
|
|
|
of
tax expense of $121
|
|
|
|
|
234
|
|
|
234
|
Change
in net unrealized loss on securities
|
|
|
|
|
|
|
|
|
available-for-sale,
net of tax expense of $339
|
|
|
|
|
655
|
|
|
655
|
Total
comprehensive income
|
|
|
|
|
|
|
|
6,689
|
Cumulative
effect of change in accounting for
|
|
|
|
|
|
|
|
|
pension
obligation, net of tax benefit of $560
|
|
|
|
|
(1,086)
|
|
|
(1,086)
|
Stock
dividend
|
27,639
|
28
|
574
|
(602)
|
|
|
|
|
Purchase
of treasury stock (54,239 shares)
|
|
|
|
|
|
|
(1,222)
|
(1,222)
|
Cash
dividends, $.86 per share
|
|
|
|
(2,442)
|
|
|
|
(2,442)
|
Balance,
December 31, 2006
|
2,992,896
|
2,993
|
11,933
|
34,007
|
(1,737)
|
-
|
(3,696)
|
43,500
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
6,736
|
|
|
|
6,736
|
Change
in unrecognized pension costs, net
|
|
|
|
|
|
|
|
|
net
of tax expense of $256
|
|
|
|
|
496
|
|
|
496
|
Change
in net unrealized loss on securities
|
|
|
|
|
|
|
|
|
available-for-sale,
net of tax expense of $460
|
|
|
|
|
893
|
|
|
893
|
Total
comprehensive income
|
|
|
|
|
|
|
|
8,125
|
Stock
dividend
|
27,642
|
27
|
576
|
(603)
|
|
|
|
|
Purchase
of treasury stock (25,818 shares)
|
|
|
|
|
|
|
(567)
|
(567)
|
Restricted
stock awards
|
|
|
2
|
|
|
(79)
|
77
|
|
Stock
awards
|
|
|
|
|
|
7
|
13
|
20
|
Cash
dividends, $.90 per share
|
|
|
|
(2,550)
|
|
|
|
(2,550)
|
Balance,
December 31, 2007
|
3,020,538
|
$ 3,020
|
$ 12,511
|
$ 37,590
|
$ (348)
|
$ (72)
|
$ (4,173)
|
$ 48,528
|
|
2007
|
2006
|
2005
|
Components
of comprehensive loss:
|
|
|
|
Change
in net unrealized gain (loss) on investment
|
|
|
|
securities
available-for-sale
|
$ 874
|
$ 658
|
$ (1,470)
|
Change
in unrecognized pension costs
|
496
|
234
|
(234)
|
Investment
losses (gains) included in net income, net
|
|
|
of
tax (benefit) expense of ($10), $1, and $0
|
19
|
(3)
|
-
|
Total
|
$ 1,389
|
$ 889
|
$ (1,704)
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
Consolidated
Statement of Cash Flows
|
|
Year
Ended December 31,
|
(in
thousands)
|
2007
|
2006
|
2005
|
Cash
Flows from Operating Activities:
|
|
|
|
Net
income
|
$ 6,736
|
$ 5,800
|
$ 5,274
|
Adjustments
to reconcile net income to net
|
|
|
|
cash
provided by operating activities:
|
|
|
|
Provision
for loan losses
|
365
|
330
|
60
|
Depreciation
and amortization
|
741
|
899
|
1,327
|
Amortization
and accretion on investment securities
|
124
|
369
|
712
|
Deferred
income taxes
|
54
|
109
|
256
|
Investment
securities (gains) losses, net
|
29
|
(4)
|
-
|
Earnings
on bank owned life insurance
|
(331)
|
(304)
|
(294)
|
Gains
on sale of foreclosed assets held for sale
|
(396)
|
(80)
|
(23)
|
Realized
gains on loans sold
|
(134)
|
(61)
|
(70)
|
Originations
of loans held for sale
|
(6,689)
|
(3,317)
|
(5,433)
|
Proceeds
from sales of loans held for sale
|
6,823
|
3,384
|
5,503
|
Increase
in accrued interest receivable
|
(64)
|
(294)
|
(429)
|
Increase
(decrease) in accrued interest payable
|
(88)
|
425
|
(8)
|
Other,
net
|
899
|
(241)
|
940
|
Net
cash provided by operating activities
|
8,069
|
7,015
|
7,815
|
Cash
Flows from Investing Activities:
|
|
|
|
Available-for-sale
securities:
|
|
|
|
Proceeds
from sales of available-for-sale securities
|
18,859
|
10,439
|
-
|
Proceeds
from maturity and principal repayments of securities
|
13,437
|
18,697
|
17,571
|
Purchase
of securities
|
(42,155)
|
(36,401)
|
(27,366)
|
Proceeds
from redemption of Regulatory Stock
|
3,676
|
2,576
|
2,702
|
Purchase
of Regulatory Stock
|
(4,489)
|
(3,723)
|
(2,783)
|
Net
increase in loans
|
(8,624)
|
(32,420)
|
(23,676)
|
Purchase
of premises and equipment
|
(462)
|
(1,335)
|
(1,306)
|
Proceeds
from sale of premises and equipment
|
-
|
-
|
200
|
Proceeds
from sale of foreclosed assets held for sale
|
1,075
|
405
|
486
|
Net
cash used in investing activities
|
(18,683)
|
(41,762)
|
(34,172)
|
Cash
Flows from Financing Activities:
|
|
|
|
Net
increase in deposits
|
9,513
|
16,716
|
10,300
|
Proceeds
from long-term borrowings
|
20,187
|
8,492
|
8,594
|
Repayments
of long-term borrowings
|
(4,406)
|
(8,787)
|
(3,471)
|
Net
increase (decrease) in short-term borrowed funds
|
(11,209)
|
23,396
|
12,577
|
Deposits
of acquired branches
|
-
|
-
|
425
|
Purchase
of treasury stock
|
(567)
|
(1,222)
|
(463)
|
Stock
awards
|
20
|
-
|
-
|
Dividends
paid
|
(2,550)
|
(2,442)
|
(2,335)
|
Net
cash provided by financing activities
|
10,988
|
36,153
|
25,627
|
Net
increase (decrease) in cash and cash equivalents
|
374
|
1,406
|
(730)
|
Cash
and Cash Equivalents at Beginning of Year
|
10,015
|
8,609
|
9,339
|
Cash
and Cash Equivalents at End of Year
|
$ 10,389
|
$ 10,015
|
$ 8,609
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
Interest
paid
|
$ 17,010
|
$ 14,528
|
$ 10,973
|
Income
taxes paid
|
$ 1,485
|
$ 1,645
|
$ 1,150
|
Noncash
activities:
|
|
|
|
Real
estate acquired in settlement of loans
|
$ 124
|
$ 463
|
$ 369
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
CITIZENS
FINANCIAL SERVICES,
INC.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business
and
Organization
Citizens
Financial Services, Inc.
(individually and collectively, the “Company”), is headquartered in Mansfield,
Pennsylvania, and provides a full range of banking and related services through
its wholly owned subsidiary, First Citizens National Bank (the
“Bank”), and its wholly
owned subsidiary, First Citizens Insurance Agency, Inc. The Bank is a national
banking association and operates sixteen full-service
banking offices in Potter,
Tioga and Bradford counties, Pennsylvania and Allegany
County, New
York. The Bank
also provides trust services, including the administration of trusts and
estates, retirement plans, and other employee benefit plans, along
with a brokerage division that
provides a
comprehensive menu of
investment services. The Bank serves individual and corporate
customers and is subject to competition from other financial institutions and
intermediaries with respect to these services. The Company is
supervised by the Board of Governors of the Federal Reserve System, while the
Bank is subject to regulation and supervision by the Office of the Comptroller
of the Currency.
A
summary of significant accounting and
reporting policies applied in the presentation of the accompanying financial
statements follows:
Basis
of
Presentation
The
financial statements are
consolidated to include the accounts of the Company and its subsidiary, First
Citizens National Bank, and its subsidiary, First Citizens Insurance Agency,
Inc. These statements have been prepared in accordance with
U.S. generally accepted
accounting
principles. All significant inter-company
accounts and transactions have
been eliminated in the consolidated financial statements.
In
preparing the financial statements,
management makes estimates and assumptions that affect the reported amounts
of
assets and liabilities as of the balance sheet date and revenues and expenses
for the period. Actual results could differ significantly from those
estimates. Material estimates that
are
particularly susceptible to significant change relate to determination of the
allowance for loan losses and deferred tax assets and
liabilities.
Operating
Segments
Statement
of Financial Accounting
Standards (FAS) No. 131 requires disclosures about an enterprise’s operating
segments in financial reports issued to shareholders. The Statement
defines an operating segment as a component of an enterprise that engages in
business activities that generates revenue and incurs expense, and the operating
results of which are reviewed by the chief operating decision maker in the
determination of resource allocation and performance. While the
Company’s chief decision makers monitor the revenue streams of the various
Company’s products and services, operations are managed and financial
performance is evaluated on a Company-wide basis. Consistent with our internal
reporting,
the Company’s business
activities are reported as
one segment, which is community banking.
Cash
and Cash
Equivalents
Cash
equivalents include cash on hand,
deposits in banks and interest-earning deposits. Interest-earning
deposits mature within one year and are carried at cost. Net cash
flows are reported for loan, deposits and short term borrowing
transactions.
Investment
Securities
Investment
securities at the time of
purchase are classified as one of the three following types:
Held-to-Maturity
Securities- includes
securities that the Company has the positive intent and ability to hold to
maturity. These securities are reported at amortized cost. The Company had
no
held-to-maturity securities as of December 31, 2007and
2006.
Trading
Securities- includes debt
and equity securities bought and held principally for the purpose of selling
them in the near term. Such securities are reported at fair value with
unrealized holding gains and losses included in earnings. The Company had no
trading securities as of December 31, 2007and
2006.
Available-for-Sale
Securities- includes debt
and equity securities not classified as held-to-maturity or trading securities.
Such securities are reported at fair value, with unrealized holding gains and
losses excluded from earnings and reported as a separate component of
stockholders’ equity, net of estimated income tax effect.
The
amortized cost of investment in debt
securities is adjusted for amortization of premiums and accretion of discounts,
computed by a method that results in a level yield. Gains and losses on the
sale
of investment securities are computed on the basis of specific identification
of
the adjusted cost of each security.
