form10-k2008.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, 2008
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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, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer 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. $54,961,808 as of June 30, 2008.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date. 2,847,371 as of February 18,
2009
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information required by Part III is incorporated by reference to the
Registrant’s Definitive Proxy Statement for the 2009 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 –
5
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ITEM
1A – RISK FACTORS
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6 –
8
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ITEM
1B – UNRESOLVED STAFF COMMENTS
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8
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ITEM
2 – PROPERTIES
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8
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ITEM
3 – LEGAL PROCEEDINGS
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8
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ITEM
4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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8
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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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9 –
10
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ITEM
6 – SELECTED FINANCIAL DATA
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11
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ITEM
7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
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12
– 34
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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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35
– 70
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ITEM
9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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71
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ITEM
9A(T) – CONTROLS AND PROCEDURES
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71
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ITEM
9B– OTHER INFORMATION
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71
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PART
III
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ITEM
10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
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72
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ITEM
11 – EXECUTIVE COMPENSATION
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72
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ITEM
12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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72
– 73
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ITEM
13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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73
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ITEM
14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
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73
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PART
IV
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ITEM
15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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74
– 75
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SIGNATURES
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76
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PART
I
ITEM 1 –
BUSINESS.
CITIZENS
FINANCIAL SERVICES, INC.
Citizens
Financial Services, Inc. (the “Company”), a Pennsylvania corporation, was
incorporated on April 30, 1984. The Company is registered with the Board of
Governors of the Federal Reserve System (“FRB”) 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. The Company is
subject to regulation, supervision and examination by the FRB. In
general, the Company is limited to owning or controlling banks and engaging in
such other activities as are properly incident thereto.
Our
Company is primarily engaged in 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) and opened for business on December 19,
2005. On November 21, 2008, the Mansfield, Pennsylvania branch of The
Elmira Savings Bank was acquired.
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. We are dependent geographically upon the economic conditions
in north central Pennsylvania and the southern tier of New York. In
addition to the main office, the Bank has 16 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 through the Bank’s
wholly owned insurance agency subsidiary, First Citizens Insurance Agency,
Inc.
As of
December 31, 2008, the Bank employed 159 full time employees and 29 part-time
employees, resulting in 169 full time equivalent employees at our corporate
offices and other banking locations.
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, and the interest
that may be charged on loans, 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 helping to 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 “Satisfactory.” 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 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 and no dividend may be paid which would make the Bank undercapitalized
after the dividend.
Under
these policies and subject to the restrictions applicable to the Bank, the Bank
could have declared, during 2008, without prior regulatory approval, aggregate
dividends of approximately $8.1 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
deposits of the Bank 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. Under the FDIC’s risk-based assessment
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, with less risky institutions paying lower
assessments.
For 2008, assessments ranged from five
to forty-three basis points of assessable deposits. Due to losses
incurred by the Deposit Insurance Fund from failed institutions in 2008, and
anticipated future losses, the FDIC has adopted, pursuant to a Restoration Plan
to replenish the fund, an across the board seven basis point increase in the
assessment range for the first quarter of 2009. The FDIC has adopted
further refinements to its risk-based
assessment
system that are effective April 1, 2009 and would effectively make the range
seven to 77 1/2 basis points. The FDIC may adjust the scale uniformly
from one quarter to the next, except that no adjustment can deviate more than
three basis points from the base scale without notice and comment
rulemaking. No institution may pay a dividend if in default of the
federal deposit insurance assessment. The Federal Deposit Insurance
Corporation has also adopted an interim final rule that would impose a special
emergency assessment of up to 20 basis points of assessable deposits, as of June
30, 2009, in order to cover the losses to the Deposit Insurance
Fund.
Due to the recent difficult economic
conditions, deposit insurance per account owner has been raised to $250,000 for
all types of accounts until January 1, 2010. In addition, the FDIC
adopted an optional Temporary Liquidity Guarantee Program by which, for a fee,
non-interest bearing transaction accounts would receive unlimited insurance
coverage until December 31, 2009 and certain senior unsecured debt issued by
institutions and their holding companies between October 13, 2008 and June 30,
2009 would be guaranteed by the FDIC through June 30, 2012. The Bank
made the business decision to participate in the unlimited non-interest bearing
transaction account coverage and the Bank and the Company opted to participate in the
unsecured debt guarantee program.
The
Federal Deposit Insurance Reform Act of 2005 (“Reform Act”) 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
and the remaining $209,000 in 2008. The Reform Act also provided for
the possibility that the FDIC may 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, 2008
averaged 1.12 basis points of assessable deposits.
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.
RECENT
LEGISLATION
Troubled Asset
Relief Program. On October 3, 2008, the Emergency
Economic Stabilization Act of 2008 (“EESA”) was enacted establishing the
Troubled Asset Relief Program (“TARP”). On October 14, 2008,
Treasury announced its intention to inject capital into U.S. financial
institutions under the TARP Capital Purchase Program (“CPP”) and since has
injected capital into many financial institutions. The Board of
Directors of the Company determined not to participate in the CPP.
Temporary
Liquidity Guarantee Program. On November 21,
2008, the Board of Directors of the FDIC adopted a final rule relating to the
Temporary Liquidity Guarantee Program (“TLG Program”). The
TLG Program was announced by the FDIC on October 14, 2008, preceded by
the determination of systemic risk by Treasury, as an initiative to counter the
system-wide crisis in the nation’s financial sector. Under the TLG Program
the FDIC will (i) guarantee, through the earlier of maturity or
June 30, 2012, certain newly issued senior unsecured debt issued by
participating institutions and (ii) provide full FDIC deposit insurance
coverage for non-interest bearing transaction deposit accounts, Negotiable Order
of Withdrawal accounts paying less than 0.5% interest per annum and Interest on
Lawyers Trust Accounts held at participating FDIC-insured institutions through
December 31, 2009. Coverage under the TLG Program was available for
the first 30 days without charge. The fee assessment for coverage of senior
unsecured debt ranges from 50 basis points to 100 basis points per
annum, depending on the initial maturity of the debt. The fee assessment for
deposit insurance coverage is 10 basis points per quarter on amounts in
covered accounts exceeding $250,000. The Company elected to participate in both
guarantee programs.
American Recovery
and Reinvestment Act of 2009. On February 17, 2009,
the American Recovery and Reinvestment Act of 2009 (“ARRA”) was
enacted. The ARRA, commonly known as the economic stimulus or
economic recovery package, includes a wide variety of programs intended to
stimulate the economy and provide for extensive infrastructure, energy, health,
and education needs. In addition, ARRA imposes certain new executive
compensation and corporate expenditure limits on all current and future TARP
recipients until the institution has repaid Treasury, which is now permitted
under ARRA without penalty and without the need to raise new capital, subject to
Treasury’s consultation with the recipient’s appropriate regulatory
agency.
Future
Legislation. Various
legislation affecting financial institutions and the financial industry is from
time to time introduced in Congress. Such legislation may change
banking statutes and the operating environment of the Company and its
subsidiaries in substantial and unpredictable ways, and could increase or
decrease the cost of doing business, limit or expand permissible activities or
affect the competitive balance depending upon whether any of this potential
legislation will be enacted, and if enacted, the effect that it or any
implementing regulations, would have on the financial condition or results of
operations of the Company or any of its subsidiaries. With the recent enactments
of EESA and ARRA, the nature and extent of future legislative and regulatory
changes affecting financial institutions is very unpredictable at this
time.
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.
The current economic environment
poses significant challenges for us and could adversely affect our financial
condition and results of operations.
We
currently are operating in a challenging and uncertain economic environment,
both nationally and in the local markets that we serve. Financial institutions
continue to be affected by sharp declines in financial and real estate
values. Continued declines in real estate values and home sales, and
an increase in the financial stress on borrowers stemming from an uncertain
economic environment, including rising unemployment, could have an adverse
effect on our borrowers or their customers, which could adversely impact the
repayment of the loans we have made. The overall deterioration in economic
conditions also could subject us to increased regulatory scrutiny. In addition,
a prolonged recession, or further deterioration in local economic conditions,
could result in an increase in loan delinquencies; an increase in problem assets
and foreclosures; and a decline in the value of the collateral for our
loans. Furthermore, a prolonged recession or further deterioration in
local economic conditions could drive the level of loan losses beyond the level
we have provided for in our loan loss allowance, which could necessitate our
increasing our provision for loans losses, which would reduce our
earnings. Additionally, the demand for our products and services
could be reduced, which would adversely impact our liquidity and the level of
revenues we generate.
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.
If
we conclude that the decline in value of any of our investment securities is
other than temporary, we are required to write down the value of that security
through a charge to earnings.
We review our investment securities
portfolio monthly and at each quarter-end reporting period to determine whether
the fair value is below the current carrying value. When the fair value of any
of our investment securities has declined below its carrying value, we are
required to assess whether the decline is other than temporary. If we conclude
that the decline is other than temporary, we are required to write down the
value of that security through a charge to earnings. As of December 31, 2008,
our investment portfolio included available for sale investment securities with
a carrying value of $171.4 million and an estimated fair value of $174.1
million, which included unrealized losses on 47 securities totaling $1.4
million. Changes in the expected cash flows of these securities
and/or prolonged price declines may result in our concluding in future periods
that the impairment of these securities is other than temporary, which would
require a charge to earnings to write down theses securities to their fair
value. Any charges for other-than-temporary impairment would not impact cash
flow, tangible capital or liquidity.
Future
FDIC assessments will hurt our earnings.
In February 2009, the FDIC adopted an
interim final rule imposing a special assessment on all insured institutions due
to recent bank and savings association failures. The interim final
rule would impose an emergency assessment of up to 20 basis points of assessable
deposits as of June 30, 2009. The assessment will be collected on
September 30, 2009. The special assessment will negatively impact the
Company’s earnings by up to $1,100,000 and the Company expects that non-interest
expense will increase by up to $1,800,000 in 2009 compared to 2008 due to this
increase in FDIC insurance. In addition, the interim rule would also
permit the FDIC to impose additional emergency special assessments after June
30, 2009, of up to 10 basis points per quarter if necessary to maintain public
confidence in federal deposit insurance or as a result of deterioration in the
deposit insurance fund reserve ratio due to institution failures. Any
additional emergency special assessment imposed by the FDIC will further hurt
the Company’s earnings.
The
market price of our common stock may be materially adversely affected by market
volatility.
Many
publicly traded financial services companies have recently experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance or prospects of such companies. We may
experience market fluctuations that are not directly related to our operating
performance but are influenced by the market’s perception of the state of
the financial services industry in general and, in particular, the market’s
assessment of general credit quality conditions, including default and
foreclosure rates in the industry.
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 non-bank 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, as amended, and the rules and regulations
issued thereunder. 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
2008 and our auditors will have to attest to our assessment beginning with the
twelve months ended December 31, 2009. This resulted in additional
expenses in 2008 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.
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 owned sixteen banking facilities and leased two other
facilities as of December 31, 2008. Subsequent to December 31, 2008,
one facility was sold and leased back. All buildings owned by the
Bank are free of any liens or encumbrances.
The net
book value of owned properties and leasehold improvements totaled $11,996,639 as
of December 31, 2008. 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,
2008, 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 in Note 13
of the consolidated financial statements).
|
Dividends
|
|
|
Dividends
|
|
2008
|
paid
|
2007
|
paid
|
|
High
|
Low
|
per
share
|
High
|
Low
|
per
share
|
First
quarter
|
$ 21.78
|
$ 17.87
|
$ 0.230
|
$ 22.57
|
$ 21.04
|
$ 0.220
|
Second
quarter
|
23.27
|
20.05
|
0.235
|
23.52
|
20.94
|
0.225
|
Third
quarter
|
24.50
|
21.25
|
0.235
|
22.75
|
20.25
|
0.225
|
Fourth
quarter
|
21.00
|
17.25
|
0.290
|
21.75
|
19.35
|
0.230
|
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 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 “Note 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 25, 2008 to all shareholders of
record as of July 11, 2008.
As of February 11, 2009, the Company
had approximately 1,535 stockholders of record. The computation of
stockholders of record excludes individual participants in securities positions
listings. The following table presents information regarding the Company’s stock
repurchases during the three months ended December 31, 2008:
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)
|
|
|
|
|
|
10/1/08
to 10/31/08
|
-
|
-
|
-
|
65,643
|
11/1/08
to 11/30/08
|
1,066
|
$19.98
|
1,066
|
64,577
|
12/1/08
to 12/31/08
|
277
|
$19.50
|
277
|
64,300
|
Total
|
1,343
|
$19.88
|
1,343
|
64,300
|
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, 2008:
(in
thousands, except share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
Interest
income
|
$ 37,238
|
$ 36,024
|
$ 32,851
|
$ 28,699
|
$ 26,606
|
Interest
expense
|
14,058
|
16,922
|
14,953
|
11,000
|
9,235
|
Net
interest income
|
23,180
|
19,102
|
17,898
|
17,699
|
17,371
|
Provision
for loan losses
|
330
|
365
|
330
|
60
|
-
|
Net
interest income after provision
|
|
|
|
|
|
for
loan losses
|
22,850
|
18,737
|
17,568
|
17,639
|
17,371
|
Non-interest
income
|
5,245
|
5,114
|
4,712
|
4,688
|
4,527
|
Investment
securities gains (losses), net
|
(4,089)
|
(29)
|
4
|
-
|
(235)
|
Non-interest
expenses
|
15,877
|
15,314
|
15,027
|
15,387
|
14,922
|
Income
before provision for income taxes
|
8,129
|
8,508
|
7,257
|
6,940
|
6,741
|
Provision
for income taxes
|
1,224
|
1,772
|
1,457
|
1,666
|
1,474
|
Net
income
|
$ 6,905
|
$ 6,736
|
$ 5,800
|
$ 5,274
|
$ 5,267
|
|
|
|
|
|
|
Return
on Assets (net income to average total assets)
|
1.13%
|
1.16%
|
1.05%
|
1.04%
|
1.09%
|
Return
on Equity (net income to average total equity)
|
13.51%
|
14.38%
|
13.21%
|
12.63%
|
13.40%
|
Dividend
Payout Ratio (dividends declared divided by net income)
|
40.77%
|
37.86%
|
42.10%
|
44.28%
|
41.90%
|
Equity
to Asset Ratio (average equity to average total assets,
|
8.33%
|
8.10%
|
7.98%
|
8.20%
|
8.15%
|
excluding
other comprehensive income)
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
Net
income (1)
|
$ 2.42
|
$ 2.35
|
$ 2.00
|
$ 1.79
|
$ 1.78
|
Cash
dividends (1)
|
0.99
|
0.90
|
0.84
|
0.79
|
0.75
|
Book
value (1) (2)
|
18.52
|
17.13
|
15.73
|
14.71
|
13.77
|
|
|
|
|
|
|
Total
investments
|
$ 174,139
|
$ 120,802
|
$ 109,743
|
$ 102,602
|
$ 95,747
|
Loans,
net (3)
|
428,436
|
419,182
|
410,897
|
379,139
|
355,774
|
Total
assets (3)
|
668,612
|
591,029
|
572,168
|
529,241
|
499,347
|
Total
deposits (3)
|
546,680
|
456,028
|
446,515
|
429,799
|
419,074
|
Stockholders'
equity
|
52,770
|
48,528
|
43,500
|
41,561
|
40,789
|
|
|
|
|
|
|
(1)
Amounts were adjusted to reflect stock dividends.
|
|
|
|
|
|
(2)
Calculation excludes accumulated other comprehensive
income.
|
|
|
(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.
|
|
|
|
|
Amounts
in 2008 reflect the branch acquisition in the fourth quarter of
2008.
|
|
|
|
|
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 the Company, the
Bank, First Citizens Insurance Agency, Inc. or the Company on a consolidated
basis. 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 the Company. Our Company’s
consolidated financial condition and results of operations consist almost
entirely of the Bank’s 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 17 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 New York, our
office is in Wellsville.