On
a monthly basis the Company evaluates
the severity and duration of impairment for its investment securities portfolio
to determine if the
impairment is other than temporary. Several factors are evaluated and
analyzed, including the Company’s positive
intent and ability to hold the security
for a period of time
sufficient to allow a market recoverywithout incurring a loss. When
an other than temporary
impairment occurs, the investment is written down to the current fair market
value with the write-down being reflected as a realized
loss.
Common
stock of the Federal Reserve Bank
and Federal Home
Loan Bank represents
ownership in institutions which are wholly owned by other financial
institutions. These equity securities are accounted for at cost and are
classified as other assets.
The
fair value of investments, except
certain state and municipal securities, is estimated based on bid prices
published in financial newspapers or bid quotations received from securities
dealers. The fair value of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar instruments, adjusted
for
differences between the quoted instruments and the instruments being
valued.
Loans
Interest
on all loans is recognized on
the accrual basis based upon the principal amount outstanding. The accrual
of
interest income on loans is discontinued when, in the opinion of management,
there exists doubt as to the ability to collect such interest. Payments received
on non-accrual
loans are applied to the
outstanding principal balance or recorded as interest income, depending upon
our
assessment of our ultimate ability to collect principal and
interest. Loans are returned to the accrual status when factors
indicating doubtful collectibility cease to exist.
The
Company recognizes nonrefundable
loan origination fees and certain direct loan origination costs over the life
of
the related loan as an adjustment of loan yield using the interest
method.
Allowance
For Loan
Losses
The
allowance for loan losses represents
the amount which management estimates is adequate to provide for probable losses
inherent in its loan portfolio. The allowance method is used in providing for
loan losses. Accordingly, all loan losses are charged to the allowance and
all
recoveries are credited to it. The allowance for loan losses is established
through a provision for loan losses which is charged to operations. The
provision is based upon management’s periodic evaluation of individual loans,
the overall risk characteristics of the various portfolio segments, past
experience with losses, the impact of economic conditions on borrowers, and
other relevant factors. The estimates used in determining the adequacy of the
allowance for loan losses are particularly susceptible to significant change
in
the near term.
Impaired
loans are commercial and
commercial real estate loans for which it is probable that the Company will
not
be able to collect all amounts due according to the contractual terms of the
loan agreement. The Company individually evaluates such loans for impairment
and
does not aggregate loans by major risk classifications. The definition of
“impaired loans” is not the same as the definition of “non-accrual
loans,” although the two
categories overlap. The Company may choose to place a loan on non-accrual status
due to payment delinquency or uncertain collectibility, while not classifying
the loan as impaired if the loan is not a commercial or commercial real estate
loan. Factors considered by management in determining impairment include payment
status and collateral value. The amount of impairment for these types of
impaired loans is determined by the difference between the present value of
the
expected cash flows related to the loan, using the original interest rate,
and
its recorded value; or, as a practical expedient in the case of a loan in the process
of
collection, the difference
between the fair value of the collateral and the recorded amount of the
loans.
Mortgage
loans on one to
four family
properties and all consumer loans
are large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which is defined as 90 days or less, generally are not classified as impaired.
Management determines the significance of payment delays on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the borrower’s prior
payment record, and the amount of shortfall in relation to the principal and
interest owed.
Foreclosed
Assets Held For
Sale
Foreclosed
assets acquired in settlement
of loans are carried at the lower of cost or fair
value lessestimated
costs to sell. Prior to
foreclosure, the value of the underlying loan is written down to fair market
value of the real estate or other assets to be acquired by a charge to the
allowance for loan losses, if necessary. Any subsequent write-downs are charged
against operating expenses. Operating expenses of such properties, net of
related income and losses on disposition, are included in other expenses and
gains are included in other non-interest income.
Premises
and
Equipment
Premises
and equipment are stated at
cost, less accumulated depreciation. Depreciation expense is computed on
straight line and accelerated methods over the estimated useful lives of the
assets, which range from 3 to 15 years for furniture, fixtures and equipment
and
5 to 39 1/2 years for building premises. Repair and maintenance expenditures
which extend the useful life of an asset are capitalized and other repair
expenditures are expensed as incurred.
When
premises or equipment are retired
or sold, the remaining cost and accumulated depreciation are removed from the
accounts and any gain or loss is credited to income or charged
to expense,
respectively.
Intangible
Assets
Intangible
assets include core deposit
intangibles, which are a measure of the value of consumer demand and savings
deposits acquired in business combinations accounted for as purchases. The
core
deposit intangibles are being amortized to expense, on average,over
a 5 ½ year
life
on a straight-line
basisand are included in
other assets.The
recoverability of the carrying value
of intangible assets is evaluated on an ongoing basis, and permanent declines
in
value, if any, are charged to expense.
Goodwill
The
Company accounts for goodwill in
accordance with Statement of Financial Accounting Standards (“FAS”) No. 142,
“Goodwill
and Other Intangible
Assets”. This
statement, among other
things, requires a two-step process for testing the impairment of goodwill
on at
least an annual basis. This approach could cause more volatility in
the Company’s reported net income because impairment losses, if any, could occur
irregularly and in varying amounts. The Company performs an annual
impairment analysis of goodwill. Based on the fair value of the
reporting unit, estimated using the expected present value of future cash flows,
no impairment of goodwill was recognized in 2007 or2006.
Bank
Owned Life
Insurance
The
Company has purchased life insurance
policies on certain officers, and is the sole beneficiary
on those
policies. Bank
owned life insurance is recorded at its cash surrender value, or the amount
that
can be realized. Increases in the cash
surrender value are recognized as other non-interest income.
Income
Taxes
The
Company and the Bank file a
consolidated federal income tax return. Deferred tax assets and
liabilities are computed based on the difference between the financial
statementbasisand
income tax basis of assets and
liabilities using the enacted marginal tax rates. Deferred income tax
expenses or benefits are based on the changes in the net deferred tax asset
or
liability from period to period.
Employee
Benefit
Plans
The
Company has a noncontributory
defined benefit pension plan covering substantially all employees. It is the
Company’s policy to fund pension costs on a current basis to the extent
deductible under existing tax regulations. Such contributions are intended
to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future.
The
Company has a defined contribution,
401(k) plan covering eligible employees. The Company contributes a
certain percentage of the eligible employee’s compensation into the
plan. The employee may also contribute to the plan on a voluntary
basis, up to a maximum percentage allowable not to exceed the limits of Code
Sections 401(k).
The
Company also has a profit-sharing
plan for employees
which
provide tax-deferred
salary savings to plan participants. The Company has a deferred
compensation plan for directors who have elected to defer all or portions of
their fees until their retirement or termination from
service.
In
2006, the shareholders of the Company
approved a restricted stock plan which covers eligible employees and
non-employee corporate directors. Under the plan, awards are granted
based upon performance related requirements and are subject to certain vesting
criteria. Compensation cost related
to
restricted stock is recognized based on the market price of the stock at the
grant date over the vesting period.
Mortgage
Servicing Rights
(MSR’s)
The
Company originates certain loans for
the express purpose of selling such loans in the secondary
market. The Company maintains all servicing rights for these
loans. The loans held for sale are
carried at lower of cost or
market. Originated MSR’s are recorded by allocating total costs
incurred between the loan and servicing rights based on their relative fair
values. MSR’s are amortized in proportion to the estimated servicing
income over the estimated life of the servicing portfolio.
Comprehensive
Income
The
Company is required to present
comprehensive income in a full set of general purpose financial statements
for
all periods presented. Other comprehensive income is comprised of unrealized
holding gains (losses) on the available-for-sale securities
portfolioand unrecognized
pension costs. The Company
has elected to report the effects of other comprehensive income as part of
the
Consolidated Statement of Changes in Stockholders’ Equity.
Recent
Accounting
Pronouncements
In
December 2007, the FASB issued
FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in an acquiree, including
the recognition and measurement of goodwill acquired in a business
combination. FAS No. 141(R) is effective for fiscal years beginning
on or after December 15, 2008. Earlier adoption is prohibited. The
Company is currently evaluating the impact the adoption of the standard will
have on the Company’s results of operations.
In
September 2006, the FASB issued FAS
No. 157, Fair Value Measurements, which provides enhanced guidance for
using fair value to measure assets and liabilities. The standard
applies whenever other standards require or permit assets or liabilities to
be
measured at fair value. The Standard does not expand the use of fair
value in any new circumstances. FAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. Early adoption is
permitted. The adoption of this standard is not expected to have a
material effect on the Company’s results of operations or financial
position.
In
February 2007, the FASB issued FAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
–
Including an amendment of FASB Statement No. 115, which provides all entities
with an option to report selected financial assets and liabilities at fair
value. The objective of the FAS No. 159 is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in earnings
caused by measuring related assets and liabilities differently without having
to
apply the complex provisions of hedge accounting. FAS No. 159 is
effective as of the beginning of an entity’s first fiscal year beginning after
November 15, 2007. Early adoption is permitted as of the beginning of
a fiscal year that begins on or before November 15, 2007 provided the entity
also elects to apply the provisions of FAS No. 157, Fair Value
Measurements. The adoption of this standard is not expected to have a
material effect on the Company’s results of operations or financial
position
In
December 2007, the FASB
issued FAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51. FAS No. 160 amends ARB
No. 51 to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated financial
statements. Among other requirements, this statement requires consolidated
net income to be reported at amounts that include the amounts attributable
to
both the parent and the noncontrolling interest. It also requires
disclosure, on the face of the consolidated income statement, of the amounts
of
consolidated net income attributable to the parent and to the noncontrolling
interest. FAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. The
Company is currently evaluating the impact the adoption of the standard will
have on the Company’s results of operations.
In
September 2006, the FASB reached
consensus on the guidance provided by Emerging Issues Task Force Issue 06-4
(“EITF 06-4”), Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The
guidance is applicable to endorsement split-dollar life insurance arrangements,
whereby the employer owns and controls the insurance policy, that are associated
with a postretirement benefit. EITF 06-4 requires that for a
split-dollar life insurance arrangement within the scope of the Issue, an
employer should recognize a liability for future benefits in accordance with
FAS
No. 106 (if, in substance, a postretirement benefit plan exists) or Accounting
Principles Board Opinion No. 12 (if the arrangement is, in substance, an
individual deferred compensation contract) based on the substantive agreement
with the employee. EITF 06-4 is effective for fiscal years beginning
after December 15, 2007. The adoption of this EITF is not expected to
have a material effect on the Company’s results of operations or financial
position.
In
March 2007, the FASB ratified
Emerging Issues Task Force Issue No. 06-10 (“EITF 06-10”), Accounting for
Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10
provides guidance for determining a liability for the postretirement benefit
obligation as well as recognition and measurement of the associated asset on
the
basis of the terms of the collateral assignment agreement. EITF 06-10 is
effective for fiscal years beginning after December 15, 2007. The adoption
of
this EITF is not expected to have a material effect on the Company’s results of
operations or financial position.
In
June 2007, the FASB ratified Emerging
Issues Task Force Issue No. 06-11 (“EITF 06-11”), Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards. EITF 06-11
applies to share-based payment arrangements with dividend protection features
that entitle employees to receive (a) dividends on equity-classified nonvested
shares, (b) dividend equivalents on equity-classified nonvested share units,
or
(c) payments equal to the dividends paid on the underlying shares while an
equity-classified share option is outstanding, when those dividends or dividend
equivalents are charged to retained earnings under FAS No. 123R, Share-Based
Payment, and result in an income tax deduction for the employer. A consensus
was
reached that a realized income tax benefit from dividends or dividend
equivalents that are charged to retained earnings and are paid to employees
for
equity-classified nonvested equity shares, nonvested equity share units, and
outstanding equity share options should be recognized as an increase in
additional paid-in capital. EITF 06-11 is effective for fiscal years
beginning after December 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact the adoption of
the EITF will have on the Company’s results of operations.
Treasury
Stock
The
purchase of the Company’s common
stock is recorded at cost. At the date of subsequent reissue, the
treasury stock account is reduced by the cost of such stock on a
last-in-first-out basis.
Cash
Flows
The
Company utilizes the net reporting
of cash receipts and cash payments for deposit, short-term borrowing
and
lending activities. The
Company considers amounts due from banks and interest-bearing deposits in banks
as cash equivalents.
Trust
Assets and
Income
Assets
held by the Companyin
a fiduciary or agency capacity for
its customers are not included in the consolidated financial statements since
such items are not assets of the Company. In
accordance with industry
practice, fees are recorded on the cash basis and approximate the fees which
would have been recognized on the accrual basis.
Earnings
Per Share
Earnings
per share calculations give
retroactive effect to stock dividends declared by the Company. The
number of weighted average
shares
used in the earnings
per share computations presented was 2,840,973, 2,871,766,
and
2,911,873for
2007,
2006and
2005,
respectively. The Company
has no dilutive securities.
Reclassification
Certain
of the prior year amounts have
been reclassified to conform with the current year presentation. Such
reclassifications had no effect on net income or stockholders’
equity.
2.
RESTRICTIONS ON CASH AND DUE FROM
BANKS
The
Bank is required to maintain
reserves, in the form of cash and balances with the Federal Reserve Bank,
against its deposit liabilities. The amount of such reserves
was
$833,000
and $844,000
at December 31, 2007and
2006,
respectively.
Non-retirement
account deposits with one financial
institution
are insured up to $100,000. The Company maintains cash and cash
equivalents with other financial institutions in excess of the insured
amount.
3.
INVESTMENT
SECURITIES
The
amortized cost and estimated fair
value of investment securities at December 31, 2007and
2006 were
as follows (in thousands):
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
December
31, 2007
|
Cost
|
Gains
|
Losses
|
Value
|
Available-for-sale
securities:
|
|
|
|
|
U.S.
Agency securities
|
$ 16,626
|
$ 610
|
$ -
|
$ 17,236
|
Obligations
of state and
|
|
|
|
|
political
subdivisions
|
30,643
|
239
|
(38)
|
30,844
|
Corporate
obligations
|
7,983
|
20
|
(190)
|
7,813
|
Mortgage-backed
securities
|
62,397
|
382
|
(137)
|
62,642
|
Equity
securities
|
2,785
|
4
|
(522)
|
2,267
|
Total
available-for-sale securities
|
$ 120,434
|
$ 1,255
|
$ (887)
|
$ 120,802
|
|
|
|
|
|
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
December
31, 2006
|
Cost
|
Gains
|
Losses
|
Value
|
Available-for-sale
securities:
|
|
|
|
|
U.S.
Agency securities
|
$ 16,647
|
$ 96
|
$ (92)
|
$ 16,651
|
Obligations
of state and
|
|
|
|
|
political
subdivisions
|
22,591
|
92
|
(121)
|
22,562
|
Corporate
obligations
|
7,981
|
21
|
(5)
|
7,997
|
Mortgage-backed
securities
|
60,950
|
90
|
(1,165)
|
59,875
|
Equity
securities
|
2,560
|
98
|
-
|
2,658
|
Total
available-for-sale securities
|
$ 110,729
|
$ 397
|
$ (1,383)
|
$ 109,743
|
The
following table shows the Company’s
gross unrealized losses and estimated fair
value, aggregated by investment
category and length of time, that the individual securities have been in a
continuous unrealized loss position, at December 31, 2007 and
2006 (in thousands). As
of December 31, 2007 and
2006, the Company
owned 44 and 75 securities whose estimated fair value was less than their cost
basis, respectively.
December
31, 2007
|
Less
than Twelve Months
|
Twelve
Months or Greater
|
Total
|
|
|
Estimated
|
Gross
|
Estimated
|
Gross
|
Estimated
|
Gross
|
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
U.S.
Agency securities
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
Obligations
of states and
|
|
|
|
|
|
|
political
subdivisions
|
3,610
|
23
|
6,666
|
15
|
10,276
|
38
|
Corporate
obligations
|
3,910
|
137
|
1,874
|
53
|
5,784
|
190
|
Mortgage-backed
securities
|
3,913
|
13
|
17,608
|
124
|
21,521
|
137
|
|
Total
debt securities
|
11,433
|
173
|
26,148
|
192
|
37,581
|
365
|
Equity
securities
|
2,267
|
522
|
-
|
-
|
2,267
|
522
|
|
|
|
|
|
|
|
|
Total
securities
|
$ 13,700
|
$ 695
|
$ 26,148
|
$ 192
|
$ 39,848
|
$ 887
|
|
|
|
|
|
|
|
|
December
31, 2006
|
Less
than Twelve Months
|
Twelve
Months or Greater
|
Total
|
|
|
Estimated
|
Gross
|
Estimated
|
Gross
|
Estimated
|
Gross
|
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
U.S.
Agency securities
|
$ -
|
$ -
|
$ 8,214
|
$ 92
|
$ 8,214
|
$ 92
|
Obligations
of states and
|
|
|
|
|
|
|
political
subdivisions
|
8,061
|
57
|
6,637
|
64
|
14,698
|
121
|
Corporate
obligations
|
4,930
|
5
|
-
|
-
|
4,930
|
5
|
Mortgage-backed
securities
|
7,466
|
36
|
39,996
|
1,129
|
47,462
|
1,165
|
|
|
|
|
|
|
|
|
Total
securities
|
$ 20,457
|
$ 98
|
$ 54,847
|
$ 1,285
|
$ 75,304
|
$ 1,383
|
The
Company’s investment securities
portfolio contains unrealized losses onmortgage-related
instruments
or other agency
securities issued
or backed by the full faith and
credit of the United States government or are generally viewed as having the
implied guarantee of the U.S. government. For fixed maturity
investments with unrealized losses due to interest rates where the Company
has
both the positive intent and ability to hold the investment for a period of
time
sufficient to allow a market recovery, declines in value below cost are not
assumed to be other than temporary. For equity securities where the
fair value has been significantly below cost for one year, the Company’s policy
is to recognize an impairment loss unless sufficient evidence is available
that
the decline is not other than temporary and a recovery period can be
predicted. The
Company has concluded that any impairment of its investment securities
portfoliooutlined in the
above table is not
other
than temporary
and is the result of
interest rate changes, sector credit rating changes, or company-specific rating
changes that are not expected to result in the non-collection
of principal and interest
during the period.
Proceeds
from sales of securities
available-for-sale during 2007,
2006,
and 2005were$18,859,000,
$10,439,000,and
$0,
respectively. Gross
gains and
gross losses were realized on those sales as follows (in thousands):
|
2007
|
2006
|
2005
|
Gross
gains
|
$ 166
|
$ 159
|
$ -
|
Gross
losses
|
195
|
155
|
-
|
Net
(losses) gains
|
$ (29)
|
$ 4
|
$ -
|
Investment
securities with an
approximate carrying value of $96,876,000 and $81,894,000
at December 31, 2007and
2006,
respectively, were pledged to secure
public funds and certain other deposits as provided by law.
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. The
amortized cost and estimated fair value
of debt securities at December 31,
2007,
by contractual maturity, are shown
below (in
thousands):
|
Amortized
|
|
Estimated
|
|
Cost
|
|
Fair
Value
|
Available-for-sale
securities:
|
|
|
|
Due
in one year or less
|
$ 1,000
|
|
$ 1,003
|
Due
after one year through five years
|
14,954
|
|
14,952
|
Due
after five years through ten years
|
31,194
|
|
31,570
|
Due
after ten years
|
70,501
|
|
71,010
|
Total
|
$ 117,649
|
|
$ 118,535
|
4.
LOANS
The
Company grants commercial,
industrial, residential, and consumer loans primarily to customers throughout
Northcentral Pennsylvania and Southern New York. Although the Company
has a diversified loan portfolio at December 31, 2007and
2006,
a substantial portion of its debtors’
ability to honor their contracts is dependent on the economic conditions within
theseregions.
Major
classifications of loans are as
follows (in
thousands):
|
December
31,
|
|
2007
|
2006
|
Real
estate loans:
|
|
|
Residential
|
$ 201,861
|
$ 206,059
|
Commercial
|
100,380
|
94,122
|
Agricultural
|
16,891
|
17,054
|
Construction
|
11,330
|
7,027
|
Loans
to individuals for household,
|
|
|
family
and other purchases
|
13,082
|
12,482
|
Commercial
and other loans
|
34,664
|
32,766
|
State
and political subdivision loans
|
45,171
|
45,263
|
|
423,379
|
414,773
|
Less
allowance for loan losses
|
4,197
|
3,876
|
Loans,
net
|
$ 419,182
|
$ 410,897
|
Real
estate loans serviced for Freddie
Macand Fannie
Mae, which are not included
in the consolidated balance sheet, totaled $38,427,000 and $36,226,000
at
December 31,
2007and
2006,
respectively.
At
December 31, 2007and
2006,
net unamortized loan fees and costs of
$1,037,000
and $996,000,
respectively, have been deducted
from the carrying value of loans.