On
November 21, 2008, the Bank acquired the Mansfield, Pennsylvania branch of the
Elmira Savings Bank, ESB. The acquisition provided the Bank with
approximately 40% of the deposit market share in Tioga County (see Note 18 to
the consolidated financial statements).
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 with the SEC, 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.
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, 2008,
non-deposit investment products under management totaled $34.5
million. Additionally, as summarized in the table below, the Trust
Department had assets under management as of December 31, 2008 and 2007 of $74.3
million and $94.4 million, respectively. The decrease is primarily
due to a decline in the fair value of plan assets given the overall market
decline in equity securities and mutual funds during 2008.
(market
values - in thousands)
|
2008
|
2007
|
INVESTMENTS:
|
|
|
Bonds
|
$ 20,842
|
$ 21,081
|
Stock
|
14,771
|
23,014
|
Savings
and Money Market Funds
|
10,068
|
9,907
|
Mutual
Funds
|
26,614
|
38,177
|
Mortgages
|
1,070
|
1,098
|
Real
Estate
|
978
|
978
|
Miscellaneous
|
1
|
12
|
Cash
|
3
|
106
|
TOTAL
|
$ 74,347
|
$ 94,373
|
ACCOUNTS:
|
|
|
Trusts
|
24,345
|
30,306
|
Guardianships
|
857
|
682
|
Employee
Benefits
|
26,722
|
34,944
|
Investment
Management
|
21,995
|
27,791
|
Custodial
|
428
|
650
|
TOTAL
|
$ 74,347
|
$ 94,373
|
Our
Financial Consultants offer full service brokerage services throughout the
Bank’s market area. Appointments can be made at any 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, 2008 was $6,905,000, which
represents an increase of $169,000, or 2.5%, when compared to the 2007 related
period. Net income for the twelve months ended December 31, 2007
totaled $6,736,000, an increase of $936,000 from the 2006 related
period. Earnings per share were $2.42, $2.35 and $2.00 for the years
ended 2008, 2007 and 2006, respectively.
The
following table sets forth certain performance ratios of our Company for the
periods indicated:
|
2008
|
2007
|
2006
|
Return
on Assets (net income to average total assets)
|
1.13%
|
1.16%
|
1.05%
|
Return
on Equity (net income to average total equity)
|
13.51%
|
14.38%
|
13.21%
|
Dividend
Payout Ratio (dividends declared divided by net income)
|
40.76%
|
37.86%
|
42.10%
|
Equity
to Asset Ratio (average equity to average total assets, excluding other
comprehensive income)
|
8.33%
|
8.10%
|
7.98%
|
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.
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)
|
|
|
|
2008 |
2007 |
2006 |
|
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
|
7,118
|
57
|
0.80
|
102
|
5
|
5.10
|
4
|
-
|
5.14
|
Total
short-term investments
|
7,118
|
57
|
0.80
|
102
|
5
|
5.10
|
4
|
-
|
5.14
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
99,872
|
5,013
|
5.02
|
95,417
|
4,702
|
4.93
|
86,198
|
3,892
|
4.52
|
Tax-exempt
(3)
|
36,016
|
2,235
|
6.21
|
24,173
|
1,451
|
6.00
|
22,952
|
1,368
|
5.96
|
Total
investment securities
|
135,888
|
7,248
|
5.33
|
119,590
|
6,153
|
5.14
|
109,150
|
5,260
|
4.82
|
Loans:
|
|
|
|
|
|
|
|
|
|
Residential
mortgage loans
|
211,958
|
15,726
|
7.42
|
211,171
|
15,640
|
7.41
|
209,305
|
14,842
|
7.09
|
Commercial
& agricultural loans
|
156,873
|
11,872
|
7.57
|
147,921
|
11,740
|
7.94
|
134,813
|
10,353
|
7.68
|
Loans
to state & political subdivisions
|
47,766
|
2,998
|
6.28
|
45,259
|
2,751
|
6.08
|
43,642
|
2,604
|
5.97
|
Other
loans
|
11,849
|
1,079
|
9.11
|
12,426
|
1,150
|
9.25
|
12,747
|
1,141
|
8.95
|
Loans,
net of discount (2)(3)(4)
|
428,446
|
31,675
|
7.39
|
416,777
|
31,281
|
7.51
|
400,507
|
28,940
|
7.23
|
Total
interest-earning assets
|
571,452
|
38,980
|
6.82
|
536,469
|
37,439
|
6.98
|
509,661
|
34,200
|
6.71
|
Cash
and due from banks
|
9,548
|
|
|
9,299
|
|
|
9,093
|
|
|
Bank
premises and equipment
|
12,390
|
|
|
12,773
|
|
|
12,415
|
|
|
Other
assets
|
19,756
|
|
|
18,832
|
|
|
18,610
|
|
|
Total
non-interest earning assets
|
41,694
|
|
|
40,904
|
|
|
40,118
|
|
|
Total
assets
|
613,146
|
|
|
577,373
|
|
|
549,779
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
NOW
accounts
|
106,694
|
1,314
|
1.23
|
95,098
|
2,026
|
2.13
|
85,481
|
1,638
|
1.92
|
Savings
accounts
|
41,494
|
153
|
0.37
|
38,443
|
137
|
0.36
|
39,170
|
130
|
0.33
|
Money
market accounts
|
45,073
|
828
|
1.84
|
50,189
|
1,787
|
3.56
|
45,717
|
1,464
|
3.20
|
Certificates
of deposit
|
242,751
|
9,197
|
3.79
|
225,590
|
9,413
|
4.17
|
218,019
|
8,453
|
3.88
|
Total
interest-bearing deposits
|
436,012
|
11,492
|
2.64
|
409,320
|
13,363
|
3.26
|
388,387
|
11,685
|
3.01
|
Other
borrowed funds
|
64,858
|
2,566
|
3.96
|
66,525
|
3,559
|
5.35
|
63,635
|
3,268
|
5.14
|
Total
interest-bearing liabilities
|
500,870
|
14,058
|
2.81
|
475,845
|
16,922
|
3.56
|
452,022
|
14,953
|
3.31
|
Demand
deposits
|
54,438
|
|
|
48,981
|
|
|
49,324
|
|
|
Other
liabilities
|
6,735
|
|
|
6,783
|
|
|
4,757
|
|
|
Total
non-interest-bearing liabilities
|
61,173
|
|
|
55,764
|
|
|
54,081
|
|
|
Stockholders'
equity
|
51,103
|
|
|
45,764
|
|
|
43,676
|
|
|
Total
liabilities & stockholders' equity
|
613,146
|
|
|
577,373
|
|
|
549,779
|
|
|
Net
interest income
|
|
24,922
|
|
|
20,517
|
|
|
19,247
|
|
Net
interest spread (5)
|
|
|
4.01%
|
|
|
3.42%
|
|
|
3.40%
|
Net
interest income as a percentage
|
|
|
|
|
|
|
|
|
|
of
average interest-earning assets
|
|
|
4.36%
|
|
|
3.82%
|
|
|
3.78%
|
Ratio
of interest-earning assets
|
|
|
|
|
|
|
|
|
|
to
interest-bearing liabilities
|
|
|
1.14
|
|
|
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, 2008, 2007 and 2006, respectively:
|
2008
|
2007
|
2006
|
Interest
and dividend income
|
|
|
|
from
investment securities (non-tax adjusted)
|
$ 6,528
|
$ 5,626
|
$ 4,750
|
Tax
equivalent adjustment
|
777
|
532
|
510
|
Interest
and dividend income
|
|
|
|
from
investment securities (tax equivalent basis)
|
$ 7,305
|
$ 6,158
|
$ 5,260
|
|
|
|
|
|
|
|
|
|
2008
|
2007
|
2006
|
Interest
and fees on loans (non-tax adjusted)
|
$ 30,710
|
$ 30,398
|
$ 28,101
|
Tax
equivalent adjustment
|
965
|
883
|
839
|
Interest
and fees on loans (tax equivalent basis)
|
$ 31,675
|
$ 31,281
|
$ 28,940
|
|
|
|
|
|
|
|
|
|
2008
|
2007
|
2006
|
Total
interest income
|
$ 37,238
|
$ 36,024
|
$ 32,851
|
Total
interest expense
|
14,058
|
16,922
|
14,953
|
Net
interest income
|
23,180
|
19,102
|
17,898
|
Total
tax equivalent adjustment
|
1,742
|
1,415
|
1,349
|
Net
interest income (tax equivalent basis)
|
$ 24,922
|
$ 20,517
|
$ 19,247
|
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)
|
2008
vs. 2007 (1)
|
2007
vs. 2006 (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
|
$ 53
|
$ (1)
|
$ 52
|
$ 5
|
$ -
|
$ 5
|
Investment
securities:
|
|
|
|
|
|
|
Taxable
|
223
|
88
|
311
|
436
|
374
|
810
|
Tax-exempt
|
733
|
51
|
784
|
73
|
10
|
83
|
Total
investment securities
|
956
|
139
|
1,095
|
509
|
384
|
893
|
Loans:
|
|
|
|
|
|
|
Residential
mortgage loans
|
58
|
28
|
86
|
133
|
665
|
798
|
Commercial
& agricultural loans
|
568
|
(436)
|
132
|
1,031
|
356
|
1,387
|
Loans
to state & political subdivisions
|
155
|
92
|
247
|
97
|
50
|
147
|
Other
loans
|
(53)
|
(18)
|
(71)
|
(26)
|
35
|
9
|
Total
loans, net of discount
|
728
|
(334)
|
394
|
1,235
|
1,106
|
2,341
|
Total
Interest Income
|
1,737
|
(196)
|
1,541
|
1,749
|
1,490
|
3,239
|
Interest
Expense:
|
|
|
|
|
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
NOW
accounts
|
289
|
(1,001)
|
(712)
|
195
|
193
|
388
|
Savings
accounts
|
11
|
5
|
16
|
(3)
|
10
|
7
|
Money
Market accounts
|
(167)
|
(792)
|
(959)
|
150
|
173
|
323
|
Certificates
of deposit
|
1,029
|
(1,245)
|
(216)
|
301
|
659
|
960
|
Total
interest-bearing deposits
|
1,162
|
(3,033)
|
(1,871)
|
643
|
1,035
|
1,678
|
Other
borrowed funds
|
(87)
|
(906)
|
(993)
|
152
|
139
|
291
|
Total
interest expense
|
1,075
|
(3,939)
|
(2,864)
|
795
|
1,174
|
1,969
|
Net
interest income
|
$ 662
|
$ 3,743
|
$ 4,405
|
$ 954
|
$ 316
|
$ 1,270
|
(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.
2008
vs. 2007
Tax
equivalent net interest income for 2008 was $24,922,000 compared with
$20,517,000 for 2007, an increase of $4,405,000 or 21.5%. The
increased volume of interest earning assets of $35.0 million generated an
increase in interest income of $1,737,000. The average rate on
interest earning assets decreased from 6.98% in 2007 to 6.82% in 2008, which had
the effect of decreasing interest income by $196,000.
Total tax
equivalent interest income from investment securities increased $1,095,000 in
2008 from 2007. The average balance of investment securities
increased $16.3 million, which had an effect of increasing interest income by
$956,000 due to volume. Of this amount, $733,000 is from income on
tax-exempt investment securities, where the average balance increased $11.8
million from 2007. The average tax-effected yield on our investment
portfolio increased from 5.14% in 2007 to 5.33% in 2008. This had the
effect of increasing interest income by $139,000 due to rate. The
Company’s strategy in 2008 was to increase the size and duration of our
investment portfolio, given the opportunity that general market conditions
provided, resulting in an increase in the overall yield on our
investments.
Loan
income increased $394,000 in 2008 from 2007. The average balance of
our loan portfolio increased by $11.7 million in 2008 compared to 2007 resulting
in an increase in interest income of $728,000 due to
volume. Offsetting this was a decrease in yield on total loans from
7.51% in 2007 to 7.39% in 2008 resulting in a decrease in interest income of
$334,000 due to rate.
Interest
income on residential mortgage loans increased only $86,000. The
average balance increased only $787,000 as issues facing the economy, financial
markets and unemployment rates significantly impacted loan
demand. 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.
During
2008, the Federal Reserve decreased the federal funds rate by 425 basis
points. This decrease as well as competitive pressures impacted loan
yields, particularly yields on commercial and agricultural loans. The
average yield on commercial and agricultural loans decreased from 7.94% in 2007
to 7.57% in 2008, decreasing interest income by $436,000 due to
rate. The average balance of commercial and agricultural loans
increased $9.0 million, increasing interest income $568,000 due to
volume.
Total
interest expense decreased $2,864,000 in 2008 compared to 2007. The
average balance of interest bearing liabilities increased $25.0 million from
2007 to 2008. This had the effect of increasing interest expense by
$1,075,000 due to volume. The average rate paid on interest bearing
liabilities decreased from 3.56% to 2.81% due to decreasing interest rates
caused by the current economic climate. This resulted in a $3,939,000
decrease in interest expense due to rate. Balances most affected were
those that were indexed to a specific market rate.
As noted
above, the federal funds rate decreased 425 basis points during
2008. 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. Our ability
to decrease rates paid on short term liabilities faster than the average rates
earned on interest earning assets resulted in an improvement in our net interest
spread. Our net interest spread for 2008 was 4.01% compared to 3.42%
in 2007. The current economic situation has resulted in a more normal
yield curve suggesting that our margin should remain consistent or near its
current level. 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.
2007
vs. 2006
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. 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.
Loan
income increased $2,341,000 in 2007 from 2006. Commercial and
agricultural loans were the primary drivers as income from these loans increased
$1,387,000 over 2006. The increase due to volume was $1,031,000 as
the average balance of commercial and agricultural loans increased $13.1 million
or 9.7%. The average rate increased from 7.68% to 7.94%, increasing
interest income $356,000 due to rate.
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.
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. Because the
average rates paid on our short term liabilities decreased faster than the
average rate earned on interest earning assets has resulted in a slight
improvement in our net interest spread from 3.40% in 2006 to 3.42%.