The
Company had non-accrual
loans, inclusive of impaired
loans, of $1,915,000 and
$1,668,000
at December 31, 2007and
2006,
respectively. Interest income on loans
would have
increased by approximately $230,000, $169,000
and $144,000
during 2007,
2006
and 2005,
respectively, if these loans had
performed in accordance with their original terms.
Information
with respect to impaired
loans as of and for the year ended December 31 is as follows (in thousands):
|
2007
|
2006
|
2005
|
Impaired
loans without related allowance for loan losses
|
$ 796
|
$ 469
|
$ 673
|
Impaired
loans with related allowance for loan losses
|
292
|
721
|
358
|
Related
allowance for loan losses
|
146
|
232
|
179
|
Average
recorded balance of impaired loans
|
1,366
|
1,283
|
1,148
|
Interest
income recognized on impaired loans
|
25
|
6
|
7
|
Changes
in
the allowance for loan losses were as
follows (in
thousands):
|
Year
Ended December 31,
|
|
2007
|
2006
|
2005
|
Balance,
beginning of year
|
$ 3,876
|
$ 3,664
|
$ 3,919
|
Provision
charged to income
|
365
|
330
|
60
|
Recoveries
on loans previously
|
|
|
|
charged
against the allowance
|
142
|
172
|
57
|
|
4,383
|
4,166
|
4,036
|
Loans
charged against the allowance
|
(186)
|
(290)
|
(372)
|
Balance,
end of year
|
$ 4,197
|
$ 3,876
|
$ 3,664
|
The
following is a summary of the past
due and non-accrual
loans as of December 31,
2007and
2006 (in
thousands):
|
December
31, 2007
|
|
Past
Due
|
Past
Due
|
|
|
30
- 89 days
|
90
days or more
|
Nonaccrual
|
Real
estate loans
|
$ 3,198
|
$ 242
|
$ 1,822
|
Installment
loans
|
195
|
9
|
-
|
Commercial
and all other loans
|
230
|
24
|
93
|
Total
|
$ 3,623
|
$ 275
|
$ 1,915
|
|
|
|
|
|
December
31, 2006
|
|
Past
Due
|
Past
Due
|
|
|
30
- 89 days
|
90
days or more
|
Nonaccrual
|
Real
estate loans
|
$ 3,230
|
$ 1,655
|
$ 1,578
|
Installment
loans
|
258
|
5
|
10
|
Commercial
and all other loans
|
233
|
30
|
80
|
Total
|
$ 3,721
|
$ 1,690
|
$ 1,668
|
5.
PREMISES &
EQUIPMENT
Premises
and equipment are summarized as
follows (in
thousands):
|
December
31,
|
|
2007
|
2006
|
Land
|
$ 3,786
|
$ 2,998
|
Buildings
|
11,699
|
11,634
|
Furniture,
fixtures and equipment
|
7,278
|
7,081
|
Construction
in process
|
92
|
798
|
|
22,855
|
22,511
|
Less:
accumulated depreciation
|
10,317
|
9,619
|
Premises
and equipment, net
|
$ 12,538
|
$ 12,892
|
Depreciation
expense amounted to
$716,000, $747,000and
$798,000 for
2007,
2006,
and 2005,
respectively.
6.
GOODWILL
A
summary of goodwill is as follows
(in thousands):
|
December
31,
|
|
2007
|
2006
|
Gross
carrying amount
|
$ 9,385
|
$ 9,385
|
Less:
accumulated amortization
|
780
|
780
|
Net
carrying amount
|
$ 8,605
|
$ 8,605
|
The
gross carrying amount of goodwill is
tested for impairment on an
annual basis. Based
on the fair value of the reporting
unit, estimated using the expected present value of future cash flows, no
goodwill impairment loss was recognized in 2007, 2006 or 2005.
7.
CORE DEPOSIT INTANGIBLE
ASSETS
A
summary of core deposit intangible
assets is as follows (in
thousands):
|
December
31,
|
|
2007
|
2006
|
Gross
carrying amount
|
$ 3,553
|
$ 3,553
|
Less:
accumulated amortization
|
3,265
|
3,121
|
Net
carrying amount
|
$ 288
|
$ 432
|
Amortization
expense amounted to
$144,000, $252,000and
$578,000
for 2007,
2006and
2005,
respectively. The
estimated amortization expense of
intangible assets for each of the twosucceeding
fiscal years is as
follows (in
thousands):
For
the year ended December 31, 2008
|
$ 144
|
For
the year ended December 31, 2009
|
144
|
Total
|
$ 288
|
8.
DEPOSITS
Certificates
of deposit of $100,000 or
more amounted to $58,137,000
and $67,912,000
at December 31, 2007and
2006,
respectively. Interest expense on
certificates of deposit of $100,000 or more amounted to $2,864,000,
$2,667,000
and $2,036,000
for the years ended December 31,
2007,
2006,
and 2005,
respectively.
Following
are maturities of certificates
of deposit as of December 31, 2007(in
thousands):
2008
|
|
$ 109,178
|
2009
|
|
42,239
|
2010
|
|
33,780
|
2011
|
|
11,303
|
2012
|
|
17,240
|
Thereafter
|
|
2,088
|
Total
certificates of deposit
|
|
$ 215,828
|
9.
BORROWED FUNDS
|
Securities
|
|
|
|
|
|
|
|
Sold
Under
|
Treasury
|
|
|
|
|
Total
|
|
Agreements
to
|
Direct
|
FHLB
|
Federal
Funds
|
Notes
|
Term
|
Borrowed
|
(dollars
in thousands)
|
Repurchase(a)
|
Investments(b)
|
Advances(c)
|
Line
(d)
|
Payable(e)
|
Loans(f)
|
Funds
|
2007
|
|
|
|
|
|
|
|
Balance
at December 31
|
$ 7,291
|
$ -
|
$ 13,857
|
$ -
|
$ 7,500
|
$ 51,700
|
$ 80,348
|
Highest
balance at any month-end
|
9,737
|
3,400
|
40,979
|
10,000
|
7,500
|
52,700
|
124,316
|
Average
balance
|
8,084
|
1,216
|
24,926
|
334
|
7,500
|
24,465
|
66,525
|
Weighted
average interest rate:
|
|
|
|
|
|
|
|
Paid
during the year
|
4.49%
|
4.85%
|
5.24%
|
4.92%
|
8.34%
|
4.86%
|
5.35%
|
As
of year-end
|
3.70%
|
0.00%
|
3.81%
|
0.00%
|
7.79%
|
4.52%
|
4.61%
|
2006
|
|
|
|
|
|
|
|
Balance
at December 31
|
$ 6,638
|
$ -
|
$ 45,637
|
$ -
|
$ 7,500
|
$ 16,000
|
$ 75,775
|
Highest
balance at any month-end
|
9,531
|
2,470
|
45,637
|
5,000
|
7,500
|
19,000
|
89,138
|
Average
balance
|
8,388
|
319
|
30,719
|
685
|
7,500
|
16,024
|
63,635
|
Weighted
average interest rate:
|
|
|
|
|
|
|
|
Paid
during the year
|
4.69%
|
4.68%
|
5.21%
|
4.98%
|
8.00%
|
3.79%
|
5.10%
|
As
of year-end
|
4.83%
|
0.00%
|
5.41%
|
0.00%
|
8.16%
|
4.46%
|
5.42%
|
2005
|
|
|
|
|
|
|
|
Balance
at December 31
|
$ 7,610
|
$ 606
|
$ 21,958
|
$ -
|
$ 7,500
|
$ 15,000
|
$ 52,674
|
Highest
balance at any month-end
|
9,476
|
2,592
|
21,958
|
-
|
7,500
|
18,000
|
59,526
|
Average
balance
|
8,320
|
244
|
10,024
|
260
|
7,500
|
15,545
|
41,893
|
Weighted
average interest rate:
|
|
|
|
|
|
|
|
Paid
during the year
|
3.63%
|
2.94%
|
3.37%
|
4.28%
|
6.17%
|
3.13%
|
3.32%
|
As
of year-end
|
4.18%
|
3.84%
|
4.23%
|
0.00%
|
7.30%
|
3.24%
|
3.89%
|
(a) Securities
sold under agreements to
repurchase mature within 5
years.
The carrying value
of the underlying securities pledged at
December 31, 2007and
2006was
$12,465,000
and $10,943,000, respectively.
(b) Treasury
Direct Investmentsconsist of notes issued
under the U.S.
Treasury Department’s program of investing the treasury tax and loan account
balances in interest-bearing demand notes insured by depository
institutions. These notes bear interest at a rate of .25 percent less
than the average Federal funds rate as computed by the Federal Reserve
Bank.
(c) FHLB
Advances consist of an “Open
RepoPlus” agreement with the Federal Home Loan Bank of Pittsburgh. FHLB “Open
RepoPlus” advances are short-term borrowings that bear interest based
on the Federal
Home Loan Bank discount rate or Federal Funds rate, whichever is
higher. The
Company has a borrowing limit of $238,861,000, inclusiveof
any outstanding
advances. Although no specific collateral is required to be pledged
for the “Open RepoPlus” borrowings, FHLB advances are secured by a blanket
security agreement that includes the Company’s FHLB stock, as well as investment
and mortgage-backed securities held in safekeeping at the FHLB and certain
residential mortgage loans. At December 31, 2007and
2006,
the approximate carrying value of the
securities collateral was $74,453,000 and $76,526,000,
respectively.
(d) Federal
funds line consistsof
an unsecured line from a third party
bank. These
advances are short-term borrowings that bear interest at a rate .10 percent
higher than the Federal funds rate as computed by the Federal Reserve
Bank. The Company has a borrowing limit of $10,000,000, inclusive of
any outstanding balances. No specific collateral is required to be
pledged for these borrowings.
(e) In
December 2003, the Company formed a
special purpose entity (“Entity”) to issue $7,500,000 of floating rate obligated
mandatory redeemable securities as part of a pooled offering. The
rate is determined quarterly
and floats based on the 3 month
LIBOR plus
2.80%. At December 31, 2007and 2006,
the rate was 7.79%
and 8.16%,
respectively. The Entity
may redeem them, in whole or in part, at face value after December 17,
2008, and on a quarterly
basis thereafter. The Company borrowed
the
proceeds of the issuance from the Entity in December 2003 in the form of a
$7,500,000 note payable. Debt issue costs of $75,000 have been
capitalized and are being amortized through the first call
date. Under current accounting rules, the Company’s minority interest
in the Entity was recorded at the initial investment amount and is included
in
the other assets section of the balance sheet. The Entity is not
consolidated as part of the Company’s consolidated financial
statements.
(f) Term
Loans consist of separate loans
with a third party bank and the Federal Home Loan Bank of Pittsburgh as follows
(in
thousands):
|
|
December
31,
|
|
December
31,
|
Interest
Rate
|
Maturity
|
2007
|
|
2006
|
Variable:
|
|
|
|
|
(g)
|
April
30, 2008
|
$ -
|
|
$ -
|
Fixed:
|
|
|
|
|
3.69%
|
February
26, 2007
|
-
|
|
3,000
|
3.82%
|
January
10, 2008
|
3,000
|
|
3,000
|
4.07%
|
January
14, 2008
|
20,000
|
|
-
|
4.97%
|
March
3, 2008
|
2,500
|
|
-
|
4.97%
|
March
3, 2008
|
1,000
|
|
-
|
4.95%
|
March
26, 2008
|
2,000
|
|
2,000
|
5.22%
|
May
12, 2008
|
2,000
|
|
2,000
|
5.34%
|
July
14, 2008
|
2,000
|
|
2,000
|
4.99%
|
August
26, 2008
|
1,000
|
|
-
|
4.93%
|
August
27, 2008
|
1,200
|
|
-
|
4.88%
|
September
26, 2008
|
2,000
|
|
2,000
|
5.26%
|
January
20, 2009
|
5,000
|
|
-
|
3.99%
|
February
25, 2009
|
2,000
|
|
2,000
|
5.25%
|
April
20, 2009
|
5,000
|
|
-
|
3.80%
|
December
31, 2009
|
3,000
|
|
-
|
Total
term loans
|
$ 51,700
|
|
$ 16,000
|
(g) Interest
rate floats monthly based on
the 1 month LIBOR +1.75%. The
interest rate was 6.45% and 7.07%at
December 31, 2007and
2006,
respectively. This line of credit has
a
borrowing limit of $5.0 million and is renewable on an annual
basis.
Following
are maturities of borrowed
funds as of December 31, 2007 (in
thousands):
2008
|
|
$ 64,247
|
2009
|
|
15,436
|
2010
|
|
644
|
2011
|
|
21
|
2012
|
|
-
|
Total
borrowed funds
|
|
$ 80,348
|
10.
EMPLOYEE BENEFIT
PLANS
Noncontributory
Defined Benefit Pension Plan
The
Bank sponsors a trusteed,
noncontributory defined benefit pension plan covering substantially all
employees and officers. The plan calls for benefits to be paid to
eligible employees at retirement based primarily upon years of service with
the
Bank and compensation rates near retirement. The Bank’s funding policy is to
make annual contributions, if needed, based upon the funding formula developed
by the plan’s actuary.
The
plan was amended, effective January
1, 2008, to cease eligibility for employees with a hire date of January 1,
2008
or later. In lieu of the pension plan, employees with a hire date of
January 1, 2008 or later are eligible to receive, after meeting certain age
and
length of service requirements, an annual discretionary 401(k) plan
contribution from the Bank equal to a percentage of an employee’s base
compensation. The contribution amount will be placed in a separate
account within the 401(k) plan and will be subject to a vesting
requirement.
The
plan was also amended, effective
January 1, 2008, for employees who are still eligible to
participate. The amended plan calls for benefits to be paid to
eligible employees based primarily upon years of service with the Bank and
compensation rates during employment. Upon retirement or other
termination of employment, employees can elect either an annuity benefit or
a lump sum distribution of vested benefits in the plan.
The
Company adopted the recognition
provisions of Statement of Financial Accounting Standards (FAS) No. 158,
Employers’
Accounting for Defined Benefit Pension and Other Post-retirement
Plansand initially applied
them to the funded status of its defined benefit pension plan as of December
31,
2006. The initial recognition of the funded status of its defined benefit
pension plan resulted in a decrease in stockholders’ equity of $1,086,000, which
was net of a tax
benefit of $560,000.
The
following table sets forth the
incremental effect of applying FAS No. 158 on individual line items in the
consolidated balance sheet at December 31, 2006 (in
thousands):
|
Before
|
|
After
|
|
Application
of
|
|
Application
of
|
|
FAS
No. 158
|
Adjustments
|
FAS
No. 158
|
|
|
|
|
Other
assets
|
$ 9,335
|
$ 176
|
$ 9,511
|
Total
assets
|
571,992
|
176
|
572,168
|
Other
liabilities
|
2,829
|
1,262
|
4,091
|
Total
liabilities
|
527,406
|
1,262
|
528,668
|
Accumulated
other comprehensive loss
|
(651)
|
(1,086)
|
(1,737)
|
Total
stockholders' equity
|
44,586
|
(1,086)
|
43,500
|
Total
liabilities and stockholders' equity
|
571,992
|
176
|
572,168
|
The
following table sets forth the
obligation and funded status as of December 31 (in
thousands):
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Change
in benefit obligation
|
|
|
|
|
Benefit
obligation at beginning of year
|
$
|
7,102
|
$
|
6,165
|
Service
cost
|
|
421
|
|
388
|
Interest
cost
|
|
407
|
|
363
|
Amendments
|
|
(601)
|
|
-
|
Actuarial
(Gain) / Loss
|
|
(137)
|
|
352
|
Benefits
paid
|
|
(176)
|
|
(166)
|
Benefit
obligation at end of year
|
|
7,016
|
|
7,102
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
5,796
|
|
4,921
|
Actual
return on plan assets
|
|
409
|
|
597
|
Employer
contribution
|
|
284
|
|
444
|
Benefits
paid
|
|
(176)
|
|
(166)
|
Fair
value of plan assets at end of year
|
|
6,313
|
|
5,796
|
|
|
|
|
|
|
Funded
status
|
$
|
(703)
|
$
|
(1,306)
|
|
|
|
|
|
|
Amounts
not yet recognized as a component of net periodic pension cost (in
thousands):
|
|
|
|
|
|
|
Amounts
recognized in accumulated other
|
|
|
|
|
comprehensive
loss consists of:
|
|
|
|
|
|
Net
loss
|
$
|
1,463
|
$
|
1,615
|
|
Prior
service cost
|
|
(570)
|
|
29
|
Total
|
$
|
893
|
$
|
1,644
|
The
accumulated benefit obligation for
the defined benefit pension plan was $6,508,000 and $5,605,000
at December 31, 2007and
2006,
respectively. Information where the
accumulated benefit obligation is in excess of plan assets at December 31 is
as
follows (in thousands):
|
|
|
2007
|
Projected
benefit obligation
|
$
|
7,016
|
Accumulated
benefit obligation
|
|
6,508
|
Fair
value of plan assets
|
|
6,313
|
The
components
of net periodic benefit costs
for the periods ending December 31 are as follows (in
thousands):
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Service
cost
|
$
|
421
|
$
|
388
|
$
|
361
|
Interest
cost
|
|
407
|
|
363
|
|
325
|
Return
on plan assets
|
|
(468)
|
|
(395)
|
|
(376)
|
Net
amortization and deferral
|
|
73
|
|
86
|
|
59
|
Net
periodic benefit cost
|
$
|
433
|
$
|
442
|
$
|
369
|
The
estimated net loss and prior service
cost (benefit) that will be amortized from accumulated other comprehensive
loss
into the net periodic benefit cost in 2008 is $60,300 and $(42,600),
respectively.
The
weighted-average assumptions
used to
determine benefit obligations at December 31:
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Discount
rate
|
|
6.00%
|
|
5.75%
|
Rate
of compensation increase
|
|
3.25%
|
|
3.25%
|
The
weighted-average assumptions
used to
determine net periodic benefit cost for the year ended December
31:
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
5.75%
|
|
5.75%
|
|
5.75%
|
Expected
long-term return on plan assets
|
|
8.00%
|
|
8.00%
|
|
8.00%
|
Rate
of compensation increase
|
|
3.25%
|
|
3.25%
|
|
3.00%
|
The
long-term rate of return on plan
assets gives consideration to returns currently being earned on plan assets
as
well as future rates expected to be earned. The investment objective
is to maximize
total return consistent with the interests of the participants and
beneficiaries, and prudent investment management. The allocation of the
pension plan
assets is determined on the basis of sound economic principles and is
continually reviewed in light of changes in market
conditions. Asset allocation favors
equity
securities, with a target allocation of 50-70%. The target allocation
for debt securities is 30-50%. The Bank’s pension plan weighted-average
asset allocations at December 31, 2007and
2006,
by asset category are summarized below. At December
31, 2007, the pension plan had a temporary, large cash and money market
position. These funds were accumulated to re-allocate the equity
portfolio for diversification purposes and reduce risk in the total
portfolio.
Asset
category:
|
|
2007
|
2006
|
|
|
|
|
|
|
|
Equity
securities
|
|
64.6
|
%
|
67.2
|
%
|
Debt
securities
|
|
16.3
|
|
23.3
|
|
Cash
and money market deposits
|
|
19.1
|
|
9.5
|
|
Total
|
|
100.0
|
%
|
100.0
|
%
|
Equity
securities include the Company’s
common stock in the amounts of $220,900
(3.5%
of total plan assets) and
$230,000
(4.0%
of total plan assets) at December 31,
2007and
2006,
respectively.
The
Bank expects to contribute
$403,000
to its pension plan in
2008. Expected
future benefit
payments that the Bank estimates from its pension plan are as
follows(in
thousands):
2008
|
|
$ 465
|
2009
|
|
317
|
2010
|
|
662
|
2011
|
|
248
|
2012
|
|
367
|
2013
- 2017
|
|
2,430
|
Defined
Contribution Plan
The
Company sponsors a voluntary
401(k) savings plan which
eligible employees can
elect
to contribute up to
the maximum amount allowable not to exceed the limits of IRS Code Sections
401(k). Under the plan, the Company
also
makes
required contributions on behalf
of the eligible employees. The Company’s contributions vest
immediately. Contributions by the Company totaled $196,000 and
$187,000
for 2007
and 2006,
respectively.
The
plan was amended, effective January
1, 2008. For employees hired prior to January 1, 2008, the Company’s
contributions are no longer required, but are dependent upon the contributions
of the eligible employees. For
employees hired January 1, and
after, employees are eligible to receive, after meeting certain age and length
of service requirements, an annual discretionary 401(k) plan contribution
from the Bank equal to a percentage of an employee’s base
compensation. The contribution amount will be placed in a separate
account within the 401(k) plan and will be subject to a vesting
requirement.