Non-interest
Income
The
following table reflects non-interest income by major category for the periods
ended December 31 (dollars in thousands):
|
2008
|
2007
|
2006
|
Service
charges
|
$ 3,489
|
$ 3,210
|
$ 3,140
|
Trust
|
561
|
520
|
487
|
Brokerage
and insurance
|
240
|
132
|
260
|
Investment
securities (losses) gains, net
|
(4,089)
|
(29)
|
4
|
Gains
on sales of foreclosed properties
|
81
|
396
|
80
|
Earnings
on bank owned life insurance
|
362
|
331
|
304
|
Other
|
512
|
525
|
441
|
Total
|
$ 1,156
|
$ 5,085
|
$ 4,716
|
|
2008/2007
|
2007/2006
|
|
Change
|
Change
|
|
Amount
|
%
|
Amount
|
%
|
Service
charges
|
$ 279
|
8.7
|
$ 70
|
2.2
|
Trust
|
41
|
7.9
|
33
|
6.8
|
Brokerage
and insurance
|
108
|
81.8
|
(128)
|
(49.2)
|
Investment
securities (losses) gains, net
|
(4,060)
|
n/a
|
(33)
|
n/a
|
Gains
on sales of foreclosed properties
|
(315)
|
(79.5)
|
316
|
395.0
|
Earnings
on bank owned life insurance
|
31
|
9.4
|
27
|
8.9
|
Other
|
(13)
|
(2.5)
|
84
|
19.0
|
Total
|
$ (3,929)
|
(77.3)
|
$ 369
|
7.8
|
2008
vs. 2007
Non-interest
income decreased $3,929,000 in 2008 from 2007, or 77.3%. Most
notable, we recorded investment security losses totaling $4,089,000 compared
with a $29,000 loss in 2007. As a result of actions taken by the U.S.
Treasury Department and the Federal Housing Financing Agency with respect to the
Federal Home Loan Mortgage Corporation (“Freddie Mac”) and deteriorating credit
and liquidity conditions in the third quarter of 2008, we recorded a
non-recurring $2,336,000 million other than temporary impairment charge related
to our investment in Freddie Mac preferred stock and a $1,796,000 other than
temporary impairment charge on a Lehman Brothers corporate bond. The
Lehman Brothers corporate bond was subsequently sold in the fourth quarter of
2008.
Service
charge income increased by $279,000 in 2008 compared to
2007. Service charge fees charged to customers for
non-sufficient funds increased by $162,000. Additionally, we
increased ATM and related check card fee income by $113,000 compared to last
year as the Company continues to promote efforts to increase usage of debit
cards by retail customers.
Brokerage
and insurance revenue increased by $108,000 in 2008, while trust revenues
increased 7.9% to $561,000 during 2008. The Company’s continued
efforts on hiring experienced professionals who strive to provide quality
service and meet customers’ needs resulted in improved revenues.
Gains on
sales of foreclosed properties decreased by $315,000 in 2008 compared to 2007
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.
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. 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 compared to
2006. This increase was offset by a decrease in brokerage and
insurance revenue of $128,000.
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, as mentioned
above.
Investment
securities losses of $29,000 were realized in 2007 due to restructuring the
investment portfolio in order to improve future yields.
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):
|
2008
|
2007
|
2006
|
Salaries
and employee benefits
|
$ 8,725
|
$ 8,386
|
$ 8,026
|
Occupancy
|
1,162
|
1,151
|
1,123
|
Furniture
and equipment
|
479
|
539
|
593
|
Professional
fees
|
625
|
645
|
551
|
Amortization
of intangibles
|
145
|
144
|
252
|
Other
|
4,741
|
4,449
|
4,482
|
Total
|
$ 15,877
|
$ 15,314
|
$ 15,027
|
|
2008/2007
|
2007/2006
|
|
Change
|
Change
|
|
Amount
|
%
|
Amount
|
%
|
Salaries
and employee benefits
|
$ 339
|
4.0
|
$ 360
|
4.5
|
Occupancy
|
11
|
1.0
|
28
|
2.5
|
Furniture
and equipment
|
(60)
|
(11.1)
|
(54)
|
(9.1)
|
Professional
fees
|
(20)
|
(3.1)
|
94
|
17.1
|
Amortization
of intangibles
|
1
|
0.7
|
(108)
|
(42.9)
|
Other
|
292
|
6.6
|
(33)
|
(0.7)
|
Total
|
$ 563
|
3.7
|
$ 287
|
1.9
|
|
2008
|
2007
|
2006
|
Other
professional fees
|
$ 316
|
$ 367
|
$ 296
|
Legal
fees
|
129
|
111
|
115
|
Examinations
and audits
|
180
|
167
|
140
|
Total
|
$ 625
|
$ 645
|
$ 551
|
|
2008/2007
|
2007/2006
|
|
Change
|
Change
|
|
Amount
|
%
|
Amount
|
%
|
Other
professional fees
|
$ (51)
|
(13.9)
|
$ 71
|
24.0
|
Legal
fees
|
18
|
16.2
|
(4)
|
(3.5)
|
Examinations
and audits
|
13
|
7.8
|
27
|
19.3
|
Total
|
$ (20)
|
(3.1)
|
$ 94
|
17.1
|
2008
vs. 2007
Non-interest
expenses for 2008 totaled $15,877,000 which represents an increase of $563,000,
or 3.7%, compared with 2007 costs of $15,314,000. Much of the
increase is attributable to salary and benefit costs increasing $339,000. Base
salaries and related payroll taxes increased $191,000 primarily due to merit
increases. The year to date full time equivalent staffing was 169
employees for 2008 compared to 170 employees for 2007. Incentive
costs increased $249,000 compared to 2007 primarily due to the attainment of
certain corporate goals and objectives, as well as the implementation of a
supplemental employee retirement plan for key management. Insurance
costs for employees increased by $70,000 attributable to a significant increase
in insurance premiums. Pension expense decreased by $187,000 compared
to 2007. Effective January 1, 2008, the Company modified its defined
benefit pension plan resulting in a reduction in expense.
Other
expenses increased $292,000 over last year mainly due to branch acquisition
costs, an increase in the FDIC assessment and operational charge
offs.
Furniture
and equipment expenses decreased $60,000 mainly due to a reduction in
depreciation expense from assets that became fully depreciated during the
year.
Due to
the FDIC’s across the board assessment increase, along with the proposed 20
basis point special assessment, our FDIC insurance expense is expected to
increase by up to $1,800,000 in 2009.
2007
vs. 2006
Non-interest
expenses for 2007 increased $287,000, or 1.9%, compared with
2006. Salary and benefit costs increased $360,000, which includes an
increase in base salaries of $111,000 primarily due to merit
increases. The year to date full time equivalent staffing was 170
employees for 2007 compared to 172 employees 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 SOX 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 $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.
Provision
For Income Taxes
The
provision for income taxes was $1,224,000 during 2008, $1,772,000 during 2007
and $1,457,000 for the 2006 related periods. The effective tax
rates for 2008, 2007 and 2006 were 15.1%, 20.8% and 20.1%,
respectively.
Income
before the provision for income taxes decreased by $379,000 in 2008 compared to
2007, while the provision for income taxes decreased by $548,000 when compared
to 2007. We have successfully managed our effective tax rate by
remaining invested in tax-exempt municipal loans and bonds. As such,
the provision was impacted in 2008 by an increase in tax exempt bond and loan
revenue. Additionally, the Emergency Economic Stabilization Act of
2008 (“EESA”) was signed into law on October 3, 2008. The EESA
included a provision which will allow the loss on the Freddie Mac preferred
stock to be treated as an ordinary loss. Management will continue to
monitor and manage our effective tax rate.
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 $738,000 out of a total $913,000 in tax credits from one project
and $263,000 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
$105,000 out of a total of $574,000 tax credits. $766,000 in tax credits
remain and will be taken over the next eight
years.
FINANCIAL
CONDITION
The
following table presents ending balances (dollars in millions), growth and the
percentage change during the past two years:
|
2008
|
|
%
|
2007
|
|
%
|
2006
|
|
Balance
|
Increase
|
Change
|
Balance
|
Increase
|
Change
|
Balance
|
Total
assets
|
$ 668.6
|
$ 77.6
|
13.1
|
$ 591.0
|
$ 18.8
|
3.3
|
$ 572.2
|
Total
investments
|
174.1
|
53.3
|
44.1
|
120.8
|
11.1
|
10.1
|
109.7
|
Total
loans, net
|
428.4
|
9.2
|
2.2
|
419.2
|
8.3
|
2.0
|
410.9
|
Total
deposits
|
546.7
|
90.7
|
19.9
|
456.0
|
9.5
|
2.1
|
446.5
|
Total
stockholders' equity
|
52.8
|
4.3
|
8.9
|
48.5
|
5.0
|
11.5
|
43.5
|
Cash
and Cash Equivalents
Cash and
cash equivalents totaled $19.9 million at December 31, 2008 compared with $10.4
million at December 31, 2007. 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, federal funds lines with correspondent banks, 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
2008
The
Company’s investment portfolio increased by $53,337,000, or 44.1%, during the
past year. During 2008, we purchased approximately $42.1 million of
mortgage-backed securities, $12.7 million of U.S. agency obligations, and $15.4
million of municipal bonds. Offsetting the purchases were $11.5
million of principal repayments and $3.5 million in maturities that occurred
during 2008. Due to unusually wide credit spreads to treasuries,
significant market opportunity existed to grow our investment portfolio during
the latter half of 2008. In doing so, the effective yield on our
portfolio for 2008 improved to 5.33% compared to 5.14% for 2007 on a tax
equivalent basis. The market value of our investment portfolio
increased approximately $2.4 million in 2008 due to a decrease in
interest rates and the realization of loss due to the Freddie Mac write-down and
the sale of the Lehman Brothers corporate bond.
2007
The
Company’s investment portfolio increased by $11,059,000, or 10.1%, in
2007. 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% for 2006 on a tax equivalent
basis. The market value of our investment portfolio increased
approximately $1.4 million in 2007.
The
following table shows the year-end composition of the investment portfolio for
the five years ended December 31 (dollars in thousands):
|
2008
|
%
of
|
2007
|
%
of
|
2006
|
%
of
|
2005
|
%
of
|
2004
|
%
of
|
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
U.
S. Agency securities
|
$ 28,942
|
16.6
|
$ 17,236
|
14.3
|
$ 16,651
|
15.2
|
$ 12,754
|
12.5
|
$ 5,812
|
6.1
|
Obligations
of state & political
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
44,132
|
25.3
|
30,844
|
25.4
|
22,562
|
20.5
|
22,612
|
22.0
|
7,452
|
7.8
|
Corporate
obligations
|
5,296
|
3.0
|
7,813
|
6.5
|
7,997
|
7.3
|
8,627
|
8.4
|
8,935
|
9.3
|
Mortgage-backed
securities
|
95,407
|
54.8
|
62,642
|
51.9
|
59,875
|
54.6
|
55,852
|
54.4
|
70,449
|
73.6
|
Equity
securities
|
362
|
0.3
|
2,267
|
1.9
|
2,658
|
2.4
|
2,757
|
2.7
|
3,099
|
3.2
|
Total
|
$ 174,139
|
100.0
|
$
120,802
|
100.0
|
$
109,743
|
100.0
|
$
102,602
|
100.0
|
$ 95,747
|
100.0
|
The
expected principal repayments (amortized cost) and average weighted yields for
the investment portfolio as of December 31, 2008, 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 Note 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
|
$ 12,348
|
4.6
|
$ 13,840
|
5.7
|
$ 1,440
|
5.5
|
$ -
|
-
|
$ 27,628
|
5.2
|
Obligations
of state & political
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
3,659
|
6.0
|
18,964
|
6.2
|
19,795
|
6.7
|
1,770
|
6.6
|
44,188
|
6.4
|
Corporate
obligations
|
-
|
-
|
-
|
-
|
5,964
|
5.6
|
-
|
-
|
5,964
|
5.6
|
Mortgage-backed
securities
|
15,460
|
4.6
|
45,153
|
5.0
|
23,477
|
5.7
|
8,947
|
6.4
|
93,037
|
5.2
|
Total
available-for-sale
|
$ 31,467
|
4.8
|
$ 77,957
|
5.4
|
$ 50,676
|
6.1
|
$ 10,717
|
-
|
$ 170,817
|
5.6
|
Loans
Historically,
our loan customers have been located in North Central Pennsylvania and Southern
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 80% 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.
2008
Total
loans grew $9.4 million in 2008 from a balance of $423.4 million at the end of
2007 to $432.8 million at the end of 2008. Total loans grew 2.2% in
2008 compared with a 2.1% loan growth rate in 2007.
Commercial
real estate loans increased $7.4 million in 2008 or 7.3% while commercial and
other loans increased $3.3 million, or 9.5%. State and political
subdivision loans also increased by $3.0 million, or 6.6%. While not
compromising credit quality, our strong team of seasoned business development
officers enabled the Company to grow our high quality, commercial loan portfolio
and achieve organic loan growth. Commercial loan demand 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 $2.7 million primarily due to the lack of loan
demand in the residential real estate market. Additionally, consumer
loans decreased by $1.4 million, or 10.9%. Increasing unemployment
rates, recessionary pressures, a softening economy, tightened credit standards,
low consumer confidence, and the depressed financial markets have all had a
negative impact on our loan growth. Despite the decrease in loan
demand, mortgage lending continues to be one of our primary focuses, as
residential real estate loans totaled $199.1 million and comprised 46.0% of the
loan portfolio as of the end of the year compared to 47.7% as of December 31,
2007. 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. We expect residential real estate loan
demand to increase as the economy improves. During 2008, $4.4 million
in conforming mortgage loans were originated and sold in the secondary market
through Freddie Mac and Fannie Mae, providing nearly $52,000 of income in
origination fees and premiums on loans sold.
2007
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 2006. The primary
increases were in commercial real estate, construction, and commercial and other
loans which increased $6.3, $4.3, and $1.9 million,
respectively. Residential loans decreased $4.2 million, or 2.0% from
2006. The overall loan growth in 2007 of 2.1% compares to the 8.4%
loan growth in 2006.
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%. Residential real
estate loans decreased $4.2 million primarily due to the lack of loan demand in
the residential real estate market. Residential real estate loans
totaled $201.9 million and comprised 47.7% of the loan portfolio as of the end
of the year. 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.