Directors’
Deferred Compensation Plan
The
Company’s directors may elect to
defer all or portions of their fees until their retirement or termination from
service. Amounts deferred under the plan earn interest based upon the
highest current rate offered to certificate of deposit
customers. Amounts deferred under the plan are not guaranteed and
represent a general liability of the Company. Amounts included in interest
expense
onthe
deferred amounts totaled
$47,000,
$44,000
and $35,000
for the years ended December 31,
2007,
2006and
2005,
respectively.
2006
Restricted Stock Plan
Effective
April 18, 2006, shareholders
of the Company approved the 2006 Restricted Stock Plan (the Plan).
Employees and non-employee corporate directors are eligible to receive awards
of
restricted stock based upon performance related requirements. Awards
granted under the Plan are in the form of the Company’s common stock and are
subject to certain vesting requirements including continuous employment or
service with the Company. 100,000 shares of the Company’s common stock
have been authorized under the Plan, which terminates April 18, 2016. The
Plan assists the Company in attracting, retaining and motivating employees
to
make substantial contributions to the success of the Company and to increase
the
emphasis on the use of equity as a key component of compensation.
During
2007, 3,414 shares of restricted
stock were awarded and 291 shares vested. Compensation cost related
to restricted stock is recognized based on the market price of the stock at
the
grant date over the vesting period. Compensation
expense related to
restricted stock was $23,000, $0 and $0 for the years ended December 31, 2007,
2006 and 2005, respectively.
11.
INCOME TAXES
The
provision for income taxes consists
of the following (in
thousands):
|
Year
Ended December 31,
|
|
2007
|
2006
|
2005
|
Currently
payable
|
$ 1,718
|
$ 1,348
|
$ 1,410
|
Deferred
tax liability
|
54
|
109
|
256
|
Provision
for income taxes
|
$ 1,772
|
$ 1,457
|
$ 1,666
|
The
following temporary differences gave
rise to the net deferred tax assets at December 31, 2007and
2006(in
thousands):
|
2007
|
2006
|
Deferred
tax assets:
|
|
|
Allowance
for loan losses
|
$ 1,352
|
$ 1,187
|
Deferred
compensation
|
584
|
574
|
Merger
& acquisition costs
|
42
|
45
|
Allowance
for losses on available-for-sale securities
|
191
|
191
|
Pension
obligation
|
239
|
444
|
Unrealized
losses on available-for-sale securities
|
-
|
336
|
Less:
valuation allowance
|
(191)
|
(182)
|
Total
|
$ 2,217
|
$ 2,595
|
|
|
|
Deferred
tax liabilities:
|
|
|
Premises
and equipment
|
$ (195)
|
$ (238)
|
Investment
securities accretion
|
(83)
|
(34)
|
Loan
fees and costs
|
(133)
|
(110)
|
Goodwill
and core deposit intangibles
|
(660)
|
(419)
|
Low
income housing tax credits
|
(34)
|
(36)
|
Mortgage
servicing rights
|
(59)
|
(60)
|
Unrealized
gains on available-for-sale securities
|
(133)
|
-
|
Total
|
(1,297)
|
(897)
|
Deferred
tax asset, net
|
$ 920
|
$ 1,698
|
At
December 31, 2007 and 2006, the
valuation
allowancewas $191,000 and
$182,000, respectively. The allowance is for
certain unrealized
losses on available-for-sale securities. As
of December 31, 2007 and 2006,
the Company
didnot
have sufficient unrealized capital
gains available to utilize the unrealized loss recognized on these securities.
The
total provision for income taxes is
different from that computed at the statutory rates due to the following items
(in thousands):
|
Year
Ended December 31,
|
|
2007
|
2006
|
2005
|
Provision
at statutory rates on
|
|
|
|
pre-tax
income
|
$ 2,892
|
$ 2,462
|
$ 2,347
|
Effect
of tax-exempt income
|
(961)
|
(913)
|
(748)
|
Low
income housing tax credits
|
(187)
|
(130)
|
(130)
|
Bank
owned life insurance
|
(113)
|
(103)
|
(100)
|
Nondeductible
interest
|
133
|
118
|
75
|
Valuation
allowance
|
9
|
-
|
182
|
Other
items
|
(1)
|
23
|
40
|
Provision
for income taxes
|
$ 1,772
|
$ 1,457
|
$ 1,666
|
Statutory
tax rates
|
34%
|
34%
|
34%
|
Effective
tax rates
|
20.8%
|
20.1%
|
24.1%
|
The
Company adopted the provisions of
FIN No. 48, Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement 109, effective January 1, 2007. FIN No. 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. Benefits from tax positions should be recognized in the financial
statements only when it is more likely than not that the tax position will
be
sustained upon examination by the appropriate taxing authority that would have
full knowledge of all relevant information. A tax position that meets the
more-likely-than-not recognition threshold is measured at the largest amount
of
benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. FIN No. 48 also
provides guidance on the accounting for and disclosure of unrecognized tax
benefits, interest and penalties. Adoption of FIN No. 48 did not have a
significant impact on the Company’s financial statements.
12.
RELATED PARTY
TRANSACTIONS
Certain
executive officers, corporate
directors or companies in
which they have 10 percent
or more beneficial ownership were indebted to the Bank. Such
loans were made in the ordinary
course of business at the Bank’s normal credit terms and do not present more
than a normal risk of collection. A
summary of loan activity for 2007 and 2006 with
officers, directors, stockholders
and associates of such persons is listed below (in thousands):
|
Year
Ended December 31,
|
|
2007
|
2006
|
Balance,
beginning of year
|
$ 2,737
|
$ 2,464
|
New
loans
|
923
|
1,209
|
Repayments
|
(832)
|
(936)
|
Balance,
end of year
|
$ 2,828
|
$ 2,737
|
13.
REGULATORY MATTERS
Dividend
Restrictions:
The
approval of the Comptroller of the
Currency is required for a national bank to pay dividends up to the Company
if
the total of all dividends declared in any calendar year exceeds the Bank’s net
income (as defined) for that year combined with its retained net income for
the
preceding two calendar years. Under this formula, the
Bank can declare
dividends in 2007without
approval of the Comptroller of
the Currency of approximately $7,423,000,
plus the Bank’s net income for
2008.
Loans:
The
Bank is subject to regulatory
restrictions which limit its ability to loan funds to the Company. At
December 31, 2007,
the regulatory lending limit amounted
to approximately $5,436,000.
Regulatory
Capital
Requirements:
Federal
regulations require the Company
and the Bank to maintain minimum amounts of capital. Specifically, each is
required to maintain certain minimum dollar amounts and ratios of Total and
Tier
I capital to risk-weighted assets and of Tier I capital to average total
assets.
In
addition to the capital requirements,
the Federal Deposit Insurance Corporation Improvement Act (FDICIA) established
five capital categories ranging from “well capitalized” to “critically
under-capitalized.”
Should
any institution
fail to meet the requirements to be considered “adequately capitalized”, it
would become subject to a series of increasingly restrictive regulatory
actions.
As
of December 31, 2007and
2006,
the Federal Reserve Board categorized the Company
and the
Office of the Comptroller
of the Currency categorized the Bank as well capitalized, under the regulatory
framework for prompt corrective action. To be categorized as a well
capitalized financial institution, Total risk-based, Tier I risk-based and
Tier
I leverage capital ratios must be at least 10%, 6% and 5%,
respectively.
The
following table reflects the
Company’s capital ratios at December 31 (dollars in thousands):
|
2007
|
|
2006
|
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
Total
capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
$ 51,320
|
13.00%
|
|
$ 47,604
|
12.59%
|
For
capital adequacy purposes
|
31,576
|
8.00%
|
|
30,252
|
8.00%
|
To
be well capitalized
|
39,470
|
10.00%
|
|
37,815
|
10.00%
|
|
|
|
|
|
|
Tier
I capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
$ 47,124
|
11.94%
|
|
$ 43,684
|
11.55%
|
For
capital adequacy purposes
|
15,788
|
4.00%
|
|
15,126
|
4.00%
|
To
be well capitalized
|
23,682
|
6.00%
|
|
22,689
|
6.00%
|
|
|
|
|
|
|
Tier
I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
$ 47,124
|
8.20%
|
|
$ 43,684
|
7.82%
|
For
capital adequacy purposes
|
22,979
|
4.00%
|
|
22,355
|
4.00%
|
To
be well capitalized
|
28,723
|
5.00%
|
|
27,944
|
5.00%
|
The
following table reflects the
Bank’scapital
ratios at December 31
(dollars in
thousands):
|
2007
|
|
2006
|
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
Total
capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
$ 45,456
|
11.53%
|
|
$ 41,249
|
10.93%
|
For
capital adequacy purposes
|
31,531
|
8.00%
|
|
30,200
|
8.00%
|
To
be well capitalized
|
39,413
|
10.00%
|
|
37,750
|
10.00%
|
|
|
|
|
|
|
Tier
I capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
$ 41,260
|
10.47%
|
|
$ 37,330
|
9.89%
|
For
capital adequacy purposes
|
15,765
|
4.00%
|
|
15,100
|
4.00%
|
To
be well capitalized
|
23,648
|
6.00%
|
|
22,650
|
6.00%
|
|
|
|
|
|
|
Tier
I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
$ 41,260
|
7.19%
|
|
$ 37,330
|
6.68%
|
For
capital adequacy purposes
|
22,959
|
4.00%
|
|
22,373
|
4.00%
|
To
be well capitalized
|
28,699
|
5.00%
|
|
27,966
|
5.00%
|
This
annual report has not been
reviewed, or confirmed for accuracy or relevance, by the Federal Deposit
Insurance Corporation.
14.
OFF-BALANCE-SHEET
RISK
The
Company 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. These instruments
involve, to varying degrees, elements of credit and interest rate or liquidity
risk in excess of the amount recognized in the consolidated balance
sheet.
The
Company’s exposure to credit loss
from nonperformance by the other party to the financial instruments for
commitments to extend credit and standby letters of credit is represented by
the
contractual amount of these instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Financial
instruments,whose
contract amounts represent credit
risk at December 31, 2007and
2006,
are as follows (in thousands):
|
2007
|
2006
|
Commitments
to extend credit
|
$67,881
|
$59,856
|
Standby
letters of credit
|
2,419
|
2,071
|
Commitments
to extend credit are legally
binding agreements to lend to customers. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of fees.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future liquidity
requirements. The Company evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by
the
Company on extension of credit is based on management’s credit assessment of the
counter party.