Five Year
Breakdown of Loans by Type as of December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
(dollars
in thousands)
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
Residential
|
$ 199,118
|
46.0
|
$ 201,861
|
47.7
|
$ 206,059
|
49.7
|
$ 195,628
|
51.1
|
$ 189,803
|
52.8
|
Commercial
|
107,740
|
24.9
|
100,380
|
23.7
|
94,122
|
22.7
|
82,128
|
21.5
|
75,228
|
20.9
|
Agricultural
|
17,066
|
3.9
|
16,891
|
4.0
|
17,054
|
4.1
|
12,991
|
3.4
|
11,564
|
3.2
|
Construction
|
11,118
|
2.6
|
11,330
|
2.7
|
7,027
|
1.7
|
7,245
|
1.9
|
7,282
|
2.0
|
Loans
to individuals
|
|
|
|
|
|
|
|
|
|
|
for
household,
|
|
|
|
|
|
|
|
|
|
|
family
and other purchases
|
11,651
|
2.7
|
13,082
|
3.1
|
12,482
|
3.0
|
13,017
|
3.4
|
12,657
|
3.5
|
Commercial
and other loans
|
37,968
|
8.8
|
34,664
|
8.2
|
32,766
|
7.9
|
29,260
|
7.6
|
28,069
|
7.8
|
State
& political subdivision loans
|
48,153
|
11.1
|
45,171
|
10.6
|
45,263
|
10.9
|
42,534
|
11.1
|
35,090
|
9.8
|
Total
loans
|
432,814
|
100.0
|
423,379
|
100.0
|
414,773
|
100.0
|
382,803
|
100.0
|
359,693
|
100.0
|
Less
allowance for loan losses
|
4,378
|
|
4,197
|
|
3,876
|
|
3,664
|
|
3,919
|
|
Net
loans
|
$ 428,436
|
|
$ 419,182
|
|
$ 410,897
|
|
$ 379,139
|
|
$ 355,774
|
|
|
2008/2007
|
2007/2006
|
|
Change
|
Change
|
|
Amount
|
%
|
Amount
|
%
|
Real
estate:
|
|
|
|
|
Residential
|
$ (2,743)
|
(1.4)
|
$ (4,198)
|
(2.0)
|
Commercial
|
7,360
|
7.3
|
6,258
|
6.6
|
Agricultural
|
175
|
1.0
|
(163)
|
(1.0)
|
Construction
|
(212)
|
(1.9)
|
4,303
|
61.2
|
Loans
to individuals
|
|
|
|
|
for
household,
|
|
|
|
|
family
and other purchases
|
(1,431)
|
(10.9)
|
600
|
4.8
|
Commercial
and other loans
|
3,304
|
9.5
|
1,898
|
5.8
|
State
& political subdivision loans
|
2,982
|
6.6
|
(92)
|
(0.2)
|
Total
loans
|
$ 9,435
|
2.2
|
$ 8,606
|
2.1
|
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, 2008, 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
|
$ 9,965
|
$ -
|
$ 9,965
|
Over
one year through five years
|
29,290
|
65
|
29,355
|
Over
five years
|
171,672
|
11,053
|
182,725
|
Total
|
$ 210,927
|
$ 11,118
|
$ 222,045
|
Sensitivity
of loans to changes in interest
|
|
|
|
rates
- loans due after December 31, 2009:
|
|
|
|
Predetermined
interest rate
|
$ 43,074
|
$ 2,831
|
$ 45,905
|
Floating
or adjustable interest rate
|
157,888
|
8,287
|
166,175
|
Total
|
$ 200,962
|
$ 11,118
|
$ 212,080
|
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.
|
2008
|
2007
|
2006
|
2005
|
2004
|
Non-performing
loans:
|
|
|
|
|
|
Non-accruing
loans, exclusive of impaired loans
|
$ 580
|
$ 827
|
$ 478
|
$ 867
|
$ 722
|
Impaired
loans
|
1,622
|
1,088
|
1,190
|
1,031
|
1,061
|
Accrual
loans - 90 days or
|
|
|
|
|
|
more
past due
|
383
|
275
|
1,690
|
337
|
437
|
Total
non-performing loans
|
2,585
|
2,190
|
3,358
|
2,235
|
2,220
|
Foreclosed
assets held for sale
|
591
|
203
|
758
|
619
|
712
|
Total
non-performing assets
|
$ 3,176
|
$ 2,393
|
$ 4,116
|
$ 2,854
|
$ 2,932
|
Non-performing
loans as a percent of loans
|
|
|
|
|
|
net
of unearned income
|
0.60%
|
0.52%
|
0.81%
|
0.58%
|
0.62%
|
Non-performing
assets as a percent of loans
|
|
|
|
|
|
net
of unearned income
|
0.73%
|
0.57%
|
0.99%
|
0.75%
|
0.82%
|
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
|
2008
|
2007
|
2006
|
2005
|
2004
|
Balance
|
|
|
|
|
|
at
beginning of period
|
$ 4,197
|
$ 3,876
|
$ 3,664
|
$ 3,919
|
$ 3,620
|
Charge-offs:
|
|
|
|
|
|
Real
estate-mortgage
|
87
|
70
|
37
|
43
|
110
|
Loans
to individuals for household,
|
|
|
|
|
|
family
and other purchases
|
44
|
111
|
118
|
168
|
70
|
Commercial
and other loans
|
115
|
5
|
135
|
161
|
135
|
Total
loans charged-off
|
246
|
186
|
290
|
372
|
315
|
Recoveries:
|
|
|
|
|
|
Real
estate-mortgage
|
26
|
81
|
6
|
2
|
-
|
Loans
to individuals for household,
|
|
|
|
|
|
family
and other purchases
|
19
|
57
|
44
|
12
|
25
|
Commercial
and other loans
|
52
|
4
|
122
|
43
|
299
|
Total
loans recovered
|
97
|
142
|
172
|
57
|
324
|
|
|
|
|
|
|
Net
loans charged-off (recovered)
|
149
|
44
|
118
|
315
|
(9)
|
Provision
charged to expense
|
330
|
365
|
330
|
60
|
-
|
Increase
related to acquisition
|
-
|
-
|
-
|
-
|
290
|
Balance
at end of year
|
$ 4,378
|
$ 4,197
|
$ 3,876
|
$ 3,664
|
$ 3,919
|
|
|
|
|
|
|
Loans
outstanding at end of year
|
$ 432,814
|
$ 423,379
|
$ 414,773
|
$ 382,803
|
$ 359,693
|
Average
loans outstanding, net
|
$ 423,382
|
$ 411,927
|
$ 400,507
|
$ 371,147
|
$ 338,836
|
Net
charge-offs to average loans
|
0.04%
|
0.01%
|
0.03%
|
0.08%
|
0.00%
|
Year-end
allowance to total loans
|
1.01%
|
0.99%
|
0.93%
|
0.96%
|
1.09%
|
Year-end
allowance to total
|
|
|
|
|
|
non-performing
loans
|
169.36%
|
191.64%
|
115.43%
|
163.94%
|
176.53%
|
As
detailed in the preceding table, the percent of non-performing loans to total
loans increased slightly from .52% to .60% as of the end of December,
2008. Foreclosed assets held for sale increased by $388,000, to
$591,000, which is average compared to the prior four years. Total
loans charged-off in 2008 totaled $246,000, an increase of $60,000 compared to
last year. Total loans recovered were $97,000, resulting in a net
charge-off for the year of $149,000 compared to $44,000 in
2007. $330,000 was charged to the provision in 2008 compared to
$365,000 in 2007. During 2007, there were $186,000 of loans
charged-off while $142,000 of loans were recovered, resulting in a net
charge-off of $44,000.
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 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
|
§
|
Changes
in the quality of the Company’s loan review
system
|
§
|
Industry
conditions including the effects of external factors such as competition,
legal, and regulatory requirements, on the level of estimated credit
losses
|
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 non-accrual 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
collectability 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):
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
Residential
|
$ 694
|
46.0
|
$ 599
|
47.7
|
$ 614
|
49.7
|
$ 493
|
51.1
|
$ 392
|
52.8
|
Commercial,
agricultural
|
2,303
|
28.8
|
2,128
|
27.7
|
1,676
|
26.8
|
1,551
|
24.9
|
1,591
|
24.1
|
Construction
|
5
|
2.6
|
-
|
2.7
|
-
|
1.7
|
-
|
1.9
|
-
|
2.0
|
Loans
to individuals
|
|
|
|
|
|
|
|
|
|
|
for
household,
|
|
|
|
|
|
|
|
|
|
|
family
and other purchases
|
449
|
2.7
|
424
|
3.1
|
734
|
3.0
|
542
|
3.4
|
463
|
3.5
|
Commercial
and other loans
|
807
|
8.8
|
736
|
8.2
|
582
|
7.9
|
484
|
7.6
|
515
|
7.8
|
State
& political subdivision loans
|
19
|
11.1
|
22
|
10.6
|
22
|
10.9
|
21
|
11.1
|
18
|
9.8
|
Unallocated
|
101
|
N/A
|
288
|
N/A
|
248
|
N/A
|
573
|
N/A
|
940
|
N/A
|
Total
allowance for loan losses
|
$ 4,378
|
100.0
|
$ 4,197
|
100.0
|
$ 3,876
|
100.0
|
$ 3,664
|
100.0
|
$ 3,919
|
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. During the fourth quarter of 2008, we increased our
investment in bank owned life insurance by approximately $3.4 million based upon
an analysis of new employees and updated future employee benefit
costs. As of December 31, 2008 and 2007, the cash surrender value of
the life insurance was $12.2 and $8.4 million, respectively. The
change in cash surrender value, net of purchases, is recognized in the results
of operations. The amounts recorded as non-interest income totaled
$362,000, $331,000 and $304,000 in 2008, 2007 and 2006,
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
2008
As can be
seen in the tables below, total deposits increased $90.7 million in 2008, or
19.9%. The increase in deposits is due to several
reasons. Our market has been positively impacted from oil and gas
exploration activities and we have developed products specifically targeting
those that have benefited from this activity. Furthermore, the
overall turbulence and volatility of the financial markets has resulted in
customers seeking stability from familiar local banks. Also, on
November 21, 2008, our Company gained approximately $16.9 million in deposits
from a local branch acquisition (see Note 18 to the consolidated financial
statements).
Non-interest
bearing deposits increased $4.6 million, or 9.0% in 2008. As a
percent to total, non-interest bearing deposits totaled 10.2% as of the end of
2008, which compares to 11.2% at the end of 2007. 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 $15.5 million, or 15.5%, and savings deposits increased
$6.5 million, or 17.0%, since the end of 2007. Most of the increase
in NOW accounts is due to state and local governmental agencies as well as $4.7
million coming from the aforementioned branch acquisition. Money
market deposit accounts decreased by $9.6 million in 2008, a decrease of 18.8%,
due mostly to customers seeking higher deposit rates since the Federal Reserve’s
actions have decreased short term rates significantly.
Certificates
of deposit increased $73.8 million, or 34.2% from 2007 primarily due to the
reasons mentioned above. Approximately $20 million of the growth came
from oil and gas exploration activities. The branch acquisition
accounted for $11.3 million in growth.
Our
deposit growth funded our growth in loans of $9.4 million, our growth in
investments of $53.3 million, and enabled us to decrease our borrowed funds by
$19.1 million while providing us with liquidity in this challenging
economy.
2007
Total
deposits increased $9.5 million in 2007, or 2.1%. Non-interest
bearing deposits increased $2.4 million. As a percent to total,
non-interest bearing deposits totaled 11.2% as of the end of 2007, which
compared to 10.9% at the end of 2006. NOW accounts increased by $13.8
million, or 16.0% since the end of 2006. Most of the increase in NOW
accounts was 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, funding alternatives resulted in less expensive
borrowing costs.
The
following table shows the breakdown of deposits by deposit type (dollars in
thousands):
|
2008
|
2007
|
2006
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Non-interest-bearing
deposits
|
$ 55,545
|
10.2
|
$ 50,944
|
11.2
|
$ 48,509
|
10.9
|
NOW
accounts
|
115,338
|
21.1
|
99,862
|
21.9
|
86,067
|
19.3
|
Savings
deposits
|
44,447
|
8.1
|
37,996
|
8.3
|
37,637
|
8.4
|
Money
market deposit accounts
|
41,752
|
7.6
|
51,398
|
11.3
|
46,066
|
10.3
|
Certificates
of deposit
|
289,598
|
53.0
|
215,828
|
47.3
|
228,236
|
51.1
|
Total
|
$ 546,680
|
100.0
|
$ 456,028
|
100.0
|
$ 446,515
|
100.0
|
|
|
|
|
|
|
2008/2007
|
2007/2006
|
|
Change
|
Change
|
|
Amount
|
%
|
Amount
|
%
|
Non-interest-bearing
deposits
|
$ 4,601
|
9.0
|
$ 2,435
|
5.0
|
NOW
accounts
|
15,476
|
15.5
|
13,795
|
16.0
|
Savings
deposits
|
6,451
|
17.0
|
359
|
1.0
|
Money
market deposit accounts
|
(9,646)
|
(18.8)
|
5,332
|
11.6
|
Certificates
of deposit
|
73,770
|
34.2
|
(12,408)
|
(5.4)
|
Total
|
$ 90,652
|
19.9
|
$ 9,513
|
2.1
|
Remaining
maturities of certificates of deposit of $100,000 or more are as follows
(dollars in thousands):
|
2008
|
2007
|
2006
|
3
months or less
|
$ 5,462
|
$ 9,489
|
$ 8,714
|
Over
3 months through 6 months
|
13,706
|
9,628
|
14,697
|
Over
6 months through 12 months
|
26,554
|
11,226
|
16,604
|
Over
12 months
|
50,297
|
27,794
|
27,897
|
Total
|
$ 96,019
|
$ 58,137
|
$ 67,912
|
As
a percent of total
|
|
|
|
certificates
of deposit
|
33.16%
|
26.94%
|
29.76%
|
Deposits
by type of depositor are as follows (dollars in thousands):
|
2008
|
2007
|
2006
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Individual,
partnerships
|
|
|
|
|
|
|
&
corporations
|
$ 465,234
|
85.1
|
$ 382,968
|
84.0
|
$ 386,314
|
86.5
|
United
States government
|
2,069
|
0.4
|
752
|
0.1
|
1,591
|
0.4
|
State
& political subdivisions
|
79,377
|
14.5
|
72,308
|
15.9
|
58,610
|
13.1
|
Total
|
$ 546,680
|
100.0
|
$ 456,028
|
100.0
|
$ 446,515
|
100.0
|
Borrowed
Funds
2008
Borrowed
funds decreased $19.1 million during 2008, a decrease of 23.8%. As of
December 31, 2008 we had $46.0 million of term loans with the Federal Home Loan
Bank compared with $51.7 million outstanding as of December 31, 2007 (see Note 9
of the consolidated financial statements for additional
information). During 2008, $36.7 million of term loans
matured. We strategically replaced these funds with $31.0 million of
new term loans at various maturities as a means of reducing our cost of funds,
given the lower interest rates that prevailed during 2008. The
significant increase in our deposits also resulted in a reduction in short term
borrowings from the Federal Home Loan Bank from $13.9 million as of December 31,
2007 to $0 at December 31, 2008.
2007
Borrowed
funds increased $4.6 million during 2007, an increase of 6.0%. This
increase was primarily due to an increase in term loans from the Federal Home
Loan Bank (see Note 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.
Stockholders’
Equity
We
evaluate stockholders’ equity in relation to total assets and the risk
associated with those assets. The greater the capital resources, the greater the
likelihood of meeting our cash obligations and absorbing 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 2008 and
2007, the Company paid out 40.8% and 37.9% of net income in dividends,
respectively.
For the
year ended December 31, 2008, the total number of common shares outstanding was
2,847,371. For comparative purposes, outstanding shares for prior periods were
adjusted for the July, 2008 stock dividend in computing earnings and cash
dividends per share as detailed in Note 1 of the consolidated financial
statements. During 2008, we also purchased 11,928 shares of treasury
stock at a weighted average cost of $22.65 per share.
There are
currently three federal regulatory measures of capital adequacy. The Company’s
ratios meet the regulatory standards for well capitalized for 2008 and 2007, as
detailed in Note 13 of the consolidated financial statements.
2008
Stockholders’
equity increased 8.7% in 2008 to $52.8 million. Excluding accumulated
other comprehensive income, which is the after-tax effect of unrealized holding
gains and losses on available-for-sale securities, additional pension obligation
and unrealized loss on interest rate swap, stockholders’ equity increased $3.9
million, or 7.9%. This increase is due to net income of $6,905,000,
offset by cash dividends of $2,815,000 and purchase of treasury stock of
$271,000. Total equity was approximately 7.9% of total assets as of
December 31, 2008, compared to 8.2% of total assets as of December 31,
2007.
2007
Stockholders’
equity increased by 11.6% in 2007 to $48.5 million. Excluding
accumulated other comprehensive income, stockholders’ equity increased $3.6
million, or 8.0%. This increase was due to net income of $6,736,000
offset by cash dividends of $2,550,000 and purchase of treasury stock of
$567,000.
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. 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 2008 totaled $1,132,000, which included:
§
|
New
branch office in process in Troy totaling
$674,000.
|
§
|
Land,
building, and equipment associated with branch acquisition totaling
$296,000.
|
§
|
New
equipment associated with merchant and branch capture totaling
$77,000.
|
§
|
Upgrades
to data processing and security equipment totaling
$73,000.
|
Capital
expenditures were $529,000 in 2007, 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.
|
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, 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 $236 million, inclusive of any
outstanding amounts, as an additional source of liquidity. The
Company also had a federal fund line with a third party provider in the amount
of $12,000,000 as of December 31, 2008. Subsequent to year end, an
additional federal fund line was established with another correspondent bank in
the amount of $10,000,000. Both federal fund lines are
unsecured.
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 Re-pricing of Company Assets and Liabilities as of December 31,
2008
|
|
|
|
|
|
|
|
|
|
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
|
$ 10,164
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 10,164
|
Investment
securities
|
7,753
|
14,911
|
31,665
|
14,316
|
51,574
|
51,143
|
171,362
|
Residential
mortgage loans
|
25,125
|
49,729
|
46,578
|
36,056
|
43,499
|
9,249
|
210,236
|
Commercial
and farm loans
|
45,546
|
21,780
|
27,444
|
22,302
|
36,065
|
9,637
|
162,774
|
Loans
to state & political subdivisions
|
2,952
|
2,782
|
10,194
|
3,498
|
22,650
|
6,077
|
48,153
|
Other
loans
|
3,168
|
2,719
|
2,461
|
1,457
|
1,199
|
647
|
11,651
|
Total
interest-earning assets
|
$ 94,708
|
$ 91,921
|
$
118,342
|
$ 77,629
|
$
154,987
|
$ 76,753
|
$
614,340
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
NOW
accounts
|
$ 61,783
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 53,555
|
$
115,338
|
Savings
accounts
|
-
|
-
|
-
|
-
|
-
|
44,447
|
44,447
|
Money
Market accounts
|
30,170
|
-
|
-
|
-
|
-
|
11,582
|
41,752
|
Certificates
of deposit
|
26,942
|
106,103
|
66,559
|
49,217
|
36,713
|
4,064
|
289,598
|
Short-term
borrowing
|
5,786
|
-
|
-
|
-
|
-
|
-
|
5,786
|
Long-term
borrowing
|
14,528
|
11,010
|
3,858
|
7,022
|
19,000
|
-
|
55,418
|
Total
interest-bearing liabilities
|
$ 139,209
|
$ 117,113
|
$ 70,417
|
$ 56,239
|
$ 55,713
|
$
113,648
|
$
552,339
|
Excess
interest-earning
|
|
|
|
|
|
|
assets
(liabilities)
|
$ (44,501)
|
$ (25,192)
|
$ 47,925
|
$ 21,390
|
$ 99,274
|
$
(36,895)
|
Cumulative
interest-earning assets
|
$ 94,708
|
$ 186,629
|
$
304,971
|
$
382,600
|
$
537,587
|
$
614,340
|
Cumulative
interest-bearing liabilities
|
139,209
|
256,322
|
326,739
|
382,978
|
438,691
|
552,339
|
Cumulative
gap
|
$ (44,501)
|
$ (69,693)
|
$
(21,768)
|
$ (378)
|
$ 98,896
|
$ 62,001
|
Cumulative
interest rate
|
|
|
|
|
|
|
sensitivity
ratio (1)
|
0.68
|
0.73
|
0.93
|
1.00
|
1.23
|
1.11
|
|
|
|
|
|
|
|
(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 re-priced 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 movements in interest rates. The down 100 scenario assumes
a parallel shift in rates to the extent possible based on current
rates. The up 100 and 200 scenarios assume a parallel shift in
interest rates. It is assumed that the change in interest rates is
instantaneous. Assumptions are also made concerning prepayment speeds
on mortgage loans and mortgage securities. The following is a rate
shock analysis for the period indicated as of December 31, 2008 (dollars in
thousands):
|
|
|
|
Change
In
|
%
Change In
|
|
|
Prospective
One-Year
|
|
Prospective
|
Prospective
|
Changes
in Rates
|
|
Net
Interest Income
|
|
Net
Interest Income
|
Net
Interest Income
|
|
|
|
|
|
|
-100
|
|
25,252
|
|
427
|
1.72
|
Base
(no change in rates)
|
|
24,825
|
|
-
|
-
|
+100
|
|
23,427
|
|
(1,398)
|
(5.63)
|
+200
|
|
22,277
|
|
(2,548)
|
(10.26)
|
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 2008 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. Furthermore, in
2008, due to economic reasons, FDIC deposit insurance coverage increased to
$250,000 for any deposit account through December
2009. Non-transactional accounts are also fully insured regardless of
balance through the same time period. The resulting premiums,
although estimated, will 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 “Satisfactory 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
All
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)
|
2008
|
2007
|
ASSETS:
|
|
|
Cash
and cash equivalents:
|
|
|
|
Noninterest-bearing
|
$ 9,692
|
$ 10,374
|
|
Interest-bearing
|
10,164
|
15
|
Total
cash and cash equivalents
|
19,856
|
10,389
|
Available-for-sale
securities
|
174,139
|
120,802
|
Loans
(net of allowance for loan losses:
|
|
|
|
2008,
$4,378; 2007, $4,197)
|
428,436
|
419,182
|
Premises
and equipment
|
12,762
|
12,538
|
Accrued
interest receivable
|
2,912
|
2,522
|
Goodwill
|
10,256
|
8,605
|
Bank
owned life insurance
|
12,176
|
8,378
|
Other
assets
|
8,075
|
8,613
|
TOTAL
ASSETS
|
$ 668,612
|
$ 591,029
|
LIABILITIES:
|
|
|
Deposits:
|
|
|
|
Noninterest-bearing
|
$ 55,545
|
$ 50,944
|
|
Interest-bearing
|
491,135
|
405,084
|
Total
deposits
|
546,680
|
456,028
|
Borrowed
funds
|
61,204
|
80,348
|
Accrued
interest payable
|
2,233
|
2,199
|
Other
liabilities
|
5,725
|
3,926
|
TOTAL
LIABILITIES
|
615,842
|
542,501
|
STOCKHOLDERS'
EQUITY:
|
|
|
Common
Stock
|
|
|
|
$1.00
par value; authorized 10,000,000 shares;
|
|
|
|
issued
3,048,289 and 3,020,538 shares
|
|
|
|
in
2008 and 2007, respectively
|
3,048
|
3,020
|
Additional
paid-in capital
|
12,981
|
12,439
|
Retained
earnings
|
41,034
|
37,590
|
Accumulated
other comprehensive income (loss)
|
26
|
(348)
|
Treasury
stock, at cost:
|
|
|
|
200,918
and 194,883 shares for 2008 and 2007, respectively
|
(4,319)
|
(4,173)
|
TOTAL
STOCKHOLDERS' EQUITY
|
52,770
|
48,528
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ 668,612
|
$ 591,029
|
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)
|
2008
|
2007
|
2006
|
INTEREST
AND DIVIDEND INCOME:
|
|
|
|
Interest
and fees on loans
|
$ 30,710
|
$ 30,398
|
$ 28,101
|
Interest-bearing
deposits with banks
|
57
|
5
|
-
|
Investment
securities:
|
|
|
|
|
Taxable
|
4,828
|
4,316
|
3,526
|
|
Nontaxable
|
1,475
|
958
|
903
|
|
Dividends
|
168
|
347
|
321
|
TOTAL
INTEREST AND DIVIDEND INCOME
|
37,238
|
36,024
|
32,851
|
INTEREST
EXPENSE:
|
|
|
|
Deposits
|
11,492
|
13,363
|
11,685
|
Borrowed
funds
|
2,566
|
3,559
|
3,268
|
TOTAL
INTEREST EXPENSE
|
14,058
|
16,922
|
14,953
|
NET
INTEREST INCOME
|
23,180
|
19,102
|
17,898
|
Provision
for loan losses
|
330
|
365
|
330
|
NET
INTEREST INCOME AFTER PROVISION FOR
|
|
|
|
|
LOAN
LOSSES
|
22,850
|
18,737
|
17,568
|
NON-INTEREST
INCOME:
|
|
|
|
Service
charges
|
3,489
|
3,210
|
3,140
|
Trust
|
561
|
520
|
487
|
Brokerage
and Insurance
|
240
|
132
|
260
|
Investment
securities gains (losses), net
|
(4,089)
|
(29)
|
4
|
Gains
on sales of foreclosed properties
|
81
|
396
|
80
|
Earnings
on bank owned life insurance
|
362
|
331
|
304
|
Other
|
512
|
525
|
441
|
TOTAL
NON-INTEREST INCOME
|
1,156
|
5,085
|
4,716
|
NON-INTEREST
EXPENSES:
|
|
|
|
Salaries
and employee benefits
|
8,725
|
8,386
|
8,026
|
Occupancy
|
1,162
|
1,151
|
1,123
|
Furniture
and equipment
|
479
|
539
|
593
|
Professional
fees
|
625
|
645
|
551
|
Amortization
of intangibles
|
145
|
144
|
252
|
Other
|
4,741
|
4,449
|
4,482
|
TOTAL
NON-INTEREST EXPENSES
|
15,877
|
15,314
|
15,027
|
Income
before provision for income taxes
|
8,129
|
8,508
|
7,257
|
Provision
for income taxes
|
1,224
|
1,772
|
1,457
|
NET
INCOME
|
$ 6,905
|
$ 6,736
|
$ 5,800
|
NET
INCOME - EARNINGS PER SHARE
|
$ 2.42
|
$ 2.35
|
$ 2.00
|
CASH
DIVIDENDS PER SHARE
|
$ 0.99
|
$ 0.90
|
$ 0.84
|
See
accompanying notes to consolidated financial statements.
|
|
|
Citizens
Financial Services, Inc.
|
Consolidated
Statement of Changes in Stockholders' Equity
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Additional
|
|
Other
|
|
|
|
Common
Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Treasury
|
|
(in
thousands, except share data)
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Total
|
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 benefit 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, $.84 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
|
|
|
|
|
|
|
|
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
|
|
|
(77)
|
|
|
77
|
-
|
Stock
awards
|
|
|
7
|
|
|
13
|
20
|
Cash
dividends, $.90 per share
|
|
|
|
(2,550)
|
|
|
(2,550)
|
Balance,
December 31, 2007
|
3,020,538
|
3,020
|
12,439
|
37,590
|
(348)
|
(4,173)
|
48,528
|
Comprehensive
income:
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
6,905
|
|
|
6,905
|
Change
in unrecognized pension costs,
|
|
|
|
|
|
|
|
net
of tax benefit of $511
|
|
|
|
|
(991)
|
|
(991)
|
Change
in net unrealized loss on securities
|
|
|
|
|
|
|
|
available-for-sale,
net of tax expense of $820
|
|
|
|
|
1,592
|
|
1,592
|
Change
in net unrealized loss on interest rate
|
|
|
|
|
|
|
|
swap,
net of tax benefit of $117
|
|
|
|
|
(227)
|
|
(227)
|
Total
comprehensive income
|
|
|
|
|
|
|
7,279
|
Stock
dividend
|
27,751
|
28
|
618
|
(646)
|
|
|
|
Purchase
of treasury stock (11,928 shares)
|
|
|
|
|
|
(271)
|
(271)
|
Restricted
stock awards
|
|
|
(106)
|
|
|
106
|
-
|
Restricted
stock vesting
|
|
|
28
|
|
|
-
|
28
|
Stock
awards
|
|
|
2
|
|
|
19
|
21
|
Cash
dividends, $.99 per share
|
|
|
|
(2,815)
|
|
|
(2,815)
|
Balance,
December 31, 2008
|
3,048,289
|
$ 3,048
|
$ 12,981
|
$ 41,034
|
$ 26
|
$ (4,319)
|
$ 52,770
|
|
2008
|
2007
|
2006
|
Components
of comprehensive loss:
|
|
|
|
Change
in net unrealized gain (loss) on investment
|
|
|
|
securities
available-for-sale
|
$ 4,291
|
$ 874
|
$ 658
|
Change
in unrecognized pension costs
|
(991)
|
496
|
234
|
Change
in unrealized loss on interest rate swap
|
(227)
|
-
|
-
|
Investment
losses (gains) included in net income, net
|
|
|
of
tax (benefit) expense of ($1,390), ($10), and $1
|
(2,699)
|
19
|
(3)
|
Total
|
$ 374
|
$ 1,389
|
$ 889
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
Consolidated
Statement of Cash Flows
|
|
Year
Ended December 31,
|
(in
thousands)
|
2008
|
2007
|
2006
|
Cash
Flows from Operating Activities:
|
|
|
|
Net
income
|
$ 6,905
|
$ 6,736
|
$ 5,800
|
Adjustments
to reconcile net income to net
|
|
|
|
cash
provided by operating activities:
|
|
|
|
Provision
for loan losses
|
330
|
365
|
330
|
Depreciation
and amortization
|
641
|
741
|
899
|
Amortization
and accretion on investment securities
|
12
|
124
|
369
|
Deferred
income taxes
|
(782)
|
54
|
109
|
Investment
securities (gains) losses, net
|
4,089
|
29
|
(4)
|
Earnings
on bank owned life insurance
|
(362)
|
(331)
|
(304)
|
Gains
on sale of foreclosed assets held for sale
|
(81)
|
(396)
|
(80)
|
Realized
gains on loans sold
|
(84)
|
(134)
|
(61)
|
Originations
of loans held for sale
|
(4,365)
|
(6,689)
|
(3,317)
|
Proceeds
from sales of loans held for sale
|
4,449
|
6,823
|
3,384
|
Increase
in accrued interest receivable
|
(390)
|
(64)
|
(294)
|
Increase
(decrease) in accrued interest payable
|
34
|
(88)
|
425
|
Other,
net
|
(39)
|
899
|
(241)
|
Net
cash provided by operating activities
|
10,357
|
8,069
|
7,015
|
Cash
Flows from Investing Activities:
|
|
|
|
Available-for-sale
securities:
|
|
|
|
Proceeds
from sales of available-for-sale securities
|
387
|
18,859
|
10,439
|
Proceeds
from maturity and principal repayments of securities
|
14,969
|
13,437
|
18,697
|
Purchase
of securities
|
(70,382)
|
(42,155)
|
(36,401)
|
Proceeds
from redemption of Regulatory Stock
|
5,044
|
3,676
|
2,576
|
Purchase
of Regulatory Stock
|
(3,606)
|
(4,489)
|
(3,723)
|
Net
increase in loans
|
(9,997)
|
(8,624)
|
(32,420)
|
Purchase
of Loans
|
(267)
|
-
|
-
|
Purchase
of bank owned life insurance
|
(3,436)
|
-
|
-
|
Purchase
of premises and equipment
|
(1,132)
|
(462)
|
(1,335)
|
Proceeds
from sale of premises and equipment
|
212
|
-
|
-
|
Proceeds
from sale of foreclosed assets held for sale
|
565
|
1,075
|
405
|
Deposit
acquisition premium
|
(1,718)
|
-
|
-
|
Net
cash used in investing activities
|
(69,361)
|
(18,683)
|
(41,762)
|
Cash
Flows from Financing Activities:
|
|
|
|
Net
increase in deposits
|
73,762
|
9,513
|
16,716
|
Deposits
of acquired branches
|
16,889
|
-
|
-
|
Proceeds
from long-term borrowings
|
31,319
|
20,187
|
8,492
|
Repayments
of long-term borrowings
|
(17,493)
|
(4,406)
|
(8,787)
|
Net
increase (decrease) in short-term borrowed funds
|
(32,969)
|
(11,209)
|
23,396
|
Purchase
of treasury stock
|
(271)
|
(567)
|
(1,222)
|
Stock
awards
|
49
|
20
|
-
|
Dividends
paid
|
(2,815)
|
(2,550)
|
(2,442)
|
Net
cash provided by financing activities
|
68,471
|
10,988
|
36,153
|
Net
increase in cash and cash equivalents
|
9,467
|
374
|
1,406
|
Cash
and Cash Equivalents at Beginning of Year
|
10,389
|
10,015
|
8,609
|
Cash
and Cash Equivalents at End of Year
|
$ 19,856
|
$ 10,389
|
$ 10,015
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
Interest
paid
|
$ 14,024
|
$ 17,010
|
$ 14,528
|
Income
taxes paid
|
$ 2,015
|
$ 1,485
|
$ 1,645
|
Non-cash
activities:
|
|
|
|
Real
estate acquired in settlement of loans
|
$ 942
|
$ 124
|
$ 463
|
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 seventeen 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, 2008 and
2007.