Standby
letters of credit are
conditional commitments issued by the Company to guarantee a financial agreement
between a customer
and a third party. Performance letters of
credit represent
conditional commitments issued by the Bank to guarantee the performance of
a
customer to a third party. These instruments are issued primarily to
support bid or performance related contracts. The coverage period for
these instruments is typically a one-year period with an annual renewal option
subject to prior approval by management. Fees earned from the
issuance of these letters are recognized duringthe
coverage period. For
secured letters of credit, the collateral is typically Bank deposit instruments
or customer business assets.
15.
ESTIMATED FAIR VALUE OF FINANCIAL
INSTRUMENTS
The
estimated fair values of the
Company’s financial instruments are as follows (in thousands):
|
December
31,
|
|
2007
|
|
2006
|
|
Carrying
|
Estimated
|
|
Carrying
|
Estimated
|
|
Amount
|
Fair
Value
|
|
Amount
|
Fair
Value
|
Financial
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
$ 10,389
|
$ 10,389
|
|
$ 10,015
|
$ 10,015
|
Available-for-sale
securities
|
120,802
|
120,802
|
|
109,743
|
109,743
|
Net
loans
|
419,182
|
428,240
|
|
410,897
|
413,498
|
Bank
owned life insurance
|
8,378
|
8,378
|
|
8,047
|
8,047
|
Regulatory
stock
|
4,809
|
4,809
|
|
3,996
|
3,996
|
Accrued
interest receivable
|
2,522
|
2,522
|
|
2,458
|
2,458
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
Deposits
|
$ 456,028
|
$ 457,425
|
|
$ 446,515
|
$ 443,208
|
Borrowed
funds
|
80,348
|
79,357
|
|
75,775
|
75,232
|
Accrued
interest payable
|
2,199
|
2,199
|
|
2,287
|
2,287
|
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
Company’s entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the
Company’s financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions can significantly affect the estimates.
Estimated
fair values have been
determined by the Company using historical data, as generally provided in the
Company’s regulatory reports, and an estimation methodology suitable for each
category of financial instruments. The Company’s fair value estimates, methods
and assumptions are set forth below for the Company’s other financial
instruments.
Cash
and Cash Equivalents:
The
carrying amounts for cash and due
from banks approximate
fair value because they
mature within one year
and
do not present
unanticipated credit concerns.
Accrued
Interest
Receivable
and Payable:
The
carrying amounts for accrued interest receivable
and payable
approximate fair value
because they are generally
received or paid in 90 days
or less and do not present unanticipated credit concerns.
Available-For-SaleSecurities:
The
fair values of available-for-sale
securitiesare based on
quoted market prices as of the balance sheet date. For certain
instruments, fair value is estimated by obtaining quotes from independent
dealers.
Loans:
Fair
values are estimated for portfolios
of loans with similar financial characteristics. The
fair value of performing loans has
been estimated by discounting expected future cash flows. The discount rate
used
in these calculations is derived from the Treasury yield curve adjusted for
credit quality, operating expense and prepayment option price, and is calculated
by discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based on the Company’s
historical experience with repayments for each loan classification, modified
as
required by an estimate of the effect of current economic and lending
conditions.
Fair
value for significant nonperforming
loans is based on recent external appraisals. If appraisals are not available,
estimated cash flows are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit risk,
cash flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
Bank
Owned
Life
Insurance:
The
carrying value of bank owned life
insurance approximates fair value based on applicable redemption
provisions.
Regulatory
Stock:
The
carrying value of regulatory stock
approximates fair value based on applicable redemption
provisions.
Deposits:
The
fair value of deposits with no
stated maturity, such as noninterest-bearing demand deposits, savings and NOW
accounts, and money market accounts, is equal to the amount payable on demand.
The fair value of certificates of deposit is based on the discounted value
of
contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
The
deposits’ fair value estimates do
not include the benefit that results from the low-cost funding provided by
the
deposit liabilities compared to the cost of borrowing funds in the market,
commonly referred to as the core deposit intangible.
Borrowed
Funds:
Rates
available to the Company for
borrowed funds with similar terms and remaining maturities are used to estimate
the fair value of borrowed funds.
16.
CONDENSED FINANCIAL INFORMATION -
PARENT COMPANY ONLY
CITIZENS
FINANCIAL SERVICES, INC.
|
CONDENSED BALANCE
SHEET
|
|
|
December
31,
|
(in
thousands)
|
2007
|
2006
|
Assets:
|
|
|
Cash
|
$ 5,117
|
$ 5,798
|
Investment
in subsidiary:
|
|
|
First
Citizens National Bank
|
50,164
|
44,644
|
Other
assets
|
771
|
653
|
Total
assets
|
$ 56,052
|
$ 51,095
|
|
|
|
Liabilities:
|
|
|
Other
liabilities
|
$ 24
|
$ 95
|
Borrowed
funds
|
7,500
|
7,500
|
Total
liabilities
|
7,524
|
7,595
|
Stockholders'
equity
|
48,528
|
43,500
|
Total
liabilities and stockholders' equity
|
$ 56,052
|
$ 51,095
|
CITIZENS
FINANCIAL SERVICES, INC.
|
CONDENSED STATEMENT
OF INCOME
|
|
Year
Ended December 31,
|
(in
thousands)
|
2007
|
2006
|
2005
|
Dividends
from:
|
|
|
|
Bank
subsidiary
|
$ 3,175
|
$ 3,038
|
$ 2,825
|
Available-for-sale
securities
|
12
|
2
|
-
|
Total
income
|
3,187
|
3,040
|
2,825
|
Expenses
|
563
|
551
|
470
|
Income
before equity
|
|
|
|
in
undistributed earnings
|
|
|
|
of
subsidiary
|
2,624
|
2,489
|
2,355
|
Equity
in undistributed
|
|
|
|
earnings
- First Citizens National Bank
|
4,112
|
3,311
|
2,919
|
Net
income
|
$ 6,736
|
$ 5,800
|
$ 5,274
|
CITIZENS
FINANCIAL SERVICES, INC.
|
STATEMENT
OF CASH FLOWS
|
|
Year
Ended December 31,
|
(in
thousands)
|
2007
|
2006
|
2005
|
Cash
flows from operating activities:
|
|
|
|
Net
income
|
$ 6,736
|
$ 5,800
|
$ 5,274
|
Adjustments
to reconcile net income to net
|
|
|
|
cash
provided by operating activities:
|
|
|
|
Equity
in undistributed earnings of subsidiaries
|
(4,112)
|
(3,311)
|
(2,919)
|
Other,
net
|
18
|
(18)
|
(11)
|
Net
cash provided by operating activities
|
2,642
|
2,471
|
2,344
|
Cash
flows from investing activities:
|
|
|
|
Purchases
of available-for-sale securities
|
(226)
|
(104)
|
-
|
Net
cash used in investing activities
|
(226)
|
(104)
|
-
|
Cash
flows from financing activities:
|
|
|
|
Cash
dividends paid
|
(2,550)
|
(2,442)
|
(2,335)
|
Purchase
of treasury stock
|
(567)
|
(1,222)
|
(463)
|
Stock
awards
|
20
|
-
|
-
|
Net
cash used in financing activities
|
(3,097)
|
(3,664)
|
(2,798)
|
Net
decrease in cash
|
(681)
|
(1,297)
|
(454)
|
Cash
at beginning of year
|
5,798
|
7,095
|
7,549
|
Cash
at end of year
|
$ 5,117
|
$ 5,798
|
$ 7,095
|
17.
CONSOLIDATED
CONDENSED
QUARTERLY DATA(UNAUDITED)
(in
thousands, except share data)
|
|
Three
Months Ended,
|
|
2007
|
Mar
31
|
Jun
30
|
Sep
30
|
Dec
31
|
Interest
income
|
$ 8,686
|
$ 8,899
|
$ 9,179
|
$ 9,260
|
Interest
expense
|
4,235
|
4,236
|
4,294
|
4,157
|
Net
interest income
|
4,451
|
4,663
|
4,885
|
5,103
|
Provision
for loan losses
|
120
|
45
|
60
|
140
|
Non-interest
income
|
1,127
|
1,591
|
1,154
|
1,242
|
Investment
securities gains (losses), net
|
-
|
-
|
24
|
(53)
|
Non-interest
expenses
|
3,778
|
3,956
|
3,788
|
3,792
|
Income
before provision for income taxes
|
1,680
|
2,253
|
2,215
|
2,360
|
Provision
for income taxes
|
300
|
493
|
461
|
518
|
Net
income
|
$ 1,380
|
$ 1,760
|
$ 1,754
|
$ 1,842
|
Earnings
Per Share
|
$ 0.48
|
$ 0.62
|
$ 0.62
|
$ 0.65
|
|
|
|
|
|
|
|
Three
Months Ended,
|
|
2006
|
Mar
31
|
Jun
30
|
Sep
30
|
Dec
31
|
Interest
income
|
$ 7,631
|
$ 8,076
|
$ 8,383
|
$ 8,761
|
Interest
expense
|
3,264
|
3,598
|
3,916
|
4,175
|
Net
interest income
|
4,367
|
4,478
|
4,467
|
4,586
|
Provision
for loan losses
|
60
|
60
|
105
|
105
|
Non-interest
income
|
1,138
|
1,186
|
1,208
|
1,180
|
Investment
securities gains (losses), net
|
(6)
|
5
|
5
|
-
|
Non-interest
expenses
|
3,891
|
3,737
|
3,698
|
3,701
|
Income
before provision for income taxes
|
1,548
|
1,872
|
1,877
|
1,960
|
Provision
for income taxes
|
272
|
386
|
329
|
470
|
Net
income
|
$ 1,276
|
$ 1,486
|
$ 1,548
|
$ 1,490
|
Earnings
Per Share
|
$ 0.44
|
$ 0.52
|
$ 0.54
|
$ 0.52
|
18. ACQUISITIONS
On
December 17, 2005, the Bank acquired
the Hannibal branch of the Fulton Savings Bank located in Hannibal, New
York. Simultaneous with the purchase, the branch was closed and
relocated to Wellsville, New York. The acquisition included retail
deposits of $425,000 and certain fixed assets. Costs associated with
this purchase totaled
$240,000. The
consolidated operating results include these expenses as well as operations
of the de novo office in Wellsville
from the date of
start-up.
REPORT
OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To
the
Stockholders and the Board of Directors of
Citizens
Financial Services, Inc.
We
have
audited the consolidated balance sheet of Citizens Financial Services, Inc.
and
subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of income, changes in stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2007. These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Citizens Financial Services,
Inc. and subsidiaries as of December 31, 2007 and 2006, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.