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, 2008 and
2007.
Available-for-Sale
Securities - includes debt and equity securities not classified as
held-to-maturity or trading securities that will be held for indefinite periods
of time. These securities may be sold in response to changes in market interest
or prepayment rates, needs for liquidity and changes in the availability of and
yield of alternative investments. 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.
Securities
are periodically reviewed for other-than-temporary impairment based upon a
number of factors, including, but not limited to, the length of time and extent
to which the market value has been less than cost, the financial condition of
the underlying issuer, the ability of the issuer to meet contractual
obligations, the likelihood of the security’s ability to recover any decline in
its market value and management’s intent and ability to hold the security for a
period of time sufficient to allow for a recovery in market value. Among the
factors that are considered in determining management’s intent and ability is a
review of the Corporation’s capital adequacy, interest rate risk position and
liquidity. The assessment of a security’s ability to recover any decline in
market value, the ability of the issuer to meet contractual obligations and
management’s intent and ability requires considerable judgment. A decline in
value that is considered to be other-than-temporary is recorded as a loss within
non-interest income in the consolidated statement of income.
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, doubt exists 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 collectability
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
collectability, 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 less estimated 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 from 3 to 5 ½
year life on a straight-line basis depending on the acquisition and 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 2008 or 2007.
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 statement basis and 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.
During
2008, the Company adopted a non-qualified supplemental executive retirement plan
(“SERP”) for certain executives to compensate those executive participants in
the Company’s noncontributory defined benefit pension plan whose benefits are
limited by compensation limitations under current tax law. The SERP
is considered an unfunded plan for tax and ERISA purposes and all obligations
arising under the SERP are payable from the general assets of the
Company. Expenses under the SERP are recognized as earned over the
expected years of service.
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.
Derivative
Financial Instruments
During
the year ended December 31, 2008, the Company entered into an interest rate swap
derivative to convert floating-rate debt to fixed-rate debt. The Company's
interest rate swap agreement involves an agreement to pay a fixed rate and
receive a floating rate, at specified intervals, calculated on an agreed-upon
notional amount. The debt and amounts that the Company hedges are determined
based on our current business plan, prevailing market conditions and the current
shape of the yield curve. The Company's objective in entering into this interest
rate financial instrument is to mitigate its exposure to significant unplanned
fluctuations in earnings caused by volatility in interest rates. As of December
31, 2008, the derivative instrument entered into was designated as a hedge of
underlying exposures. The Company does not use this instrument for trading or
speculative purposes. Derivative instruments used by the Company
involve, to varying degrees, elements of credit risk, in the event a
counter party should default, and market risk, as the instruments are
subject to interest rate fluctuations. Credit risk is managed through the use of
counterparty diversification and monitoring of counterparty financial
condition.
All
derivatives are recognized on the balance sheet at their fair value. To date,
the derivative entered into by the Company qualifies for and is designated as a
cash flow hedge. Changes in the fair value of a derivative that is highly
effective, and that is designated and qualifies as a cash flow hedge to the
extent that the hedge is effective, are recorded in other comprehensive income
(loss) until earnings are affected by the variability of cash flows of the
hedged transaction (e.g. until periodic settlements of a variable asset or
liability are recorded in earnings). Any hedge ineffectiveness (which represents
the amount by which the changes in the fair value of the derivative exceed the
variability in the cash flows of the forecasted transaction) is recorded in
current-period earnings. There was no net gain or loss recognized in earnings
related to our derivative instruments during the year ended December 31,
2008.
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 portfolio, unrecognized pension costs, and
unrealized gain (loss) on interest rate swap. 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 adoption of this standard is not expected to have a
material effect on the Company’s results of operations or financial
position
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. In February 2008, the FASB issued
Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13, which removed leasing transactions accounted for under FAS No. 13 and
related guidance from the scope of FAS No. 157. Also in February
2008, the FASB issued Staff Position No.157-2, Partial Deferral of the Effective
Date of Statement 157, which deferred the effective date of FAS No. 157 for all
nonfinancial assets and nonfinancial liabilities to fiscal years beginning after
November 15, 2008. 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 adoption of this
standard is not expected to have a material effect on the Company’s results of
operations or financial position.
In
February 2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions. This
FSP concludes that a transferor and transferee should not separately account for
a transfer of a financial asset and a related repurchase financing unless (a)
the two transactions have a valid and distinct business or economic purpose for
being entered into separately and (b) the repurchase financing does not result
in the initial transferor regaining control over the financial
asset. The FSP is effective for financial statements issued for
fiscal years beginning on or after November 15, 2008, and interim periods within
those fiscal years. The adoption of this FSP is not expected to have
a material effect on the Company’s results of operations or financial
position.
In March
2008, the FASB issued FAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, to require enhanced disclosures about
derivative instruments and hedging activities. The new standard has revised
financial reporting for derivative instruments and hedging activities by
requiring more transparency about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities; and how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows. FAS No. 161 requires disclosure of the
fair values of derivative instruments and their gains and losses in a tabular
format. It also requires entities to provide more information about their
liquidity by requiring disclosure of derivative features that are credit
risk-related. Further, it requires cross-referencing within footnotes to enable
financial statement users to locate important information about derivative
instruments. FAS No. 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encourage. The adoption of this standard is not
expected to have a material effect on the Company’s results of operations or
financial position.
In April
2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should
be considered in developing assumptions about renewal or extension used in
estimating the useful life of a recognized intangible asset under FAS
No. 142, Goodwill and
Other Intangible Assets. This standard is intended to improve the
consistency between the useful life of a recognized intangible asset under FAS
No. 142 and the period of expected cash flows used to measure the fair
value of the asset under FAS No. 141R and other GAAP. FSP 142-3
is effective for financial statements issued for fiscal years beginning after
December 15, 2008. The measurement provisions of this standard will apply
only to intangible assets of the Company acquired after the effective
date. The Company is currently evaluating the impact the adoption of
this standard will have on the Company’s results of operations.
In May
2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). This FSP provides guidance on the accounting for
certain types of convertible debt instruments that may be settled in cash upon
conversion. Additionally, this FSP specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. The FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
adoption of this FSP is not expected to have a material effect on the Company’s
results of operations or financial position.
In June
2008, the FASB ratified EITF Issue No. 08-4, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjusted
Conversion Ratios. This Issue provides transition guidance for
conforming changes made to EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjusted
Conversion Ratios, that resulted from EITF Issue No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, and FAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liability and
Equity. The conforming changes are effective for financial
statements issued for fiscal years ending after December 15, 2008, with earlier
application permitted. The adoption of this FSP is not expected to
have a material effect on the Company’s results of operations or financial
position.
In June
2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,
to clarify that instruments granted in share-based payment transactions can be
participating securities prior to the requisite service having been
rendered. A basic principle of the FSP is that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and are to be
included in the computation of EPS pursuant to the two-class method. The
provisions of this FSP are effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those years.
All prior-period EPS data presented (including interim financial statements,
summaries of earnings, and selected financial data) are required to be adjusted
retrospectively to conform with the provisions of the FSP. . The
Company is currently evaluating the impact the adoption of this standard will
have on the Company’s results of operations.
In
December 2008, the FASB issued FASB Staff Position (FSP) No. FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets. This FSP amends FASB
Statement No. 132 (revised 2003), Employers’ Disclosures about
Pensions and Other Postretirement Benefits, to improve an employer’s
disclosures about plan assets of a defined benefit pension or other
postretirement plan. The disclosures about plan assets required by the FSP are
to be provided for fiscal years ending after December 15, 2009. The
Company is currently evaluating the impact the adoption of the FSP 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 Company 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 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 2,850,943, 2,868,725, and
2,899,518 for 2008, 2007 and 2006, 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 $1,317,000 and $833,000 at December 31, 2008 and 2007,
respectively.
Non-retirement
account deposits with one financial institution are insured up to $250,000
through December 2009. 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,
2008 and 2007 were as follows (in thousands):
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
December
31, 2008
|
Cost
|
Gains
|
Losses
|
Value
|
Available-for-sale
securities:
|
|
|
|
|
U.S.
Agency securities
|
$ 27,628
|
$ 1,314
|
$ -
|
$ 28,942
|
Obligations
of state and
|
|
|
|
|
political
subdivisions
|
44,188
|
424
|
(480)
|
44,132
|
Corporate
obligations
|
5,964
|
-
|
(668)
|
5,296
|
Mortgage-backed
securities
|
93,037
|
2,437
|
(67)
|
95,407
|
Equity
securities
|
545
|
20
|
(203)
|
362
|
Total
available-for-sale securities
|
$ 171,362
|
$ 4,195
|
$ (1,418)
|
$ 174,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
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,
2008 and 2007 (in thousands). As of December 31, 2008 and 2007,
the Company owned 47 and 44 securities whose estimated fair value was less than
their cost basis, respectively.
December
31, 2008
|
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
|
16,910
|
463
|
1,348
|
17
|
18,258
|
480
|
Corporate
obligations
|
1,874
|
135
|
3,421
|
533
|
5,295
|
668
|
Mortgage-backed
securities
|
9,413
|
67
|
-
|
-
|
9,413
|
67
|
|
Total
debt securities
|
28,197
|
665
|
4,769
|
550
|
32,966
|
1,215
|
Equity
securities
|
231
|
203
|
-
|
-
|
231
|
203
|
|
|
|
|
|
|
|
|
Total
securities
|
$ 28,428
|
$ 868
|
$ 4,769
|
$ 550
|
$ 33,197
|
$ 1,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
The
Company’s investment securities portfolio contains unrealized losses on
mortgage-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 portfolio outlined 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 2008, 2007, and 2006 were
$387,000, $18,859,000, and $10,439,000, respectively. The gross
losses are made up a realized loss of $1,796,000 on a sale of a corporate bond
and an impairment charge of our Freddie Mac preferred stock in the amount of
$2,336,000. Gross gains and gross losses were realized as follows (in
thousands):
|
2008
|
2007
|
2006
|
Gross
gains
|
$ 43
|
$ 166
|
$ 159
|
Gross
losses
|
4,132
|
195
|
155
|
Net
(losses) gains
|
$ (4,089)
|
$ (29)
|
$ 4
|
Investment
securities with an approximate carrying value of $106,669,000 and $96,876,000 at
December 31, 2008 and 2007, 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, 2008, by contractual maturity, are shown below (in
thousands):
|
Amortized
|
|
Estimated
|
|
Cost
|
|
Fair
Value
|
Available-for-sale
securities:
|
|
|
|
Due
in one year or less
|
$ 510
|
|
$ 513
|
Due
after one year through five years
|
19,070
|
|
19,430
|
Due
after five years through ten years
|
33,288
|
|
33,631
|
Due
after ten years
|
117,949
|
|
120,203
|
Total
|
$ 170,817
|
|
$ 173,777
|
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, 2008 and 2007, a substantial portion of its debtors’ ability to
honor their contracts is dependent on the economic conditions within these
regions.
Major
classifications of loans are as follows (in thousands):
|
December
31,
|
|
2008
|
2007
|
Real
estate loans:
|
|
|
Residential
|
$ 199,118
|
$ 201,861
|
Commercial
|
107,740
|
100,380
|
Agricultural
|
17,066
|
16,891
|
Construction
|
11,118
|
11,330
|
Loans
to individuals for household,
|
|
|
family
and other purchases
|
11,651
|
13,082
|
Commercial
and other loans
|
37,968
|
34,664
|
State
and political subdivision loans
|
48,153
|
45,171
|
|
432,814
|
423,379
|
Less
allowance for loan losses
|
4,378
|
4,197
|
Loans,
net
|
$ 428,436
|
$ 419,182
|
Real
estate loans serviced for Freddie Mac and Fannie Mae, which are not included in
the consolidated balance sheet, totaled $37,523,000 and $38,427,000 at December
31, 2008 and 2007, respectively.
At
December 31, 2008 and 2007, net unamortized loan fees and costs of $1,060,000
and $1,037,000, respectively, have been deducted from the carrying value of
loans.