We
were
not engaged to examine management's assertion about the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2007
included in the accompanying Management’s Annual Report on Internal Control over
Financial Reporting and, accordingly, we do not express an opinion thereon.
/s/
S.R.
Snodgrass, A.C.
By:
S.R.
Snodgrass, A.C.
Wexford,
Pennsylvania
(External
Auditor)
Date:
March 5,
2008
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Management
of the Company is responsible
for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. The Company’s internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Because
of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because
of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
A
material weakness is a significant
deficiency (as defined in Public Company Accounting Oversight Board Auditing
Standard No. 2), or a combination of significant deficiencies, that results
in there being more than a remote likelihood that a material misstatement of
the
annual or interim financial statements will not be prevented or detected on
a
timely basis by management or employees in the normal course by management
or
employees in the normal course of performing their assigned
functions.
Management
assessed the effectiveness of
the Company’s internal control over financial reporting as of December 31,
2007. In making this assessment, management used the criteria set forth by
the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on this assessment,
management believes that,
as of December 31, 2007, the Company’s internal control over financial
reporting was effective.
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.
/s/
Randall
E. Black
By:
Randall E. Black
President
(Principal
Executive
Officer)
Date:
March 6, 2008
/s/
Mickey
L. Jones
By:
Mickey L. Jones
Treasurer
(Principal
Financial & Accounting
Officer)
Date:
March 6, 2008
ITEM
9 – CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM
9A(T) –
CONTROLS AND PROCEDURES.
(a)
|
Disclosure
Controls and Procedures
|
The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company’s disclosure controls and procedures
were effective for the purpose of ensuring that the information required to
be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required
disclosure.
(b)
|
Internal
Controls Over Financial Reporting
|
|
Management’s
annual report on internal control over financial reporting is incorporated
herein by reference to Item 8 - the Company’s audited Consolidated
Financial Statements in this Annual Report on Form 10-K
|
|
(c)
|
Changes
to Internal Control Over Financial Reporting
|
There
were no changes in the Company’s internal control over financial reporting
during the three months ended December 31, 2007 that have materially affected,
or are reasonable likely to materially affect, the Company’s internal control
over financial reporting.
ITEM
9B – OTHER INFORMATION.
None.
PART
III
ITEM
10 – DIRECTORS, EXECUTIVE
OFFICERS AND
CORPORATE GOVERNANCE
Directors
For information relating to
the
directors of the Company, the section captioned “Proposal
1.
Election of Directors”in
the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders is
incorporated by reference.
Executive
Officers
For information relating to
officers of the Company, the section captioned “Proposal
1.
Election of Directors”in
the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders is
incorporated by reference.
Compliance
with Section 16(a) of the
Exchange Act
For information regarding
compliance with Section 16(a) of the Exchange Act, the section captioned
“Other
Information Relating to Directors and Executive Officers - Section 16(a)
Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for
the
2008 Annual Meeting of Stockholders are incorporated by
reference.
Disclosure
of Code of
Ethics
The Company has adopted a Code
of
Ethics that applies to directors, officers and employees of the Company and
the
Bank. A copy of the Code of Ethics is posted on the Company’s website
at www.firstcitizensbank.com. The Company intends to satisfy the
disclosure requirement under Item 10 of Form 8-K regarding an amendment to,
or a
waiver from, a provision of its Code of Ethics by posting such information
on
its website.
Corporate
Governance
For information regarding the
audit committee and its composition and the audit committee financial expert,
the section captioned “Corporate
Governance – Committees of the Board of Directors”in the Company’s Proxy Statement for
the
2008 Annual Meeting of Stockholders is incorporated by
reference.
ITEM
11 – EXECUTIVE
COMPENSATION
Executive
Compensation
For information regarding
executive compensation, the sections captioned “Executive
and
Director Compensation” in
the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders are
incorporated by reference.
ITEM
12 – SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
(a)
|
Security
Ownership of Certain
Beneficial Owners Information required by this item is incorporated
herein
by reference to the section captioned “Stock
Ownership”in the
Company’s Proxy Statement for the 2008 Annual Meeting of
Stockholders.
|
(b)
|
Security
Ownership of Management
Information required by this item is incorporated herein by reference
to
the section captioned “Stock
Ownership”in the
Company’s Proxy Statement for the 2008 Annual Meeting of
Stockholders.
|
Management
of the Company knows of no
arrangements, including any pledge by any person or securities of the Company,
the operation of which may at a subsequent date result in a change in control
of
the registrant.
(d) Equity
Compensation Plan
Information
|
The
following table sets forth
information as of December 31, 2007 about Company common stock that
may be
issued under the Company’s 2006 Restricted Stock Plan. The plan
was approved by the Company’s
stockholders.
|
Plan
Category
|
|
Number
of securities to be issued
upon the exercise of outstanding options, warrants and
rights
|
|
Weighted-average
exercise price of
outstanding options, warrants and rights
|
|
Number
of securities remaining
available for future issuance under equity compensation plans (excluding
securities reflected in the first column)
|
|
|
|
|
|
|
|
Equity
compensation plans approved
by security holders
|
|
|
|
|
|
96,586
|
|
|
|
|
|
|
|
Equity
compensation plans not
approved by security holders
|
|
n/a
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
96,586
|
ITEM
13 – CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain
Relationships and Related
Transactions
For information regarding certain
relationships and related transactions, the section captioned “Other
Information
Relating to Directors and Executive Officers - Transactions with
Management”in the Company’s
Proxy Statement for the 2008 Annual Meeting of Stockholders is incorporated
by
reference.
Director
Independence
For information regarding director
independence, the section captioned “Corporate
Governance – Director Independence”in the Company’s Proxy Statement for
the
2008 Annual Meeting of Stockholders is incorporated by
reference.
ITEM
14 – PRINCIPAL
ACCOUNTANT FEES AND
SERVICES
For
information regarding the principal
accountant fees and expenses the section captioned “Proposal
2.
Ratification of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for
the 2008 Annual Meeting of Stockholders is incorporated by
reference.
PART
IV
ITEM
15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The
following documents are filed as a part of this report:
1. The
following financial statements are
incorporated by reference in Item 8:
Report
of Independent Registered Public
Accounting Firm
Consolidated
Balance Sheet as of
December 31, 2007 and 2006
Consolidated
Statement of Income for the
Years Ended December 31, 2007, 2006 and 2005
Consolidated
Statement of Changes in
Stockholders' Equity for the Years Ended December 31, 2007, 2006 and2005
Consolidated
Statement of Cash Flows for
the Years Ended December 31, 2007, 2006 and 2005
Notes
to Consolidated Financial
Statements
2. All
financial statement schedules are omitted because the required information
is
either not applicable, not required or isshown in the respective financial
statement or in the notes thereto, which are incorporated by reference at
subsection(a)(1) of this item.
3.
The following
Exhibits are filed herewith, or incorporated by reference as a part of this
report.
3.1
|
|
Articles
of Incorporation of
Citizens Financial Services, Inc., as amended(1)
|
3.2
|
|
Bylaws
of Citizens Financial
Services, Inc.(2)
|
4
|
|
Instrument
defining the rights of
security holders (3)
|
10.1
|
|
Amended
and Restated Executive
Employment Agreement between Citizens Financial Services, Inc., First
Citizens National Bank and Randall E. Black(4)
|
10.2
|
|
Consulting
and Non-Compete
Agreement between Citizens Financial Services, Inc., First Citizens
National Bank and Richard E. Wilber(5)
|
10.3
|
|
Citizens
Financial Services, Inc.
Directors’ Deferred Compensation Plan(6)
|
10.4
|
|
Citizens
Financial Services, Inc.
Directors’ Life Insurance Program(7)
|
10.5
|
|
Citizens
Financial Services, Inc.
2006 Restricted Stock Plan(8)
|
21
|
|
List
of
Subsidiaries
|
23
|
|
Consent
of S.R. Snodgrass, A.C.,
Certified Public Accountants
|
31.1
|
|
Rule
13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
|
31.2
|
|
Rule
13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
|
32.1
|
|
Section
1350 Certification of
Chief Executive Officer
|
32.2
|
|
Section
1350 Certification of
Chief Financial Officer
|
______________________
(1)
Incorporated by reference to
Exhibit 3(i) to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000, as filed with the Commission on May 11,
2000.
(2)
Incorporated by reference to
Exhibit 3(ii) to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2003, as filed with the Commission on April 29,
2004.
(3)
Incorporated by reference to
Exhibit 4 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, as filed with the commission on March 14,
2006.
(4)
Incorporated by reference to
Form
8-K filed with the Commission on September 19, 2006.
(5)
Incorporated by Reference to
Exhibit 10 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2003, as filed with the Commission on March 18,
2004.
(6)
Incorporated by reference to
Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2004, as filed with the Commission on March 14,
2005.
(7)
Incorporated by reference to
Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2004, as filed with the Commission on March 14,
2005.
(8)
Incorporated by reference to
Exhibit 4.1 to the Company’s Form S-8, as filed with the Commission on August
29, 2006.
(b) See
Item
15(a)(3).
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
Citizens
Financial Services, Inc.
(Registrant)
/s/
Randall E. Black
By:
Randall E. Black
President
(Principal
Executive Officer)
Date:
March 6,
2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
and
Capacity |
Date |
/s/
Randall E. Black
Randall E. Black, President, Director
(Principal Executive Officer)
|
March
6,
2008 |
/s/ Carol J. Tama
Carol J. Tama, Director
|
March
6,
2008 |
/s/ R. Lowell Coolidge
R. Lowell Coolidge, Director
|
March
6,
2008 |
/s/ Rudolph J. van der Hiel
Rudolph J. van der Hiel, Director
|
March
6,
2008 |
/s/ Robert W. Chappell
Robert W. Chappell, Director
|
March
6,
2008 |
/s/ Mark L. Dalton
Mark L. Dalton, Director
|
March
6,
2008 |
/s/ R. Joseph Landy
R. Joseph Landy, Director
|
March
6,
2008 |
/s/ Roger C. Graham, Jr.
Roger C. Graham, Director
|
March
6,
2008 |
/s/ E. Gene Kosa
E. Gene Kosa, Director
|
March
6,
2008 |
/s/ Rinaldo A. DePaola
Rinaldo A. DePaola, Director
|
March
6,
2008 |
/s/
Mickey L. Jones
Mickey
L. Jones, Treasurer
(Principal
Financial & Accounting Officer)
|
March
6,
2008 |