The
Company had non-accrual loans, inclusive of impaired loans, of $2,202,000 and
$1,915,000 at December 31, 2008 and 2007, respectively. Interest
income on loans would have increased by approximately $112,000, $230,000 and
$169,000 during 2008, 2007 and 2006, 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):
|
2008
|
2007
|
2006
|
Impaired
loans without related allowance for loan losses
|
$ 684
|
$ 796
|
$ 469
|
Impaired
loans with related allowance for loan losses
|
938
|
292
|
721
|
Related
allowance for loan losses
|
108
|
146
|
232
|
Average
recorded balance of impaired loans
|
1,521
|
1,366
|
1,283
|
Interest
income recognized on impaired loans
|
156
|
25
|
6
|
Changes
in the allowance for loan losses were as follows (in thousands):
|
Year
Ended December 31,
|
|
2008
|
2007
|
2006
|
Balance,
beginning of year
|
$ 4,197
|
$ 3,876
|
$ 3,664
|
Provision
charged to income
|
330
|
365
|
330
|
Recoveries
on loans previously
|
|
|
|
charged
against the allowance
|
97
|
142
|
172
|
|
4,624
|
4,383
|
4,166
|
Loans
charged against the allowance
|
(246)
|
(186)
|
(290)
|
Balance,
end of year
|
$ 4,378
|
$ 4,197
|
$ 3,876
|
The
following is a summary of the past due and non-accrual loans as of December 31,
2008 and 2007 (in thousands):
|
December
31, 2008
|
|
Past
Due
|
Past
Due
|
|
|
30
- 89 days
|
90
days or more
|
Nonaccrual
|
Real
estate loans
|
$ 2,099
|
$ 381
|
$ 2,142
|
Installment
loans
|
117
|
2
|
-
|
Commercial
and all other loans
|
125
|
-
|
60
|
Total
|
$ 2,341
|
$ 383
|
$ 2,202
|
|
|
|
|
|
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
|
5.
PREMISES & EQUIPMENT
Premises
and equipment are summarized as follows (in thousands):
|
December
31,
|
|
2008
|
2007
|
Land
|
$ 3,890
|
$ 3,786
|
Buildings
|
11,381
|
11,699
|
Furniture,
fixtures and equipment
|
7,318
|
7,278
|
Construction
in process
|
753
|
92
|
|
23,342
|
22,855
|
Less:
accumulated depreciation
|
10,580
|
10,317
|
Premises
and equipment, net
|
$ 12,762
|
$ 12,538
|
Depreciation
expense amounted to $658,000, $716,000 and $747,000 for 2008, 2007, and
2006, respectively.
6.
GOODWILL
A summary
of goodwill is as follows (in thousands):
|
December
31,
|
|
2008
|
2007
|
Beginning
carrying amount
|
$ 9,385
|
$ 9,385
|
Add: amount
related to acquisition
|
1,651
|
-
|
Gross
carrying amount
|
$ 11,036
|
$ 9,385
|
Less:
accumulated amortization
|
780
|
780
|
Net
carrying amount
|
$ 10,256
|
$ 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 2008, 2007 or 2006.
7.
CORE DEPOSIT INTANGIBLE ASSETS
A summary
of core deposit intangible assets is as follows (in thousands):
|
December
31,
|
|
2008
|
2007
|
Beginning
carrying amount
|
$ 3,553
|
$ 3,553
|
Add: amount
related to acquisition
|
66
|
-
|
Gross
carrying amount
|
$ 3,619
|
$ 3,553
|
Less:
accumulated amortization
|
3,410
|
3,265
|
Net
carrying amount
|
$ 209
|
$ 288
|
Amortization
expense amounted to $145,000, $144,000 and $252,000 for 2008, 2007 and 2006,
respectively. The estimated amortization expense of intangible assets for
each of the four succeeding fiscal years is as follows (in thousands):
For
the year ended December 31, 2009
|
$ 160
|
For
the year ended December 31, 2010
|
17
|
For
the year ended December 31, 2011
|
17
|
For
the year ended December 31, 2012
|
15
|
Total
|
$ 209
|
8.
DEPOSITS
Certificates
of deposit of $100,000 or more amounted to $97,709,000 and $58,137,000 at
December 31, 2008 and 2007, respectively. Interest expense on certificates of
deposit of $100,000 or more amounted to $2,815,000, $2,864,000 and $2,667,000
for the years ended December 31, 2008, 2007, and 2006,
respectively.
Following
are maturities of certificates of deposit as of December 31, 2008 (in
thousands):
2009
|
|
$ 133,045
|
2010
|
|
66,559
|
2011
|
|
49,217
|
2012
|
|
18,716
|
2013
|
|
17,997
|
Thereafter
|
|
4,063
|
Total
certificates of deposit
|
|
$ 289,597
|
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,f)
|
Loans(g)
|
Funds
|
2008
|
|
|
|
|
|
|
|
Balance
at December 31
|
$ 7,704
|
$ -
|
$ -
|
$ -
|
$ 7,500
|
$ 46,000
|
$ 61,204
|
Highest
balance at any month-end
|
9,125
|
2,576
|
34,002
|
-
|
7,500
|
62,700
|
115,903
|
Average
balance
|
8,493
|
248
|
9,642
|
-
|
7,500
|
38,975
|
64,858
|
Weighted
average interest rate:
|
|
|
|
|
|
|
|
Paid
during the year
|
2.22%
|
0.49%
|
2.93%
|
0.00%
|
6.18%
|
4.15%
|
3.94%
|
As
of year-end
|
1.24%
|
0.00%
|
0.00%
|
0.00%
|
5.86%
|
3.88%
|
3.80%
|
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%
|
(a) Securities
sold under agreements to repurchase mature within 5 years. The carrying value of
the underlying securities pledged at December 31, 2008 and 2007 was $11,348,000
and $12,465,000, respectively.
(b) Treasury
Direct Investments consist of notes issued under the U.S. Treasury Department’s
program of investing balances in interest-bearing demand notes insured by
depository institutions.
(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
$236,106,000, inclusive of 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 and
commercial mortgage loans. At December 31, 2008 and 2007, the
approximate carrying value of the securities collateral was $115,811,000 and
$74,453,000, respectively.
(d) Federal
funds line consists of an unsecured line from a third party bank at market
rates. The Company has a borrowing limit of $12,000,000, 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 was determined quarterly and floated
based on the 3 month LIBOR plus 2.80. 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 fully
amortized as of December 31, 2008. 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) In
December, 2008, the Company entered into an interest rate swap agreement to
convert floating-rate debt to fixed rate debt on a notional amount of $7.5
million. The interest rate swap instrument involves an agreement to receive
a floating rate and pay a fixed rate, at specified intervals, calculated on the
agreed-upon notional amount. The differentials paid or received on interest rate
swap agreements are recognized as adjustments to interest expense in the period.
The interest rate swap agreement was entered into on December 17, 2008 and
expires December 17, 2013. The fair value of the interest rate swap at
December 31, 2008 was a liability of $344,000 and is included within other
liabilities on the consolidated balance sheets.
(g) 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
|
2008
|
|
2007
|
Variable:
|
|
|
|
|
(h)
|
August
26, 2009
|
$ -
|
|
$ -
|
Fixed:
|
|
|
|
|
3.82%
|
January
10, 2008
|
-
|
|
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
|
5.22%
|
May
12, 2008
|
-
|
|
2,000
|
5.34%
|
July
14, 2008
|
-
|
|
2,000
|
4.99%
|
August
26, 2008
|
-
|
|
1,000
|
4.93%
|
August
27, 2008
|
-
|
|
1,200
|
4.88%
|
September
26, 2008
|
-
|
|
2,000
|
5.26%
|
January
20, 2009
|
5,000
|
|
5,000
|
3.99%
|
February
25, 2009
|
2,000
|
|
2,000
|
5.25%
|
April
20, 2009
|
5,000
|
|
5,000
|
2.57%
|
September
3, 2009
|
2,000
|
|
-
|
3.80%
|
December
31, 2009
|
3,000
|
|
3,000
|
3.23%
|
January
14, 2010
|
2,000
|
|
-
|
2.82%
|
May
10, 2010
|
1,000
|
|
-
|
3.12%
|
May
9, 2011
|
1,000
|
|
-
|
3.73%
|
July
11, 2011
|
2,000
|
|
-
|
3.79%
|
August
22, 2011
|
1,000
|
|
-
|
3.70%
|
September
6, 2011
|
1,000
|
|
-
|
3.62%
|
September
6, 2011
|
2,000
|
|
-
|
3.57%
|
May
7, 2012
|
2,000
|
|
-
|
3.36%
|
May
9, 2012
|
2,000
|
|
-
|
3.89%
|
September
5, 2012
|
1,000
|
|
-
|
3.75%
|
May
6, 2013
|
2,000
|
|
-
|
3.55%
|
May
9, 2013
|
2,000
|
|
-
|
3.42%
|
December
2, 2013
|
5,000
|
|
-
|
3.52%
|
December
5, 2013
|
5,000
|
|
-
|
Total
term loans
|
$ 46,000
|
|
$ 51,700
|
(h) Interest
rate floats monthly based on the 1 month LIBOR +1.25%. The interest
rate was 2.05% and 6.45% at December 31, 2008 and 2007,
respectively. This line of credit has a borrowing limit of $10
million and is renewable on an annual basis.
Following
are maturities of borrowed funds as of December 31, 2008 (in
thousands):
2009
|
|
$ 31,324
|
2010
|
|
3,858
|
2011
|
|
7,022
|
2012
|
|
5,000
|
2013
|
|
14,000
|
Total
borrowed funds
|
|
$ 61,204
|
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 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
following table sets forth the obligation and funded status as of December 31
(in thousands):
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
Change
in benefit obligation
|
|
|
|
|
Benefit
obligation at beginning of year
|
$
|
7,016
|
$
|
7,102
|
Service
cost
|
|
324
|
|
421
|
Interest
cost
|
|
407
|
|
407
|
Amendments
|
|
-
|
|
(601)
|
Actuarial
(Gain) / Loss
|
|
(398)
|
|
(137)
|
Benefits
paid
|
|
(235)
|
|
(176)
|
Benefit
obligation at end of year
|
|
7,114
|
|
7,016
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
6,313
|
|
5,796
|
Actual
return (loss) on plan assets
|
|
(1,415)
|
|
409
|
Employer
contribution
|
|
486
|
|
284
|
Benefits
paid
|
|
(235)
|
|
(176)
|
Fair
value of plan assets at end of year
|
|
5,149
|
|
6,313
|
|
|
|
|
|
|
Funded
status
|
$
|
(1,965)
|
$
|
(703)
|
|
|
|
|
|
|
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
|
$
|
2,922
|
$
|
1,463
|
|
Prior
service cost
|
|
(527)
|
|
(570)
|
Total
|
$
|
2,395
|
$
|
893
|
The
accumulated benefit obligation for the defined benefit pension plan was
$6,638,000 and $6,508,000 at December 31, 2008 and 2007,
respectively. Information where the accumulated benefit obligation is
in excess of plan assets at December 31 is as follows (in
thousands):
|
|
|
2008
|
Projected
benefit obligation
|
$
|
7,114
|
Accumulated
benefit obligation
|
|
6,638
|
Fair
value of plan assets
|
|
5,149
|
The
components of net periodic benefit costs for the periods ending December 31 are
as follows (in thousands):
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
Service
cost
|
$
|
324
|
$
|
421
|
$
|
388
|
Interest
cost
|
|
407
|
|
407
|
|
363
|
Return
on plan assets
|
|
(503)
|
|
(468)
|
|
(395)
|
Net
amortization and deferral
|
|
18
|
|
73
|
|
86
|
Net
periodic benefit cost
|
$
|
246
|
$
|
433
|
$
|
442
|
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 2009
is $176,900 and $(42,600), respectively.
The
weighted-average assumptions used to determine benefit obligations at December
31:
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
Discount
rate
|
|
6.00%
|
|
6.00%
|
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:
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
6.00%
|
|
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%
|
|
3.25%
|
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, 2008 and 2007, by asset
category are summarized below. At December 31, 2008, the pension plan
had a sufficient cash and money market position in order to re-allocate the
equity portfolio for diversification purposes and reduce risk in the total
portfolio.
Asset
category:
|
|
2008
|
2007
|
|
|
|
|
|
|
|
Equity
securities
|
|
52.3
|
%
|
64.6
|
%
|
Debt
securities
|
|
29.4
|
|
16.3
|
|
Cash
and money market deposits
|
|
18.3
|
|
19.1
|
|
Total
|
|
100.0
|
%
|
100.0
|
%
|
Equity
securities include the Company’s common stock in the amounts of $217,500 (4.2%
of total plan assets) and $220,900 (3.5% of total plan assets) at December 31,
2008 and 2007, respectively.
The Bank
expects to contribute $400,000 to its pension plan in 2009. Expected
future benefit payments that the Bank estimates from its pension plan are as
follows (in thousands):
2009
|
|
$ 313
|
2010
|
|
629
|
2011
|
|
243
|
2012
|
|
362
|
2013
|
|
228
|
2014
- 2018
|
|
2,471
|
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 $203,000 and $196,000 for 2008 and 2007,
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
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 on the deferred amounts totaled $40,000, $47,000 and $44,000
for the years ended December 31, 2008, 2007 and 2006, respectively.
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
2008 and 2007, 4,993 and 3,414 shares of restricted stock were awarded and 1,247
and 291 shares were 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 $56,000, $23,000 and $0 for the years ended December 31, 2008, 2007 and
2006, respectively.
Supplemental Executive
Retirement Plan
During
2008, the Company adopted a non-qualified supplemental executive retirement plan
(“SERP”) for certain executives to compensate those executive participants in
the Company’s noncontributory defined benefit pension plan whose benefits are
limited by compensation limitations under current tax law. At
December 31, 2008, an obligation of $188,000 was included in other liabilities
for this plan in the consolidated balance sheet. Expenses related to
this plan totaled $188,000 for 2008.
11.
INCOME TAXES
The
provision for income taxes consists of the following (in
thousands):
|
Year
Ended December 31,
|
|
2008
|
2007
|
2006
|
Currently
payable
|
$ 2,006
|
$ 1,718
|
$ 1,348
|
Deferred
tax liability (asset)
|
(782)
|
54
|
109
|
Provision
for income taxes
|
$ 1,224
|
$ 1,772
|
$ 1,457
|
The
following temporary differences gave rise to the net deferred tax assets at
December 31, 2008 and 2007 (in thousands):
|
2008
|
2007
|
Deferred
tax assets:
|
|
|
Allowance
for loan losses
|
$ 1,488
|
$ 1,352
|
Deferred
compensation
|
588
|
584
|
Merger
& acquisition costs
|
57
|
42
|
Allowance
for losses on available-for-sale securities
|
985
|
191
|
Pension
and other retirement obligation
|
732
|
239
|
Unrealized
loss on interest rate swap
|
117
|
-
|
Unrealized
losses on available-for-sale securities
|
28
|
-
|
Less:
valuation allowance
|
-
|
(191)
|
Total
|
$ 3,995
|
$ 2,217
|
|
|
|
Deferred
tax liabilities:
|
|
|
Premises
and equipment
|
$ (221)
|
$ (195)
|
Investment
securities accretion
|
(161)
|
(83)
|
Loan
fees and costs
|
(125)
|
(133)
|
Goodwill
and core deposit intangibles
|
(903)
|
(660)
|
Low
income housing tax credits
|
(38)
|
(34)
|
Mortgage
servicing rights
|
(52)
|
(59)
|
Unrealized
gains on available-for-sale securities
|
(973)
|
(133)
|
Total
|
(2,473)
|
(1,297)
|
Deferred
tax asset, net
|
$ 1,522
|
$ 920
|
At
December 31, 2008 and 2007, the valuation allowance was $0 and $191,000,
respectively. The allowance at December 31, 2007 was for certain
unrealized losses on available-for-sale securities, as the Company did not have
sufficient unrealized capital gains available to utilize the unrealized loss
recognized on these securities. On October 3, 2008, the Emergency
Economic Stabilization Act of 2008 was signed into law. A provision
in the act allowed the loss on the Freddie Mac preferred stock to be treated as
an ordinary loss. As such, the Bank can treat our Freddie Mac
preferred stock write-down as an ordinary loss, thus eliminating the need for a
valuation allowance.
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,
|
|
2008
|
2007
|
2006
|
Provision
at statutory rates on
|
|
|
|
pre-tax
income
|
$ 2,757
|
$ 2,892
|
$ 2,462
|
Effect
of tax-exempt income
|
(1,178)
|
(961)
|
(913)
|
Low
income housing tax credits
|
(187)
|
(187)
|
(130)
|
Bank
owned life insurance
|
(123)
|
(113)
|
(103)
|
Nondeductible
interest
|
125
|
133
|
118
|
Valuation
allowance
|
(191)
|
9
|
-
|
Other
items
|
21
|
(1)
|
23
|
Provision
for income taxes
|
$ 1,224
|
$ 1,772
|
$ 1,457
|
Statutory
tax rates
|
34%
|
34%
|
34%
|
Effective
tax rates
|
15.1%
|
20.8%
|
20.1%
|
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 2008 and 2007 with officers, directors, stockholders and
associates of such persons is listed below (in thousands):
|
Year
Ended December 31,
|
|
2008
|
2007
|
Balance,
beginning of year
|
$ 2,828
|
$ 2,737
|
New
loans
|
1,499
|
923
|
Repayments
|
(1,164)
|
(832)
|
Balance,
end of year
|
$ 3,163
|
$ 2,828
|
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 2008 without approval of the
Comptroller of the Currency of approximately $8,131,000, plus the Bank’s net
income for 2009.
Loans:
The Bank
is subject to regulatory restrictions which limit its ability to loan funds to
the Company. At December 31, 2008, the regulatory lending limit
amounted to approximately $5,920,000.
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, 2008 and 2007, 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):
|
2008
|
|
2007
|
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
Total
capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
$ 54,924
|
13.06%
|
|
$ 51,320
|
13.00%
|
For
capital adequacy purposes
|
33,652
|
8.00%
|
|
31,576
|
8.00%
|
To
be well capitalized
|
42,065
|
10.00%
|
|
39,470
|
10.00%
|
|
|
|
|
|
|
Tier
I capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
$ 50,546
|
12.02%
|
|
$ 47,124
|
11.94%
|
For
capital adequacy purposes
|
16,826
|
4.00%
|
|
15,788
|
4.00%
|
To
be well capitalized
|
25,239
|
6.00%
|
|
23,682
|
6.00%
|
|
|
|
|
|
|
Tier
I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
$ 50,546
|
7.91%
|
|
$ 47,124
|
8.20%
|
For
capital adequacy purposes
|
25,547
|
4.00%
|
|
22,979
|
4.00%
|
To
be well capitalized
|
31,934
|
5.00%
|
|
28,723
|
5.00%
|
The
following table reflects the Bank’s capital ratios at December 31 (dollars in
thousands):
|
2008
|
|
2007
|
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
Total
capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
$ 49,248
|
11.73%
|
|
$ 45,456
|
11.53%
|
For
capital adequacy purposes
|
33,593
|
8.00%
|
|
31,531
|
8.00%
|
To
be well capitalized
|
41,991
|
10.00%
|
|
39,413
|
10.00%
|
|
|
|
|
|
|
Tier
I capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
$ 44,871
|
10.69%
|
|
$ 41,260
|
10.47%
|
For
capital adequacy purposes
|
16,796
|
4.00%
|
|
15,765
|
4.00%
|
To
be well capitalized
|
25,194
|
6.00%
|
|
23,648
|
6.00%
|
|
|
|
|
|
|
Tier
I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
$ 44,871
|
7.04%
|
|
$ 41,260
|
7.19%
|
For
capital adequacy purposes
|
25,510
|
4.00%
|
|
22,959
|
4.00%
|
To
be well capitalized
|
31,887
|
5.00%
|
|
28,699
|
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, 2008
and 2007, are as follows (in thousands):
|
2008
|
2007
|
Commitments
to extend credit
|
$84,089
|
$67,881
|
Standby
letters of credit
|
6,203
|
2,419
|
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 during the 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
Effective
January 1, 2008, the Company adopted SFAS No. 157, which, among other things,
requires enhanced disclosures about assets and liabilities carried at fair
value. SFAS No. 157 establishes a hierarchal disclosure framework associated
with the level of pricing observability utilized in measuring assets and
liabilities at fair value. The three broad levels defined by SFAS No. 157
hierarchy are as follows:
Level
I:
|
Quoted
prices are available in active markets for identical assets or liabilities
as of the reported date.
|
Level
II:
|
Pricing
inputs are other than quoted prices in active markets, which are either
directly or indirectly observable as of the reported date. The nature of
these assets and liabilities include items for which quoted prices are
available but traded less frequently, and items that are fair valued using
other financial instruments, the parameters of which can be directly
observed.
|
|
|
Level
III:
|
Assets
and liabilities that have little to no pricing observability as of the
reported date. These items do not have two-way markets and are measured
using management’s best estimate of fair value, where the inputs into the
determination of fair value require significant management judgment or
estimation.
|
The
following table presents the assets reported on the consolidated balance sheet
at their fair value as of December 31, 2008 by level within the fair value
hierarchy. As required by SFAS No. 157, financial assets and liabilities are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement.
(In
thousands)
|
|
December
31, 2008
|
|
|
Level
1
|
|
|
Level
II
|
|
|
Level
III
|
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value measurements on recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$ 362
|
|
|
$173,777
|
|
|
$ -
|
|
|
$174,139
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value measurements on non-recurring
|
|
|
|
|
|
|
|
|
|
|
|
basis:
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
$ -
|
|
|
$ 830
|
|
|
$ -
|
|
|
$ 830
|
The
estimated fair values of the Company’s financial instruments are as follows (in
thousands):
|
December
31,
|
|
2008
|
|
2007
|
|
Carrying
|
Estimated
|
|
Carrying
|
Estimated
|
|
Amount
|
Fair
Value
|
|
Amount
|
Fair
Value
|
Financial
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
$ 19,856
|
$ 19,856
|
|
$ 10,389
|
$ 10,389
|
Available-for-sale
securities
|
174,139
|
174,139
|
|
120,802
|
120,802
|
Net
loans
|
428,436
|
445,571
|
|
419,182
|
428,240
|
Bank
owned life insurance
|
12,176
|
12,176
|
|
8,378
|
8,378
|
Regulatory
stock
|
3,371
|
3,371
|
|
4,809
|
4,809
|
Accrued
interest receivable
|
2,912
|
2,912
|
|
2,522
|
2,522
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
Deposits
|
$ 546,680
|
$ 555,089
|
|
$ 456,028
|
$ 457,425
|
Borrowed
funds
|
61,204
|
60,823
|
|
80,348
|
79,357
|
Accrued
interest payable
|
2,233
|
2,233
|
|
2,199
|
2,199
|
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-Sale
Securities:
The fair
values of available-for-sale securities are 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)
|
2008
|
2007
|
Assets:
|
|
|
Cash
|
$ 4,987
|
$ 5,117
|
Investment
in subsidiary:
|
|
|
First
Citizens National Bank
|
54,821
|
50,164
|
Other
assets
|
746
|
771
|
Total
assets
|
$ 60,554
|
$ 56,052
|
|
|
|
Liabilities:
|
|
|
Other
liabilities
|
$ 284
|
$ 24
|
Borrowed
funds
|
7,500
|
7,500
|
Total
liabilities
|
7,784
|
7,524
|
Stockholders'
equity
|
52,770
|
48,528
|
Total
liabilities and stockholders' equity
|
$ 60,554
|
$ 56,052
|
CITIZENS
FINANCIAL SERVICES, INC.
|
CONDENSED STATEMENT
OF INCOME
|
|
Year
Ended December 31,
|
(in
thousands)
|
2008
|
2007
|
2006
|
Dividends
from:
|
|
|
|
Bank
subsidiary
|
$ 3,284
|
$ 3,175
|
$ 3,038
|
Available-for-sale
securities
|
21
|
12
|
2
|
Total
income
|
3,305
|
3,187
|
3,040
|
Realized
securities gains
|
30
|
-
|
-
|
Expenses
|
449
|
563
|
551
|
Income
before equity
|
|
|
|
in
undistributed earnings
|
|
|
|
of
subsidiary
|
2,886
|
2,624
|
2,489
|
Equity
in undistributed
|
|
|
|
earnings
- First Citizens National Bank
|
4,019
|
4,112
|
3,311
|
Net
income
|
$ 6,905
|
$ 6,736
|
$ 5,800
|
CITIZENS
FINANCIAL SERVICES, INC.
|
STATEMENT
OF CASH FLOWS
|
|
Year
Ended December 31,
|
(in
thousands)
|
2008
|
2007
|
2006
|
Cash
flows from operating activities:
|
|
|
|
Net
income
|
$ 6,905
|
$ 6,736
|
$ 5,800
|
Adjustments
to reconcile net income to net
|
|
|
|
cash
provided by operating activities:
|
|
|
|
Equity
in undistributed earnings of subsidiaries
|
(4,019)
|
(4,112)
|
(3,311)
|
Investment
securities gains, net
|
(30)
|
-
|
-
|
Other,
net
|
115
|
18
|
(18)
|
Net
cash provided by operating activities
|
2,971
|
2,642
|
2,471
|
Cash
flows from investing activities:
|
|
|
|
Purchases
of available-for-sale securities
|
(226)
|
(226)
|
(104)
|
Proceeds
from the sale of available-for-sale securities
|
162
|
-
|
-
|
Net
cash used in investing activities
|
(64)
|
(226)
|
(104)
|
Cash
flows from financing activities:
|
|
|
|
Cash
dividends paid
|
(2,815)
|
(2,550)
|
(2,442)
|
Purchase
of treasury stock
|
(271)
|
(567)
|
(1,222)
|
Stock
awards
|
49
|
20
|
-
|
Net
cash used in financing activities
|
(3,037)
|
(3,097)
|
(3,664)
|
Net
decrease in cash
|
(130)
|
(681)
|
(1,297)
|
Cash
at beginning of year
|
5,117
|
5,798
|
7,095
|
Cash
at end of year
|
$ 4,987
|
$ 5,117
|
$ 5,798
|
17.
CONSOLIDATED CONDENSED QUARTERLY DATA (UNAUDITED)
(in
thousands, except share data)
|
|
Three
Months Ended,
|
|
2008
|
Mar
31
|
Jun
30
|
Sep
30
|
Dec
31
|
Interest
income
|
$ 9,208
|
$ 9,186
|
$ 9,345
|
$ 9,499
|
Interest
expense
|
3,800
|
3,356
|
3,382
|
3,520
|
Net
interest income
|
5,408
|
5,830
|
5,963
|
5,979
|
Provision
for loan losses
|
120
|
-
|
105
|
105
|
Non-interest
income
|
1,209
|
1,318
|
1,365
|
1,353
|
Investment
securities gains (losses), net
|
-
|
-
|
(4,089)
|
-
|
Non-interest
expenses
|
3,915
|
3,938
|
4,032
|
3,992
|
Income
(loss) before provision (benefit) for income taxes
|
2,582
|
3,210
|
(898)
|
3,235
|
Provision
(benefit) for income taxes
|
561
|
764
|
154
|
(255)
|
Net
income (loss)
|
$ 2,021
|
$ 2,446
|
$ (1,052)
|
$ 3,490
|
Earnings
(Loss) Per Share
|
$ 0.70
|
$ 0.86
|
$ (0.37)
|
$ 1.23
|
|
|
|
|
|
|
|
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
|
$ 0.49
|
$ 0.61
|
$ 0.61
|
$ 0.64
|
18.
ACQUISITIONS
On
November 21, 2008, the Company acquired the Mansfield branch of the Elmira
Savings Bank located in Mansfield, Pennsylvania. The acquisition included
retail deposits of $16,889,000 and loans of $267,000. Land, building
and certain other fixed assets were acquired with an approximate fair
market value of $296,000. The Company also recorded goodwill of
$1,651,000 and $67,000 of core deposit
intangible.
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Stockholder’s and Board of Directors of
Citizens
Financial Services, Inc.
We have
audited the accompanying consolidated balance sheets of Citizens Financial
Services, Inc. and subsidiary as of December 31, 2008 and 2007, 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,
2008. 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 subsidiary as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 3 to the consolidated financial statements, effective
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, Fair
Value Measurements.
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, 2008,
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.
Wexford,
Pennsylvania
March 11,
2009
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, 2008. 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, 2008, 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 12, 2009
/s/ Mickey L.
Jones
By:
Mickey L. Jones
Treasurer
(Principal
Financial & Accounting Officer)
Date:
March 12, 2009
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, 2008 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 2009 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 2009 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 2009 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 2009
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 2009 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 2009 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 2009 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, 2008 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
|
|
n/a
|
|
n/a
|
|
91,593
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
n/a
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
Total
|
|
n/a
|
|
n/a
|
|
91,593
|
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 2009 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 2009 Annual
Meeting of Stockholders is incorporated by reference.
ITEM
14 – PRINCIPAL ACCOUNTING 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 2009 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, 2008 and 2007
Consolidated Statement of Income for
the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statement of Changes in
Stockholders' Equity for the Years Ended December 31, 2008, 2007
and2006
Consolidated Statement of Cash Flows
for the Years Ended December 31, 2008, 2007 and 2006
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)
|
10.6
|
|
Supplemental
Executive Retirement Plan
|
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.
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 12,
2009
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
12, 2009 |
/s/
Carol J. Tama
Carol
J. Tama, Director
|
March
12, 2009 |
/s/
R. Lowell Coolidge
R.
Lowell Coolidge, Director
|
March
12, 2009 |
/s/
Rudolph J. van der Hiel
Rudolph
J. van der Hiel, Director
|
March
12, 2009 |
/s/
Robert W. Chappell
Robert
W. Chappell, Director
|
March
12, 2009 |
/s/
Mark L. Dalton
Mark
L. Dalton, Director
|
March
12, 2009 |
/s/
R. Joseph Landy
R.
Joseph Landy, Director
|
March
12, 2009 |
/s/
Roger C. Graham, Jr.
Roger
C. Graham, Director
|
March
12, 2009 |
/s/
E. Gene Kosa
E.
Gene Kosa, Director
|
March
12, 2009 |
/s/
Rinaldo A. DePaola
Rinaldo
A. DePaola, Director
|
March
12, 2009 |
/s/
Mickey L. Jones
Mickey
L. Jones, Treasurer
(Principal
Financial & Accounting Officer)
|
March
12, 2009 |